Last spring, the federal government provided $25 billion of payroll support funding to U.S. passenger airlines, preventing job cuts in the hard-hit industry. However, this aid only provided a temporary reprieve, which ended on Sept. 30. Airlines subsequently let go of tens of thousands of workers, after Congress failed to agree on a payroll support extension despite bipartisan support for the concept.

Congress finally approved a second round of payroll support last month. In recent days, three of the largest U.S. airlines reported that they have already received their first disbursements under the new program. Let's take a look at what this means for American Airlines, Delta Air Lines, and Southwest Airlines.

Airlines announce agreements with the Treasury Department

Congress allocated $15 billion for the second round of airline payroll support -- significantly less than the amount available under the original program last spring. This is filtering through to the amounts offered to each company.

Airline

March 2020 Payroll Support Amount

December 2020 Payroll Support Amount

American Airlines (NASDAQ:AAL)

$6 billion

$3.1 billion

Delta Air Lines (NYSE:DAL)

$5.6 billion

$2.9 billion

Southwest Airlines (NYSE:LUV)

$3.4 billion

$1.7 billion

Data sources: American Airlines, Delta Air Lines, and Southwest Airlines SEC filings.

As with the initial payroll support program, grants will account for about 70% of the payroll support funds disbursed to these airlines. American, Delta, and Southwest will be required to repay the other 30%. This loan portion of the payroll support will carry very low interest rates, though: just 1% for the first five years.

The main condition attached to the new round of funding was that airlines had to recall all of their furloughed workers at full pay for the period from Dec. 1, 2020, through March 31, 2021. That includes retroactive pay for December.

All three companies reported that they received half of the expected payments under the new payroll support program last Friday. The other half will be disbursed later this quarter. The Treasury Department also might have funds left over after processing all of the payroll support applications, in which case it would provide a final additional payment toward the end of this quarter.

Who benefits the most?

Obviously, the payroll support extension is great news for all eligible U.S. airlines. They are getting a combination of free money and low-cost loans. However, some airlines are poised to reap a bigger benefit from this program than others.

From one perspective, American Airlines will be the top beneficiary. It has the weakest balance sheet of any major U.S. airline and is burning the most cash. (Last month, it estimated average daily cash burn for the fourth quarter at $30 million.) Thus, it had the greatest need for additional government support.

An American Airlines plane in flight, with mountains in the background

Image source: American Airlines.

On the other hand, American Airlines furloughed about 19,000 workers last fall. American's labor costs will increase from recalling those workers. By contrast, Delta and Southwest haven't furloughed any workers, relying instead on voluntary measures to minimize payroll costs. Thus, Delta and Southwest will see more of a bottom-line benefit from the payroll support program. (Moreover, since they are burning far less cash than American Airlines, their payroll support funds will go a lot further.)

Between Delta and Southwest, Delta Air Lines looks like the bigger winner from the new round of relief. It's set to receive about 70% more payroll support funding than Southwest, reflecting its larger size. Yet both airlines burned an average of about $12 million a day last quarter. Additionally, Southwest Airlines had planned to furlough up to 7,000 workers as soon as this month -- among other cuts -- had the payroll support program not been approved. It will now forgo the labor cost savings it otherwise could have captured.

Indeed, the $2 billion grant portion of Delta's payroll support easily exceeds its projected first-quarter cash burn. And with management expecting the airline to return to positive free cash flow next quarter, Delta Air Lines thinks its net debt has already peaked. That puts it in great shape to begin its recovery in 2021.

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