For the past six months, a payroll support program created under the CARES Act enabled airlines to keep their workers employed despite an unprecedented drop in demand. But with U.S. air travel demand still at just a third of 2019 levels, more relief is needed to avoid tens of thousands of furloughs and layoffs.
Despite aggressive lobbying by airlines and their unions and bipartisan support for a six-month extension of the payroll support program, no agreement had materialized by the time the initial batch of payroll support funds ran out last week. However, with the furlough process beginning, it appears that Congress is finally close to extending the payroll support program.
A rollercoaster ride
For the past two months at least, there has been solid bipartisan support for extending the payroll support program for airlines. Between the likely job losses in big hub markets and potential service cuts in small cities, most members of Congress have a vested interest in helping airlines avoid big cuts. Nevertheless, in recent weeks, the likelihood of an extension seemed to fade due to disagreements between Democrats and Republicans about the size and composition of a broader follow-up coronavirus relief bill.
As a result, airlines -- particularly American Airlines Group (AAL 1.16%) and United Airlines Holdings (UAL 0.70%) -- began to implement mass furloughs and layoffs on Thursday. The number of planned job cuts totaled around 19,000 at American and 13,342 at United. Regional affiliates of the two airlines were also preparing to furlough or lay off thousands of employees.
These stark figures are goading Congress into action. Congressional leaders also seem to recognize that furloughs are particularly disruptive in the airline industry, where training and licensing requirements make it virtually impossible to recall furloughed workers quickly.
On Friday, Speaker of the House Nancy Pelosi asked airlines to delay their furloughs and said more aid was on the way. Negotiations around the next large-scale relief bill remain contentious, but Pelosi also dangled the possibility of a stand-alone extension of the airline payroll support program. Such a stand-alone bill would likely pass Congress easily.
Short-term and long-term savings
The terms of an extended payroll support program are unclear. However, if Congress just rolls the existing program forward, the Treasury Department would provide $25 billion of aid to passenger airlines over the next six months -- split roughly 70% to 30% between grants and loans -- earmarked specifically for payroll costs. In return, the airlines would agree not to implement any involuntary layoffs or furloughs until at least April.
Obviously, this would be a huge win for airline workers. With coronavirus vaccine development moving along and air travel demand being strongest during the spring and summer, postponing furloughs until at least April 1, 2021 would probably make the ultimate number of furloughs much lower.
Of course, U.S. airlines will also be big beneficiaries of any additional aid. In the near term, a payroll support extension should enable many airlines to post break-even or even positive cash flow over the next six months. Big airlines like American and United were burning $100 million of cash per day (or more) at the peak of the pandemic this spring, and the payroll support funds only offset a portion of those losses. By contrast, United Airlines expects to report daily cash burn of around $25 million for the third quarter, an amount that the grant portion of its payroll support funds would almost fully cover.
Looking further ahead, the payroll support extension would enable airlines to avoid unnecessary training costs and limitations on which aircraft are available for service. They will be able to make sure all of their employees get enough work to maintain their regulatory certifications. Airlines will also have an easier time ramping up their schedules in 2021 and 2022 as demand recovers.
High debt loads, subpar pre-pandemic profitability, and heavy exposure to market segments that are likely to recover slowly will continue to weigh on shares of American Airlines and United Airlines. However, their prospects appear a lot better now than they did just a few days ago.