U.S. to Take Stakes in Airlines in Exchange for Grants, Mnuchin Says

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Steven Mnuchin said last week that equity stakes could be part of an eventual coronavirus aid package.

Photo: Sarah Silbiger/Bloomberg News

WASHINGTON—Treasury Secretary Steven Mnuchin indicated that the U.S. government would take stakes in airlines in exchange for billions of dollars in direct grants to the companies, according to people familiar with the matter, as part of a $2 trillion economic rescue package.




He detailed his plans during last-minute negotiations when the aid to airlines emerged as a major legislative sticking point. Republicans had rejected providing cash grants to airlines, and an earlier version of the legislation would have provided $50 billion in loans and loan guarantees to passenger airlines and $8 billion to cargo airlines—but no direct aid.

Mr. Mnuchin has previously signaled such a move was on the table, saying last week that equity stakes could be part of the eventual aid package. While it wasn’t clear what form the investment would take, one option is a warrant that converts into equity. A warrant gives the buyer the option to buy shares at a certain price.

A Treasury spokesman didn’t immediately respond to a request for comment.

What’s in the Senate’s $2.1 Trillion Emergency Aid Bill

Airlines for America, the industry group for U.S. carriers, said the direct payroll grants would help airlines continue paying workers. “We remain hopeful that the federal government will expeditiously release these funds with as few restrictions as possible to ensure airlines are able to utilize these provisions and meet our payroll,” the group said. Its statement didn’t address the issue of the government taking stakes in companies.

Carriers have announced severe cutbacks in service amid sharp declines in passengers, and they have been trying to bolster liquidity in recent weeks by drawing down credit facilities and taking out new loans.

The version of the legislation passed by the Senate Wednesday night would provide $25 billion in loans and guarantees to passenger airlines, with the remaining $25 billion in the form of direct grants, meeting the requests of the airlines. Airlines had wanted outright grants, last week proposing a $50 billion assistance package, with half of that paid in grants to provide the cash that many carriers need right away to avoid furloughs and pay cuts.

The Senate bill details the forms of investment that the Treasury secretary might make in connection with the grants, listing warrants, options, preferred stock, debt securities, notes or other financial instruments to “provide appropriate compensation” to the federal government for providing financial assistance.

Industry and government officials said the Treasury Department could have leeway to tailor the form of its investments to individual carriers.

“We know the government values what we do as an essential service, and they are committed to helping us keep our team flying through—and eventually out of—this crisis, so we are optimistic that the terms will not be onerous,” American Airlines Group Inc. Chief Executive Doug Parker and President Robert Isom told employees Thursday.

Analysts have said the government aid would likely help airlines avoid the worst outcomes for now. But they are still in a precarious position, depending on the duration of the coronavirus pandemic, how quickly passengers begin flying again and the extent to which the virus’s spread continues to bring new operational challenges.

“We remain concerned that in the absence of second-half demand recovery, airlines could still come to find that court-supervised restructurings are necessary,” J.P. Morgan analysts wrote in a client note Wednesday.

Contagion-driven staffing emergencies at air-traffic-control facilities could make it challenging to continue flying in parts of the country at times.

Air travel has dwindled as a patchwork of government restrictions and public-health recommendations have encouraged people to stay home. Many flights have taken off with just a handful of passengers, while thousands have been canceled due to lack of demand. Only 240,000 passengers passed through airport-security screening checkpoints Wednesday, down nearly 90% from a year ago, according to the Transportation Security Administration.

Airlines have been shrinking themselves to contend with reduced demand—offering employees the option to take temporary leave without pay, parking planes and retiring some types of aircraft earlier than scheduled. Top executives have also agreed to reduce or forgo salaries in many cases.

Source: Johns Hopkins Center for Systems Science and Engineering

Alaska Air Group Inc., for example, said Wednesday that it would cut flying by 70% in April and May. The airline is burning through some $14 million in cash daily, CEO Brad Tilden said in a message to employees that was reviewed by The Wall Street Journal.

“We must move swiftly and courageously to reduce it, and to give us the best chance possible of waiting out this storm and capitalizing on any opportunities we see on the other side. This is the case even with the possible government aid that may flow to us,” he said. Mr. Tilden said in the message that Alaska should receive more than $2 billion through the government assistance outlined Wednesday.

Airlines continued to raise private finance themselves on Thursday, with Alaska Air announcing a new $425 million loan and United Continental Holdings Inc. borrowing another $500 million.

In exchange for the payroll grants, carriers must agree not to furlough, lay off or cut pay for employees until Sept. 30. Assistance also hinges on companies agreeing not to buy back shares or pay dividends, along with limits on executive compensation.

The package also allows the Transportation Department to direct airlines to keep operating specific flights so that rural communities don’t lose service and to support delivery of health-care-related cargo

Airline labor leaders had joined with carriers in pushing for the direct grants to support payroll in recent days, and portrayed their inclusion as a victory for front-line aviation workers. In the Senate package, the cargo airlines would receive $4 billion in grants and contractors $3 billion in grants.

The coronavirus pandemic is disrupting the global economy. WSJ’s Greg Ip explains what the Federal Reserve can do to stem the damage. Illustration: Carlos Waters/WSJ

Mr. Mnuchin has said repeatedly that the assistance to industries provided by the bill doesn’t constitute a bailout, and that taxpayers will be protected.

“We will be doing things on market terms, and if we determine that market terms include equity, we have the ability to do that,” Mr. Mnuchin said Monday in an interview with Fox Business Network, when the negotiations were continuing. “If the taxpayers are putting money at risk, they should be properly compensated.”

Write to Siobhan Hughes at siobhan.hughes@wsj.com, Alison Sider at alison.sider@wsj.com and Kate Davidson at kate.davidson@wsj.com

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