The coronavirus pandemic has brought the global economy to a standstill, and few industries have taken more of a hit than the airlines. With travel restrictions making passenger travel nearly impossible, major airlines such as Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), and American Airlines Group (NASDAQ:AAL) have seen their revenue almost disappear -- and their share prices plunge.
To try to help the airline industry, the economic stimulus bill allowed the federal government to make grants and loans to ailing carriers. Most major airlines have requested that aid, and now, we're starting to see what some of those aid packages look like. Not all of the details are available, but early indications show that shareholders should be aware of what the deals could mean for their ownership interest in airlines going forward.
Delta makes a deal
On Tuesday, Delta CEO Ed Bastian released an internal memorandum announcing that it had reached agreement with the U.S. Treasury for $5.4 billion in emergency relief from the payroll support program. As a result of the aid, Bastian said the Atlanta-based airline wouldn't have to furlough workers or impose reductions in pay through the end of September. That's welcome news, given the 95% drop in passenger traffic Delta has seen.
The $5.4 billion breaks down into two parts. Delta borrowed $1.6 billion of that money in what Bastian called an "unsecured 10-year low-interest loan." The remaining $3.8 billion apparently has no payback requirements.
However, Delta will have to give the federal government warrants to purchase shares of the airline's stock over the next five years. The memo indicated that the government will be able to buy about a 1% interest in Delta if it chooses to pay $24.39 per share -- roughly where the airline's stock closed on Tuesday.
Similar terms for American
American Airlines Group also filed a disclosure that gave the terms of its agreement with the federal government. The Fort Worth-based airline expects $5.81 billion in aid for payroll support, and it believes $1.71 billion of that will be in the form of a low-interest 10-year loan.
For the remaining $4.1 billion, American expects to issue five-year warrants for 13.7 million shares at $12.51 per share. That's slightly higher than where American shares closed Tuesday, but the number of warrants works out to a larger percentage of the airline's total share count, at just over 3%.
In addition, American revealed terms for another type of federal aid. The company expects to borrow $4.75 billion under the federal government's loan program, and it'll have to offer security in the form of collateral for the loans. The U.S. Treasury is apparently demanding a much larger stake of 38 million shares of American stock for the loan under this part of the program, which Delta's announcement didn't address.
Watch out for shareholder dilution
As of noon on April 15, Southwest and United Airlines Holdings (NASDAQ:UAL) hadn't filed disclosures with the SEC regarding the terms of any aid they expect to receive. Nevertheless, most analysts believe they'll end up with similar provisions, including having to pay back roughly 30% of aid under the payroll support program and offering warrants.
What that means for airline shareholders is that any recovery in the stock prices of airlines will result in a portion of gains getting diverted to the Treasury. For Delta, a 1% stake isn't huge, but American's proposal has a potentially much larger clawback.
Airline stocks initially reacted favorably to the news, but once shareholders had a chance to consider the terms, the share prices continued lower. With no end in sight to travel disruptions, it appears likely that the aid to help airlines through September might not be enough to outlast the impacts of the coronavirus on the industry.