Another way to look at this is to calculate the benefit to an airline’s investors. United had about 240 million shares outstanding before last week’s offering, and it sold an additional 40 million shares at $US26.50 each. Meanwhile, in return for the aid, Treasury received 4.6 million warrants. For each dollar of future stock price appreciation, legacy United shareholders will get 84 cents and new shareholders will get 14 cents. Treasury’s return? Less than 2 cents per dollar of share price appreciation, and there’s a catch: Treasury doesn’t get anything until the price exceeds $US31.50, the exercise price of the warrants.
During the financial crisis, the legislation that created the Troubled Asset Relief Program – the primary crisis response adopted by Congress – required Treasury to obtain warrants on all investments. Treasury recovered its capital plus an additional 10 per cent on the bank investments. That was mostly because the federal government took preferred stock in the banks, which they were obligated to repay. The warrants helped, though the government’s upside was limited because the law required Treasury to sell the warrants when a bank repaid the investment. Even the auto company bailouts – the only financial crisis investments on which Treasury lost money – provided a much better return than taxpayers will get from the airline assistance, with the government recouping almost 90 per cent of its capital.
In drafting the $US2 trillion CARES Act, there were different proposals on how to help the airlines. Some favoured equity investments coupled with two board seats for labour representatives. The employees’ unions viewed outright grants as the most likely way to preserve jobs. Republicans, who railed against the investments in the auto companies in 2009, agreed to outright grants to the airlines.
It’s good that the assistance agreements prohibit the airlines from paying dividends or repurchasing their common stock and require them to avoid furloughs. But those same terms could have been built into a transaction in which all the assistance was in the form of a low-cost loan. Loans even could have been structured to postpone principal payments and very low or no interest for three to five years, giving the industry time to recover. To best protect taxpayers, the loans also could have been secured; when Delta said last month that it was selling secured debt it disclosed that it had $US15 billion in unencumbered assets.
It is hard to quickly design assistance programs in the midst of a crisis, and it’s better to do too much than too little. And the airlines are a vital industry that needs to be supported at a time like this. But it is not the only industry badly hurt by the pandemic, yet the treatment it got from the government stands out for its generosity. We need to spend more wisely in keeping our economy afloat.
Timothy Massad is a senior fellow at the John F Kennedy School of Government at Harvard University. He served as chairman of the Commodities Futures Trading Commission from 2014 to 2017 and was the US Treasury Department’s assistant secretary for the Office of Financial Stability, which oversaw the Troubled Asset Relief Program.