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7 U.S. Carriers Choose Treasury Loans: More Federal Aid Ahead?

The dreaded coronavirus continues to ravage stocks in the airline space even though more than six months have elapsed since the health peril was declared a pandemic by the World Health Organization. Due to this ongoing crisis, the top lines of the aviation stocks were crippled with depressed passenger revenues. Despite the recent improvement noticed in travel demand, passenger revenues are trending way below the year-ago levels.

Due to their financial distress, airlines are burning significant amount of cash per day. To help the cash-strapped carriers in the United States, a $25-billion federal loan package was approved under the Coronavirus Aid, Relief, and Economic Security (CARES) Act earlier this year.

Although in July, many carriers had signed letters of intent pertaining to their share in the federal aid, the likes of Delta Air Lines DAL and Southwest Airlines LUV finally decided against availing of the treasury loans. Evidently, Delta opted for private funding instead of government grants. This Atlanta, GA-based carrier aims to borrow $9 billion while pledging its SkyMiles frequent flyer program as collateral.

As a result of the opt-outs, share of the carriers availing of federal loans increased. For instance, the maximum amount that the currently Zacks Rank #3 (Hold) American Airlines AAL could borrow was initially pegged at $4.75 billion. However, the same climbed to $5.5 billion following the opt-outs. Regional carrier SkyWest SKYW is eligible to borrow up to $573 million. American Airlines and SkyWest already borrowed $550 million and $60 million from their respective permitted amounts with an option to further borrow in maximum two more installments until Mar 26, 2021.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other carriers that have agreed to take loans so far are United Airlines UAL, Alaska Air ALK, Frontier Airlines, JetBlue Airways JBLU and Hawaiian Airlines, the wholly owned subsidiary of Hawaiian Holdings HA. Today is the last day for any other airline to take a call on accepting the loans the loans. With not many more additions expected to the existing list of seven, share of the participating airlines could expand further. For example, American Airlines’ share may be hiked to $7.5 billion (the maximum amount permissible to any carrier) next month. However, companies agreeing to utilize the federal stimulus package must abide by certain conditions like restricting executive compensation and offering equity or other financial stakes to the government in exchange.

What Lies Ahead?

The above $25-billion loan package was in addition to the $25-billion payroll support to the airlines. The payroll cushion, dispensed mostly through grants in April, expires today.  As a condition to receiving the payroll support, airlines were prohibited from laying off employees until Sep 30.

However, many airlines had warned of job cuts starting Oct 1 in the event of no further federal aid as they are faced with the problem of overstaffing in the continued tepid demand scenario. Consequently, U.S. carriers are seeking a six-month extension of the payroll support program with airline executives meeting the White House chief of staff Mark Meadows earlier this month as up to 50,000 jobs are on the line.

The above-mentioned federal loans are also unlikely to be enough in absence of a second round of stimulus. In fact Treasury Secretary Steven T. Mnuchin also spoke in favor of an additional federal aid: “We call on Congress to extend the Payroll Support Program so we can continue to support aviation industry workers as our economy reopens and we continue on the path to recovery.”

Even though the proposal to extend the assistance for airlines garnered a bipartisan support, nothing has been approved yet. However, airlines are still hopeful of getting more federal help, which would protect multiple jobs. To this end, Delta reportedly deferred the decision to furlough its pilots by a month to Nov 1. This delay will allow the carrier more time to lobby for additional federal assistance.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
Hawaiian Holdings, Inc. (HA) : Free Stock Analysis Report
 
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