American Consequences - August 2020

THE DEATH OF AIRLINES

75% of the time, they restructure... Existing shareholders get wiped out, and the debt gets adjusted to an amount the new entity can handle. So the planes keep flying – just with new owners. Three of the four major U.S. airlines have restructured in bankruptcy over the past 14 years... United completed its restructuring in 2006, Delta in 2007, and American in 2013. Bankruptcy is nothing new in the airline industry... And if this current situation doesn’t improve soon – which seems unlikely – we can expect major airlines to go bankrupt as well. Dave Calhoun, the CEO of aircraft maker Boeing (BA), said earlier this year that he believes we may see a major U.S. carrier go

out of business as early as September. And the federal government is unlikely to come to the rescue this time... Since March, the federal government has approved around $3 trillion worth of funding in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and other stimulus bills. The CARES Act provides U.S. airlines with up to $25 billion in “payroll support” cash grants for agreeing not to lay off workers through September 30... and another $25 billion in loans. But this isn’t an industry savior. It’s nothing more than a stopgap measure to keep the airline industry in place for now. The fall in traffic and the resulting cash burn is too great. The government doesn’t need zombie airlines... the same way it didn’t need a zombie automaker in 2009. By the time General Motors (GM) declared bankruptcy in June 2009, it had received more than $50 billion in loans from the government. Ultimately, $42 billion of those loans were converted in the bankruptcy restructuring to 60% of the stock in the “new” General Motors (the current company). And $8 billion of the loans stayed on the books of the new entity. Besides the grants to keep workers employed, the loans that the airlines are receiving from the government must be paid back. They’re not free. The more loans the airlines take... the more likely they’ll be overwhelmed by debt and go bankrupt. And if they go bankrupt – as with

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August 2020

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