The Coronavirus Aid, Relief and Economic Security (CARES Act) was signed into law March 27. The $2 trillion stimulus package includes up to $50 billion in funding for U.S. passenger airlines. The aid safeguards many airline employees’ paychecks through Sept. 30 and provides much needed liquidity for an industry that will be a critical to sparking an economic recovery once the coronavirus pandemic subsides. A forceful public outcry led to several restrictions in the CARES Act designed to prevent the passenger airlines from using money received under the act to boost stock prices or executive compensation.
These guardrails are a good start, but they do not go far enough. While the law requires that the airlines continue some service to remote locations, the CARES Act lacks much-needed protections for most consumers, such as guaranteeing fair pricing and reasonable flight availability when regular air travel resumes. It is up to the Department of Treasury and Department of Transportation to issue regulations that ensure passengers’ needs are met.
Natural economic forces are unlikely to force passenger airlines to make decisions that benefit consumers. The airline industry has undergone significant consolidation over the last 15 years through a series of mergers and acquisitions. This consolidation has created a market dominated by the “Big Four” airlines—American Airlines, Delta Airlines, United Airlines and Southwest Airlines— which account for 80% of the domestic market.
The practical effect of consolidation is limited competition on many air routes within the United States, often with just two or three airlines competing for passengers. As a result, one airline cutting service on a specific route will, without government intervention, lead to increased prices and decreased service for passengers. The CARES Act, understandably, focuses on immediate stop-gap measures, but in the coming months the Department of Treasury and Department of Transportation must take steps to guarantee that the temporary measures do not become permanent economic advantages for the airlines.
The CARES Act provides up to $25 billion in loans and loan guarantees to U.S. passenger airlines and another $25 billion for the payment of airline employee wages, salaries and benefits. In the discussion surrounding the CARES Act, the passenger airline industry came under intense criticism for the airlines’ use of record profits in recent years to implement stock buy-backs.
The new law includes several restrictions on passenger airlines that participate in the loan program or receive payroll grants provided under the CARES Act. The passenger airlines are restricted from buying back stock and paying dividends through Sept. 30, 2021. The CARES Act also places limits on executive compensation. Airline employees that make over $425,000 may not receive any pay increase until loans under the CARES Act are no longer outstanding. The act also limits executive compensation to a maximum of $3,000,000 during the same period.
The Department of Treasury and Department of Transportation are also instituting new regulations in conjunction with the CARES Act. At major airports, airlines need to purchase “slots” that allow them to fly into and out of the airports at certain times. There is a “use it or lose it” rule that requires airlines to use their allotted slots or lose them. This has led to airlines flying empty flights from point to point— just to maintain their slots. The Secretary of Transportation has issued waivers to the use it or lose it rule. In addition, the Department of Transportation is considering regulations permitting airlines to share flights. This would allow multiple airlines that typically service one route to sell seats on the same plane—imagine buying a Delta Airlines ticket, but flying on American Airlines metal.
While the restrictions on stock buybacks, dividends and executive compensation have garnered a great deal of media attention, far less focus has been placed on how the airlines will operate as regular air travel resumes and what steps will be taken to prevent the airlines from taking advantage of the regulatory accommodations to boost their profits.
The CARES Act provides the Secretary of the Treasury with the authority to require participating airlines to continue operating flights to any point the airline serviced prior to March 1, 2020. The purpose of this provision is to guarantee that airlines continue to serve less-traveled areas. This is important, but it does not protect the vast majority of airline passengers.
There are several additional actions the Department of Treasury and Department of Transportation should take to protect consumers.
First, the federal agencies should require that, as a condition of taking CARES Act funds, passenger airlines guarantee that pricing will not exceed March 1 pricing levels for a period of at least six to nine months following the closing on any CARES loan or receipt of payments to provide salary relief.
Second, the federal agencies should require participating airlines to gradually resume flight levels substantially similar to those in effect on March 1, once the imminent threat of the coronavirus subsides.
Third, the federal agencies should provide for a sensible, orderly rollback of slot waivers that will ensure that traditional slotting rules are back in place within a short time period.
These actions are necessary to ensure that consumers are not unintentionally harmed by the CARES Act and the attendant federal regulations. They will also provide a direct benefit to taxpayers in exchange for their substantial contribution to the passenger airline industry.
*This article was republished with permission from Daily Business Review. Click here to access the publication.
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