Airlines Got the Sweetest Coronavirus Bailout Around

(Bloomberg Opinion) -- The U.S. Treasury Department has asked more than 200 public companies that received almost $1 billion in loans under the Paycheck Protection Program to return the money, even if they technically qualify as small businesses. Treasury Secretary Steven Mnuchin has said the program wasn't intended for these companies because they have access to the capital markets.

Yet consider the federal aid to the airline industry. One day after receiving $5 billion in assistance from the Treasury, United Airlines sold $1 billion of common stock. Two days after receiving $5.4 billion in taxpayer funds, Delta said it was raising $3 billion by selling secured debt. It's good that the airlines are fortifying their balance sheets; their businesses are likely to suffer for some time because of the pandemic. But these actions should raise questions about the terms of the aid.

Let's stipulate: Any type of government assistance to a business is going to help its stockholders and creditors. But the issue is the extent of that benefit and its cost to the taxpayer. The aid to air carriers is particularly good for investors and costly to taxpayers because most of it -- 70% to be exact -- doesn't have to be repaid. Although all of it must be used for employee compensation, most of it is neither debt nor an equity investment; it is simply a grant. Congress authorized $25 billion for loans, and another $25 billion for “payroll support.”

In connection with that assistance, the law said Treasury may -- but was not required to --receive “warrants, options, preferred stock, debt securities or notes . . . [to] provide compensation to the federal government.” Treasury decided only 30% of the total for each airline would need to be repaid, and obtained warrants for common shares for 10% of that 30%. That's 3% of the total aid compared with 15% for warrants on the funds used to help banks in the 2008 financial crisis.

Don't expect those airline warrants to fully compensate the federal government for this lifeline. Assuming the loan portion is fully repaid, and ignoring interest (which is only 1%), United's share price would need to reach almost $800 for the government to recoup all the aid. The stock now trades at about $29. Even if the shares reach their pre-pandemic level of about $90, the warrants will return less than 5% of the total assistance provided by Treasury.

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 $26.50 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 $31.50.

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% 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% of its capital.

In drafting the $ 2 trillion CARES Act, there were different proposals on how to help the airlines. Some favored equity investments coupled with two board seats for labor 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.

The airlines are required to avoid furloughs, which does save the government the cost of unemployment compensation, but that's not the approach we've taken generally. It's also good that the assistance agreements prohibit the airlines from paying dividends or repurchasing their common stock. 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 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 $15 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.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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 U.S. Treasury Department's assistant secretary for the Office of Financial Stability, which oversaw the Troubled Asset Relief Program.