Airline investors were disappointed a few months ago, when Congress failed to renew the payroll support program that prevented involuntary layoffs and furloughs in the sector from April to September. The initiative had bipartisan support, and there was clear evidence by October that air travel demand would remain extremely low for many more months. Nevertheless, the proposed payroll support extension died over partisan disagreements about other potential relief measures.
However, Congress is reviving the payroll support program in a slimmed-down format as part of the new coronavirus stimulus bill. This is great news for airlines, especially leisure-focused carriers such as Hawaiian Holdings (NASDAQ:HA) and Spirit Airlines (NYSE:SAVE) that are feeling some strain on their balance sheets now but could benefit from a leisure demand recovery starting next spring.
More aid is on the way
The payroll support program included in the CARES Act provided $25 billion of aid to U.S. passenger airlines. That covered most of their labor costs for the second and third quarters. Outright grants accounted for about 70% of the aid, with the rest distributed as low-interest loans. Airlines were required to provide warrants tied to the loan amounts they received. The warrants have enabled the government to share in a modest way in the airlines' share price recoveries since March, with further upside if airline stocks keep rising.
This week's $900 billion coronavirus aid package includes an additional $15 billion of payroll support funds for passenger airlines. The funds will be distributed on approximately the same terms as the first round of payroll support. Of course, since Congress is allocating 60% of what it provided to passenger airlines under the CARES Act, airlines won't receive as much aid as they did between April and September.
The new batch of payroll support funds will also come with similar restrictions. Specifically, airlines must recall any workers they laid off or furloughed and keep them on payroll at least until the end of March. Furthermore, they must compensate employees recalled from furlough for any pay they would have been owed going back to Dec. 1.
Lower price tag is no problem for airlines
At first glance, the reduced funding level for airlines in the new stimulus bill might seem like a letdown. However, in some ways it's more generous, as airlines don't need aid as desperately now. For nearly two months beginning in late March, the TSA screened less than 10% of the number of passengers that passed through its checkpoints on the comparable days in 2019. By contrast, while demand is still extremely low by historical standards, TSA checkpoint volumes have averaged about a third of year-ago levels in December.
As a result, Spirit Airlines estimated earlier this month that cash burn will average $2 million a day in the fourth quarter. That's down from $9.5 million a day at the peak of the crisis in April. Similarly, Hawaiian Airlines has said it expects to burn an average of $2.2 million per day this quarter: down by more than half from April.
Spirit Airlines received $344 million from the CARES Act payroll support program, while Hawaiian received just over $300 million. This time around, that puts them in line for a little over $200 million and just under $200 million, respectively. Assuming that 70% is disbursed as grants, the new payroll support program would fully cover about two months of cash burn for Hawaiian Airlines and even more for Spirit Airlines. (Each carrier would also get low-interest loans to cover another month or so of cash burn.)
Business-focused airlines face longer-term issues
Of course, Spirit and Hawaiian are hardly the only airlines that will benefit from the new relief measure. However, they stand out in the industry for two reasons. First, they have weaker balance sheets than many low-fare airlines, such as Southwest Airlines. Thus, they have greater need for assistance.
Second, leisure-focused airlines have a relatively straightforward path to recovery next year. The rollout of COVID-19 vaccines could drive a surge in pent-up demand for vacation travel. As a result, Spirit expects to return to 2019 capacity levels by around the middle of 2021, while Hawaiian Airlines recently announced four new domestic routes designed to capitalize on a demand recovery beginning next spring.
By contrast, airlines focused on business travel could suffer a lot longer, as demand in that segment could remain depressed for years. United Airlines' top executives warned on Monday that they don't expect a meaningful improvement in demand between now and next March. While the company will recall all of its furloughed workers as required under the new payroll support program, it expects to furlough all of them again when the current batch of aid expires.
With the U.S. facing a dark winter because of the severity of the COVID-19 pandemic, airlines will be very grateful for the additional payroll support they are about to receive. However, the aid only represents a realistic bridge to a potential recovery for part of the sector.