Executive Summary

On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”) into law, which provides for substantial financial support for the U.S. aviation sector in the form of both loans and grants. The Act will provide needed liquidity for the airline industry, which directly employs over 750,000 people and is indirectly responsible for over 10 million jobs (7.3% of all U.S. jobs).

On Monday, March 30, 2020, the U.S. Treasury Department released preliminary Procedures and Minimum Requirements for the loans (“Procedures and Requirements”) and Guidelines and Application Procedures for the grants.

The Act provides for a total of $46 billion in loans and loan guarantees for passenger air carriers, ticket agents, MROs, cargo air carriers, and "businesses critical to maintaining national security," specifically:

  • Up to $25 billion for “passenger air carriers” (defined in the Treasury guidance as an air carrier that, from April 1, 2019 to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of passengers), ticket agents, and MROs;
  • Up to $4 billion for “cargo air carriers” (defined in the Treasury guidance as an air carrier that, from April 1, 2019 to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of property or mail, or both); and
  • Up to $17 billion for “businesses critical to maintaining national security.”

The Act also provides for $32 billion in direct grants available for passenger air carriers, cargo air carriers, and contractors, to be used exclusively for employee wages, salaries and benefits, as follows:

  • Up to $25 billion for passenger air carriers;
  • Up to $4 billion for cargo air carriers; and
  • Up to $3 billion for contractors (or subcontractors) performing services under contract with a U.S. passenger air carrier operating under 14 C.F.R. Part 121 (including, but not limited to, cargo services providers, contractors providing services to passengers with disabilities, security companies, caterers, ticketing/check-in agents, ground handlers, and cleaning services).

Additionally, airports are eligible for up to $10 billion in grants to “prevent, prepare for, and respond to coronavirus.” The Act also suspends aviation excise taxes through the end of 2020, including taxes and fees on airline passenger tickets, cargo, and aviation jet fuel. Only U.S. companies are eligible to receive loans and grants.

While the CARES Act generally provides the aviation sector with the financial support it had publicly requested in recent days and weeks, the Act establishes a number of conditions and oversight mechanisms to provide for transparency and accountability in how the grants and loans will be used.1

Loans, Grants and Related Provisions

Loans

As directed under the CARES Act, the Treasury Department published preliminary Procedures and Requirements for the loans on March 30, 2020. These will be supplemented with additional terms and an application form, and may be revised, modified, or waived by the Treasury Department. As part of the loan application process, borrowers must provide certain financial, employment and operational information, as detailed in the Procedures and Requirements, and are encouraged to begin compiling this initial list of information to expedite loan applications. There is no deadline within the Act for when loan funds must be disbursed.

As restated in the Procedures and Requirements, the CARES Act enumerates a number of terms and conditions applicable to the loans, including:

  • Loan interest rates, “to the extent practicable,” will not be less than an interest rate based on market conditions for comparable obligations prior to the outbreak of COVID-19;
  • The duration of the loan must be as short as practicable and in any case not longer than five years;
  • Indebtedness may not be reduced through loan forgiveness;
  • Through September 30, 2030, borrowers must maintain employment levels as of March 24, 2020, “to the extent practicable,” but in any case may not reduce employment by more than 10% from the levels on that date;
  • Borrowers may not pay dividends until one year after the loan or loan guarantee is no longer outstanding;
  • Borrowers or any affiliates may not buy back stock (unless required under pre-existing contractual obligations) until one year after the loan or loan guarantee is no longer outstanding. The Secretary is authorized to waive this requirement if necessary to protect the interests of the Federal Government, but to do so the Secretary would have to testify before the Senate Banking Committee and the House Financial Services Committee to explain the reasons for the waiver;
  • Companies seeking loans must be: 1) created or organized in the U.S.; and 2) have significant operations and a majority of employees in the U.S.;
  • Limits on compensation for certain employees and officers beginning the date on which the agreement is executed and ending one year after the date on which the loan or loan guarantee is no longer outstanding; and
  • The U.S. Secretary of Transportation may require, to the extent reasonable and practicable, that carriers accepting loans maintain air service to any point served before March 1, 2020 through March 1, 2022 at the latest, with special consideration given to small communities and to the maintenance of health care and pharmaceutical supply chains.

The Act also contains the following oversight mechanisms:

  • The Act creates a Special Inspector General For Pandemic Recovery (“Special Inspector General”) within the Department of the Treasury, who will be appointed by the President with the advice and consent of the Senate. The Special Inspector General is charged with overseeing and auditing the making, purchasing, management, and sale of loans, loan guarantees, and other investments made by the Treasury Secretary under the Act and must submit detailed reports to “the appropriate committees of congress;” and
  • The Act creates a bipartisan, five-member Congressional Oversight Commission that is charged with overseeing the implementation of the law, must release reports every thirty days, and is empowered to hold hearings, take testimony and receive evidence.

