Airline stocks were rallying in extended trading on reports that carriers had struck a deal with the U.S. Treasury Department on a rescue package of loans and grants.
U.S. airlines and the Treasury Department reached an agreement in principle on billions of dollars in payroll grants, according to The Wall Street Journal. Carriers including American Airlines Group (ticker: AAL), Delta Air Lines (DAL), United Airlines (UAL), JetBlue (JBLU), and Southwest Airlines (LUV) have applied for aid to maintain liquidity amid a near total collapse of air travel due to the coronavirus.
“We welcome the news that a number of major airlines intend to participate in the Payroll Support Program,” Treasury Secretary Steven Mnuchin said in a statement on Tuesday afternoon. Ten major airlines plan to participate in the Payroll Support Program, he said, and “conversations continue with other airlines regarding their potential participation.” Treasury officials are also working with smaller airlines on a rescue package.
Terms of the aid are likely to emerge later Tuesday.
The Cares Act set aside more than $50 billion in aid for airlines, including a mix of grants, loans and tax relief. Airlines have been hoping to tap payroll grants that they wouldn’t need to repay (keeping furloughed employees off unemployment rolls in exchange). But Mnuchin told airline executives on Friday that aid packages would include low-interest loans worth 30% of total aid. The loans would have to be repaid over the next five years and they would come with warrants that could be converted into equity.
The big question is how much the warrants will dilute outstanding equity.
Bernstein analyst David Vernon expects warrants to amount to 10% of the total loan value. Carriers with strong balance sheets heading into the crisis would require less aid than those with more leverage and liquidity concerns. By his math, Southwest stock would be diluted by just 2% and American’s stock by up to 11% (reflecting their relative financial health).
Airlines have been chafing at government requirements that they maintain minimum levels of service to qualify for a rescue deal. Despite deep cuts in schedules, however—including a 75% cut in scheduled flights at American and over 80% at United—service levels appear above those thresholds, according to Vernon.
Investors appear relieved that the aid may soon start flowing, keeping airlines from filing for bankruptcy protection.
Shares of American and United were each up more than 8% after hours. Southwest and Delta were ahead more than 7% in extended trading. The NYSE Arca Airline Index gained 3.9% in regular trading on Tuesday.
Write to Daren Fonda at daren.fonda@barrons.com
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April 15, 2020 at 05:08AM
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Airline Stocks Rally on Agreement for U.S. Aid. Here Are the Details So Far. - Barron's
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