The Coronavirus Aid, Relief, and Economic Security Act: Assistance Available to Passenger Airlines and Airports

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”), a $2+ trillion stimulus package intended to ease the economic and social disruptions facing the country in the wake of the COVID-19 outbreak.  Unsurprisingly, the new law includes funding and financing for passenger airlines and airports, which are among those expected to be hardest hit by the outbreak. 

While the CARES Act includes targeted funding for certain transportation programs, such as $56 million for the Essential Air Service program, the largest aviation related relief programs are:

• $25 billion for loans and loan guarantees to passenger airlines;
• $25 billion for wages, salaries and benefits of airline employees; and
• $10 billion for aid to airports.

Below is a description of these programs. 

$25 Billion for Loans and Loan Guarantees to Passenger Airlines

The CARES Act provides the Secretary of the Treasury (the “Secretary”) with $25 billion to make loans and loan guarantees to passenger airlines, repair stations and ticket agents. Key features of this program are—

• Application Process: The Secretary is required to publish procedures for applying for loans or loan guarantees within 10 days after enactment of the law, i.e. April 6, 2020.
• Terms of Agreements: Loans and loan guarantees are to be made “in such form and on such terms and conditions and contain such covenants, representations, warranties, and requirements” as required by the Secretary and at rates “based on the risk and current average yield on outstanding marketable obligations of the United States of comparable maturity”.
• Conditions to Receiving a Loan/Loan Guarantee: The Secretary, in its discretion, may enter into an agreement to make a loan or a loan guarantee if:
  • (1) the applicant is an eligible business for which credit is not reasonably available at the time of the transaction;
  • (2) the intended obligation is “prudently incurred”;
  • (3) the loan or loan guarantee is sufficiently secured or is made at a rate that (i) reflects the associated risk, and (ii) to the extent practicable, is not less than an interest rate based on pre-COVID-19 conditions;
  • (4) the duration of the loan or loan guarantee is as short as possible (but not longer than 5 years);
  • (5) the relevant agreement provides that, until 12 months after the loan or loan guarantee is no longer outstanding,
    • (i) neither the recipient nor any affiliate may purchase an equity security of that business on a national securities exchange, “except to the extent required under a contractual obligation in effect as of the date of the enactment of this Act”; and
    • (ii) the recipient cannot pay dividends or make other capital distributions with respect to its common stock;
  • (6) the relevant agreement provides that, until September 30, 2020, the recipient will maintain its employment levels as they existed on March 24, 2020, “to the extent possible,” and in any case must not reduce employment levels by more than 10%;
  • (7) the relevant agreement contains a certification that the recipient is created or organized in the US and has significant operations, and a majority of its employees based, in the US; and
  • (8) the recipient has “incurred or is expected to incur covered losses such that the continued operations of the business are jeopardized, as determined by the Secretary”.
• Limitations on Certain Employee Compensation: To receive a loan or loan guarantee, an airline must enter into an agreement with the Secretary that provides that, for the period from when the agreement is executed through one-year after the loan or loan guarantee is no longer outstanding –
  • (1) no officer or employee that received total compensation in excess of  $425,000 in 2019 will receive (a) total compensation that exceeds, for any 12 consecutive month period, the total compensation received in 2019, or (b) severance or similar benefits that exceeds twice the maximum total compensation received in 2019; and
  • (2) no officer or employee that received total compensation in excess of $3 million in 2019 will receive total compensation during any 12 consecutive months in excess of (i) $3 million and (ii) 50% of the excess over $3 million received in 2019.
• Continuation of Services: The Secretary of Transportation may require, “to the extent reasonable and practicable,” that an airline receiving a loan or loan guarantee must maintain scheduled air transportation service that the Secretary of Transportation deems necessary.  In exercising this authority, the Secretary of Transportation is to consider the needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains.
• Collective Bargaining Agreements: The issuance of a loan or loan guarantee cannot be conditioned on renegotiating a collective bargaining agreement.

$25 Billion for Air Carrier Worker Support

The CARES Act provides passenger airlines with $25 billion to be used exclusively for the continuation of employee wages, salaries, and benefits.  Key features of this program are—

• Amount of Payments: Distributions are formulaic, based the salaries and benefits reported by the airline for the period from April 1, 2019 through September 30, 2019.
• Application Process: The Secretary is required to publish “streamlined and expedited procedures” within five days of the enactment of the law, i.e. April 1, 2020.
• Timing of Payments: The initial payment must be made within 10 days of the enactment of the law, and the Secretary is required to establish procedures for subsequent payments.
• Required Assurances for Receiving Financial Assistance: To be eligible to receive this financial assistance, an airline must enter into an agreement, or otherwise certify, that:
  • (1) until September 30, 2020, it will not reduce pay rates and benefits, or conduct involuntary furloughs;
  • (2) until September 30, 2021, it will ensure that neither the airline nor any affiliates purchase an equity security of the airline that is listed on a national securities exchange;
  • (3) until September 30, 2021, it will ensure that the airline will not pay dividends or make other capital distributions with respect to its common stock (or equivalent interest); and
  • (4) it will satisfy certain other requirements under the CARES Act.
• Continuation of Services: The Secretary of Transportation may require, “to the extent reasonable and practicable,” that an airline receiving this financial assistance maintain scheduled air transportation service that the Secretary of Transportation deems necessary. In exercising this authority, the Secretary of Transportation is to consider the needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains.
• Collective Bargaining Agreements: This financial assistance cannot be conditioned on renegotiating a collective bargaining agreement.
• Limitations on Certain Employee Compensation: Financial assistance under this section of the CARES Act is only available if an airline enters into an agreement that provides that during the two year period between March 24, 2020 and March 24, 2022
  • (1) no officer or employee whose total compensation exceeded $425,000 in 2019 will receive (i) total compensation that exceeds, for any 12 consecutive month period, the total compensation received in 2019, or (ii) severance or other benefits upon termination that exceeds twice the maximum total compensation received in 2019; and
  • (2) no officer or employee that received total compensation in excess of $3 million in 2019 will receive total compensation during any 12 consecutive months in excess of (i) $3 million and (ii) 50% of the excess over $3 million received in 2019.
• Repayment: To provide the Federal Government with “appropriate compensation” for providing this financial assistance, the Secretary may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by the recipient airlines.

$10 Billion for “Grants-In-Aid for Airports”

The CARES Act provides the Federal Aviation Administration with $10 billion to be distributed as “Grants-In-Aid for Airports” to “sponsors of airports”.  Key features of this program are—

• Definition of “Sponsor”: A “sponsor” is (i) a public agency, which is defined as “a State or political subdivision of a State, or a tax-supported organization”; and (ii) a private owner of a “public-use airport,” which is defined as an airport used or intended to be used for public purposes – (a) that is under the control of a public agency; and (b) of which the area is used or intended to be used for the landing, taking off, or surface maneuvering of aircraft is publicly owned.
• Use of Funds: This financial assistance “may not be used for any purpose not directly related to the airport”.
  • At least $7.4 billion is available “for any purpose for which airport revenues may lawfully be used” provided that 50% “shall” be allocated pro rata among all commercial service airports based on each sponsor’s fiscal year 2018 debt service as a percentage of the combined debt service for all commercial service airports and each sponsor’s ratio of unrestricted reserves to their respective debt service.
• Retention of Workers:  Airports receiving this financial assistance must continue to employ, through December 31, 2019, at least 90% of its employees. However, this requirement:
  • Does not apply to non-hub or non-primary airports; and
  • May be waived if it is determined that the airport is experiencing economic hardship “as a direct result” of the requirement, or the requirement “reduces aviation safety or security”.

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