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How can future government bailouts of the aviation industry be avoided?

Gary Leff on February 14, 2021.

The federal government provided $65 billion in grants and interest subsidized loans to airlines in 2020, and a third bailout is being considered. Although this money was sold as protecting jobs, only about one-eighth of the second bailout was actually used to pay laid-off workers (and airlines that never laid anyone off received billions).

After the bailouts during the Great Recession, a national debate arose recognizing that the companies that had been rescued were not really private companies and that it was necessary to ensure that bailouts never happened again.

Airlines have already been partially nationalized. The federal government has provided each of the major assisted airlines with grants for the first round of wage assistance, subsidized loans, and a second round of wage assistance. American Airlines has even committed its frequent flyer program, AAdvantage, to guarantee its loans to the government.

It cannot be said that rescues in this unprecedented era are unique. This is not the first pandemic, nor the first rescue. Twenty years ago, the Air Transportation Stabilization Agency was created and airlines like American West and US Airways were rescued by the government.

How can we make sure this travesty never happens again? Increasing minimum capital requirements won’t help, because the airlines are just putting a gun to the head of legislators,

  • They are threatening to lay off workers, and Democrats want to protect union jobs (while President Trump did not want the job losses to be visible just before the election).
  • They said no vaccine would be transported without subsidies.
  • Airlines currently have unprecedented liquidity and a new bailout is being considered.

The ban on share repurchases and dividends does not work either; they were suspended as the first (and second) relief measure and the other is on the table. It also forces airlines to create liquidity, which they then seek in other ways, such as mergers, acquisitions or aircraft orders. (United Airlines has given $1 billion to urban mobility company Archer).

‘Re-regulation’, or a return to the pre-1978 situation, simply means that the government tells airlines where they can fly and what prices to charge. But did you know that the DOT actually had the right to determine flight paths by taking subsidized loans and refusing to use them? Moreover, this will have no impact on future bailouts.

Dodd-Frank financial reform was enacted in part to prevent future bank bailouts, but it simply made direct investment more profitable by keeping the best start-ups secret longer (as it increased the cost of an IPO). And parts of it, such as the Durbin Amendment, made banking unaffordable for the poor by eliminating the means by which banks covered checking account costs (debit card changes), resulting in costs in the absence of minimum account balances and direct pay deposits.

Ultimately, the only way to prevent future airline bailouts is not to do so, but the political impulse is always to spend money to satisfy small constituencies at the expense of a public that has little individual incentive to pay attention to how it is being screwed. In other words, this is not the first time and it will not be the last. In the United States, airlines will always be vassals of the government, disguised as private companies.

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Frequently asked questions

Will the government save the airlines?

WASHINGTON (Reuters) – A bipartisan bill unveiled Sunday by U.S. lawmakers would give U.S. airlines $15 billion in new wages that would allow them to reinstate more than 32,000 workers on furlough by March 31, sources familiar with the matter told Reuters.

Why do governments guarantee airlines?

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What is government support?

A bailout occurs when a company, individual or government provides money and/or resources (also known as a capital injection) to an insolvent company. These measures help prevent the consequences of a possible bankruptcy of a company, including bankruptcy and failure to meet financial obligations.

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