Reed: Warrants are Warranted & Will Ensure Taxpayers Get a Healthy Return When Airline Recovery Eventually Takes Off
WASHINGTON, DC – With the novel coronavirus (COVID-19) causing severe economic turbulence for the airline industry, Congress stepped in with a $50 billion rescue package in the CARES Act to help save hundreds of thousands of jobs and ensure air travel remains safe, reliable, and a viable connection for people, communities, and our economy.
Notably, the amount of the airline rescue package is just $5 billion more than what the five largest U.S. airlines paid out to shareholders and executives over the last five years, according to data from public filings. In fact, according to Bloomberg, major air carriers have directed 96 percent of their free cash flow over the last decade to buying back their own shares, which has come at the expense of investing in priorities that could have better positioned airlines for a downturn.
In order to protect taxpayers, and ensure the American people don’t just assume all the risk while investors and executives reap all the financial rewards, U.S. Senator Jack Reed (D-RI) included a provision in the CARES Act providing the federal government the ability to secure through ‘warrants,’ non-voting equity shares in airlines that choose to seek taxpayer assistance. A stock warrant is a contract between a company and an investor that provides the investor the option to purchase a share of the company's stock at a specific price.
Reed’s warrants provision ensures taxpayers -- and not just investors and executives -- benefit when the economy recovers and the company’s share price rebounds. It is modeled on a warrants law Reed wrote in the 2008 bank bailout package that successfully returned nearly $10 billion in profits to U.S. taxpayers as the banks recovered. Without Reed’s law, investors and executives would have pocketed all the profits, and taxpayers wouldn’t have been compensated appropriately for assuming the risks.
“Risk and reward are part of any major financial investment. My provision means the major carriers are getting a hand up from taxpayers instead of a corporate handout. If you believe, as I do, that the airlines will rebound at some point in the future, then this is a good deal for both taxpayers and commercial airlines alike. We will spare no effort in combating coronavirus and restoring our nation’s economy. But we must do so in a smart, responsible way that protects taxpayers and builds on lessons learned from the 2008 bailout,” said Senator Reed, a senior member of the Banking Committee. “It is in everyone's interest to ensure American companies make a strong comeback from COVID-19. I want the federal government to invest wisely to ensure taxpayers are protected.”
Reed credited investor Warren Buffet for sparking the idea: “When Warren Buffet makes investments in struggling companies that eventually turnaround, he is lauded as an astute investor and reaps billions in profits. Similarly, if taxpayer funds are needed, the terms must be fair, and taxpayers should be rewarded for helping struggling companies turnaround."
The $50 billion airline bailout plan in the CARES Act includes a combination of grants and loans and includes several key stipulations that Senator Reed backed to ensure money goes to supporting workers and limiting things like stock buybacks. Participating airlines are prohibited from furloughing employees or reducing employee pay and benefits through September 30, 2020 and they are barred from paying dividends or pursuing stock buybacks through September 30, 2021.
“The airlines didn’t cause this crisis, but most could have done more to be better positioned for a major downturn in a historically turbulent industry. Now they need taxpayer assistance. My provision ensures taxpayers are fairly treated and compensated for the risks they are taking. There are many factors that will determine the pace of recovery, and it will take some time. But when commercial airlines return to profitability, taxpayers should get a healthy return on their investment,” said Reed.
Several major carriers have already agreed to the terms and accepted cash grants in exchange for warrants.
Under the law, the Treasury Secretary has the authority to secure warrants to purchase common stock at a pre-set price in order to protect taxpayers. On April 14, Secretary Mnuchin and ten major airlines announced an agreement in principle. Essentially the agreement between Treasury and the airlines means that for every $1 billion in government assistance the airlines accepted, approximately $700 million would be in grants and $300 million would be provided in low-interest loans with an option for the federal government to acquire $30 million worth of shares at current stock prices. Under the terms of the agreement, the Secretary of the Treasury can cash in those warrants, ideally at a time when stock prices have rebounded with profits returning to the Treasury to benefit taxpayers.
The National Law Review outlined the terms of several agreements that have been publicly announced, including:
• Alaska Airlines (together with its affiliate, Horizon Air) will receive $992 million in total payroll assistance; $725 million will make up the grant portion and $267 million will be funded as a loan. The Treasury Department will acquire the right to purchase 847,000 non-voting shares of Alaska Air Group at $31.61 per share.
• American Airlines (together with affiliates Envoy Air, Piedmont Airlines, and PSA Airlines) will receive $5.8 billion in total payroll support; $4.1 billion will be paid as a grant and $1.7 billion will be funded as a loan. The Treasury Department will acquire warrants to purchase approximately 13.7 million shares of common stock of American Airlines Group – the parent company of American Airlines and its aforementioned affiliates – at $12.51 per share.
• Delta Air Lines will receive $5.4 billion in total payroll assistance, with a grant of $3.8 billion and $1.6 billion making up the loan portion. The Treasury Department will acquire warrants to acquire approximately 1 percent of the company at a price of $24.39 per share.
• JetBlue Airways will receive $935.8 million in the aggregate, with $685.1 million being paid as a grant and $250.7 million being made as a loan. Analysts estimate that the Treasury Department will acquire warrants to purchase roughly 2.6 million shares of common stock of JetBlue Airways at $9.50 per share.
• Southwest Airlines will receive $3.2 billion in total aid, with $2.3 billion coming as a grant and nearly $1 billion through a loan. The Treasury Department will acquire warrants to purchase 2.6 million shares in the airline at $36.47 per share.
• United Airlines will receive a total of $5 billion in total aid. Roughly $3.5 billion will be a direct grant and $1.5 billion will be made as a loan. The Treasury Department will acquire a warrant to purchase approximately 4.6 million shares of common stock of the airline’s parent company – United Airlines Holdings – at $31.50 per share.