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Flight risk

17 Dec 2020 By Lauren Silva Laughlin

Airlines are sitting tight for another bailout from U.S. taxpayers. The industry may receive $17 billion as part of a $900 billion coronavirus relief bill working through Congress, Reuters reported on Thursday. Since airlines are now unquestionably considered an essential industry, it’s time their bailouts came with tighter strings.

The air travel business received $50 billion earlier this year in the form of loans and grants, with big carriers like American Airlines taking in as much as $13.5 billion. Grant recipients were forced to keep staff on the payroll, but some airlines let employees go anyway. Executives threatened this fall to resume layoffs if they didn’t get more cash by the end of September. Yet American, for example, had more than $8 billion in liquidity at the end of the third quarter, twice what it had a year earlier.

It’s understandable if airlines take whatever they can get. But other industries that have received big bailouts, such as banks, have ended up with tougher rules as a result. Unlike banks, airlines didn’t create their current crisis. But greater financial discipline might mean that next time disaster strikes, it’s less costly to the general public.

Cash buffers are a good place to start. Airlines now know how much cash they burn daily in a real crisis. At American it’s $58 million daily, based on the second quarter of this year. At Delta Air Lines it was $43 million. At the end of 2019, both airlines had cash and short-term investments sufficient to withstand just over two months like that. In future, it might be prudent to require them to have enough to last six months –Southwest Airlines was closer to that level.

Capping indebtedness might help too. In the five years to the end of 2019, American Airlines’ net debt crept from one year’s EBITDA to almost 3.5 years’ worth, according to Refinitiv. Setting leverage limits at two times would be reasonable, even if that means less for things like stock buybacks and dividends. American paid out $13 billion to investors over that time.

This isn’t the first time airlines have needed money: they received cash after the attacks on the World Trade Center in 2001, too. And it won’t be the last. Congress will spend much of 2021 dealing with problems caused by the current crisis, but keeping closer tabs on airlines’ finances would help prepare for the next one.


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