Tuesday, May 5, 2020

One business sector receiving government support during the Covid-19 crisis is the airline industry. And now that major carriers are starting to file their Q1 2020 reports, financial analysts can use Calcbench to see exactly how much support those formerly high fliers are getting.

For example, Delta Airlines ($DAL) filed its quarterly report on April 22 with a note devoted to Covid-19 disclosures. One section addressed support Delta received from the government as part of the $2 trillion CARES Act, and it included the details of the bailout — direct grants and low-interest loans Uncle Sam will send Delta’s way, in exchange for warrants letting the U.S. Treasury buy Delta shares at a fixed price over the next five years.

So what are those details? The U.S. government has pledged to give Delta $3.8 billion as a direct grant of cash, plus another $1.6 billion delivered as a 10-year loan. That loan will have a 1 percent interest rate through April 2025, and then a floating rate equal to the Secured Overnight Financing Rate plus 2 percent for the remaining five years.

In exchange, the Treasury gets warrants to acquire 6.5 million shares of Delta common stock, at an exercise price of $24.39 per share. For comparison purposes, Delta had been floating around the upper $50s for most of the last 12 months, and then plummeted to $21 in early April. Right now it’s hovering around $24.

OK, those are the details of this specific bailout — but how large is that bailout relative to Delta’s overall business? And how does Delta’s bailout compare to what rival airlines are receiving?

We decided to take a look.

Cash Grants and Revenue

We examined six major airlines:

  • Alaska Air Group ($ALK)
  • American Airlines ($AAL)
  • Delta
  • JetBlue ($JBLU)
  • Southwest ($LUV)
  • United Airlines ($UAL)

All six received two types of aid: direct cash grants, and 10-year loans with the same low-interest rate terms we described for Delta. In exchange, all six airlines gave the U.S. government warrants for common stock with an exercise price based on the firm’s April 9 share price.

What did the airlines actually get? See Figure 1, below.



Which airline received the best deal? That depends on how you define “best.”

For example, if you define success as the smallest dilution of shareholder value, that honor would go to Southwest. Its 2.6 million warrants will dilute shareholders by only 0.48 percent.

On the other hand, Southwest will also see its long-term debt balloon by 51.3 percent, thanks to that $948 million loan — which is, we might note, one of the smaller loan amounts the airlines received. Southwest also took the largest cash grant as a percentage of revenue.

American Exceptionalism

We also need to call out American Airlines for its unusually confusing bailout disclosure. The other five airlines followed one clear pattern: “We received this much in direct grant and this much as a loan, in exchange for this many warrants at this exercise price.” Like, pretty straightforward stuff, right?

Not so for American.

American stated that the company would receive $5.8 billion from the Treasury — but $1.7 billion of that amount would fund a promissory note American will give back to the Treasury, plus warrants for 13.7 million in AAG stock. Take a look:

As partial compensation to the U.S. Government for the provision of financial assistance under the Payroll Support Program, AAG and its subsidiaries expect to issue an aggregate principal amount of approximately $1.7 billion under a promissory note and warrants to purchase up to 13.7 million shares of AAG common stock (assuming the full $5.8 billion of financial assistance is received).

Well, it’s clear that the total bailout for American is $5.8 billion. If the company is also pledging $1.7 billion of that sum back to the Treasury, that means the total direct grant is only $4.1 billion. Hence the figures we included in Figure 1, above.

Also, American has applied for a separate loan from the U.S. government for $4.75 billion, in exchange for warrants worth another 38 million shares. That loan was still pending and unapproved when American filed its 10-Q on April 30, so it is not included in our totals above.

Filed under: High Flyers No More.


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