 

Grants

The CARES Act provides $32 billion in grants for air carriers and eligible contractors/subcontractors, which must be used exclusively for employee wages, salaries, and benefits -- $25 billion is allocated for passenger air carriers, $4 billion is allocated for cargo air carriers, and $3 billion is allocated for contractors/subcontractors.

On March 30, 2020, the Treasury Department also released guidance for grant applicants. Air carriers and contractors are instructed to file by 5:00 p.m. EDT on April 3, 2020. Among other terms and conditions detailed in the guidance, applicants must identify the total amounts they paid to employees in (a) wages and salaries, (b) benefits, and (c) other compensation, in each month between April 2019 and September 2019. Applications received after April 3, 2020 will be considered but may take longer to process. Applications received after April 27, 2020 may not be considered. Under the Act, initial payments to applicants must be made no later than April 6, 2020.

The Act enumerates the following conditions for grants:

  • Each carrier or contractor is entitled to grant assistance in an amount equal to the salaries and benefits of its employees between April 1, 2019 and September 30, 2019;
  • Grant recipients must agree not to conduct involuntary furloughs or reduce pay rates or benefits through September 30, 2020;
  • Grant recipients may not pay dividends or buy back shares of stock until September 30, 2021, and must agree to limits on employee/officer compensation from March 24, 2020 through March 24, 2022; and

The U.S. Secretary of Transportation may require, to the extent reasonable and practicable, that carriers accepting grants maintain air service to any point served before March 1, 2020 through March 1, 2022 at the latest, with special consideration given to small communities and to the maintenance of health care and pharmaceutical supply chains.

Airports

The CARES Act allocates $10 billion in grants for airports to “prevent, prepare or, and respond to coronavirus.” The grants are only available to airport sponsors (i.e. public agencies and private owners of public-use airports) and must be for purposes directly related to airports.

The airport grants will be allocated by formula -- $3.7 billion will be allocated among all commercial airports based on each airport’s percentage of calendar year 2018 enplanements; another $3.7 billion will be allocated among all commercial service airports based on each sponsor’s debt service and unrestricted reserves. In addition, the Act reserves $100 million for general aviation airports.

Hub and primary airports receiving grants must continue to employ at least 90 percent of their current number of employees through December 31, 2020 (excluding retirements or voluntary separations). The Secretary may waive this requirement upon determining that the airport is experiencing economic hardship as a result of the requirement, or that adherence to the requirement reduces aviation safety or security.

U.S. Government Ownership in Aid Recipients

Under the Act, and as clarified in the loan Procedures and Requirements, the Treasury Department may not issue a loan to (1) a borrower that has issued securities that are traded on a national securities exchange unless the Treasury Department receives a warrant or equity interest in the borrower, or (2) any other borrower unless the Treasury Department receives, in the discretion of the Treasury Department, a warrant or equity interest in the borrower, or a senior debt instrument issued by the borrower. These requirements appear to give the Treasury Department considerable discretion in determining what warrants, equity interests, or senior debt instruments it will accept from borrowers. The loan Procedures and Requirements also instruct applicants to identify the financial instruments they propose to issue to the Treasury Department.

For grants, the Secretary is not required to receive financial instruments in return, but “may” choose to receive warrants, options, preferred stock, debt securities, or other instruments which, in the Secretary’s sole determination, “provide appropriate compensation” to the government. Secretary Mnuchin has reportedly indicated that the government will choose to take equity stakes in airlines receiving grants. Consistent with these reports, grant applicants are required by the application procedures released by the Treasury Department to identify financial instruments that will provide appropriate compensation to the Federal Government for the grants received.

Next steps

The grants and loans will provide immediate relief in the form of liquidity to companies in the U.S. aviation sector, many of which have obtained new loans from the private sector and have drawn on their credit lines in recent days. It will also provide needed job security to these companies’ employees for the next six months. Airlines have been proactive in positioning themselves to withstand the unprecedented decrease in passenger traffic resulting from the COVID-19 pandemic, including by repurposing passenger aircraft to fly cargo-only service, reducing flight numbers, storing unused aircraft, streamlining maintenance, and reducing fixed costs. The CARES Act provides critical relief to the industry during a difficult and uncertain time until traffic rebounds -- hopefully in the coming months.


[1] The final Act also did not include disputed provisions on labor relations, carbon emissions, or ancillary service charges, as were proposed in a standalone bill introduced in the U.S. House of Representatives on March 23rd. 

 

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