Following the federally-mandated COVID-19 related shutdown of most air travel, which wreaked havoc on a sector directly employing hundreds of thousands of Americans, Congress has responded with many appropriate measures. Besides separate provisions assisting other businesses across the economy, the Coronavirus Aid, Relief, and Economic Security (CARES) Act delivered relief from the onerous excise tax burdens facing airlines and their customers, created loans and loan guarantees to get carriers through forced business interruption, and constituted a grant program for the sole purpose of helping to maintain airline employee compensation during tough times.
Now comes the hard part: implementation. Much of the aid in the CARES Act comes with various restrictions and conditions on the businesses receiving them. One of the sillier strings attached are prohibitions on stock buybacks for companies receiving loans – a particularly wrongheaded approach for airlines that was prompted by calls from lawmakers who fail to grasp the economics of such buybacks.
Another matter of direct concern to taxpayers is CARES Act language stating that for the airline grants, the Secretary of the Treasury has the discretion to require warrants, stock debt instruments, and other financial concessions from companies accepting the assistance. Here’s hoping the Secretary recognizes that discretion does not mean broad license.
Requiring such a condition for the loans is one thing, but extending it to the grants may not provide taxpayers the protection that it was intended to afford. As The Wall Street Journal put it:
The desire to get something for the taxpayer’s buck is understandable, but there’s a real risk here of a long-term nationalization. …The law doesn’t appear to restrict the government from voting the shares it might receive in exchange for these grants. Washington should have no role in directing the business of a private company, and Treasury Secretary Steven Mnuchin perhaps would agree. What if his successor turns out to be Treasury Secretary Elizabeth Warren?
More troubling for taxpayers is the peril this type of federal involvement would have for the nation’s finances. State-run airlines typically receive massive subsidies from their governments to compete with airlines that rely more on consumers and investors to shape their business approaches. Moreover, as a 2018 NTU Policy Paper exhaustively recounted, U.S. airline deregulation proved to be a model not only for other transportation sectors in America, but for air travel competition worldwide.
Taxpayers have spent more than a decade now attempting to extricate themselves from a somewhat similar problem in the housing finance sector. While not completely analogous to the situation in which CARES Act authority could put airlines, the taxpayer bailout of mortgage giants Fannie Mae and Freddie Mac gave the Treasury rights to an ongoing “net worth sweep” that essentially incentivizes the federal government to keep the entities under conservatorship. The ironic result: by attempting to recover taxpayer funds that kept Fannie and Freddie afloat, the net worth sweep also makes it more difficult to cut the federal strings preventing them operating without a taxpayer backstop.
Washington, DC could endanger taxpayers in another, equally destructive way: make the grants so unappealing to airlines that layoffs and bankruptcies are preferable options to staying alive through the current crisis. Under either scenario – large federal ownership stakes in private airlines or full federal ownership of airlines as if they were public utilities – taxpayers could be encumbered for years on end.
Look no further than Amtrak, now approaching its 50th year of taxpayer-subsidized service, for evidence of the federal government’s lack of prowess in directly managing anything that involves the movement of passengers. If Uncle Sam can’t run a railroad without costing taxpayers billions, how could it possibly run an airline, much less several?
At least the CARES Act excluded several destructive proposals that would have tightened the federal grip over airlines into a stranglehold. The initial version of the third coronavirus package offered by House Speaker Nancy Pelosi would have effectively mandated price controls on airfares and instituted emission reduction requirements on fleets, among other ill-advised dictates. Travelers and taxpayers, who have benefitted from airline regulatory reform for more than 40 years, may not be so fortunate when the Speaker and her colleagues offer a promised fourth bill on COVID-19.
For the time being, however, Treasury Secretary Steven Mnuchin can, and should, avoid creating so much red tape surrounding relief for the air travel sector that taxpayers become entangled in a de facto federal airline takeover. History has shown that flying skies (or rolling down rails) like these will lead to a turbulent ride for the American people who pay government’s bills.