US Treasury wants warrants, repayment from major US airlines on 30% of grant money: sources

[WASHINGTON] US Treasury Secretary Steven Mnuchin told major airlines on Friday he wants them to repay some of the US$25 billion in cash grants the US Congress approved last month to cover payroll costs as airlines weather an unprecedented crisis due to the coronavirus, three industry officials briefed on the matter told Reuters.

The Treasury said in a statement Mr Mnuchin will not require passenger air carriers that will receive US$100 million in payroll assistance or less to provide compensation and "funds will be available promptly upon approval of their applications".

Mr Mnuchin spoke with the chief executives of major airlines in separate calls on Friday and told them the department was offering 70 per cent of the aid in grants that would not need to be repaid, and 30 per cent in low-interest loans for which the airlines would be required to offer warrants, the sources said.

Three people briefed on the matter said the warrants, which would give the government the right to buy equity at a pre-set price and time, would be equal to 10 per cent of the value of the loan.

That means that every US$1 billion in government aid would include US$700 million in grants, US$300 million in low-interest loans and an option for the government to buy US$30 million in shares.

Two people said the warrants would be priced at current stock prices.

Any of the terms could still be subject to change.

Warrants do not generate any balance sheet debt and thus should not hamper the ability of airlines, which can also apply for a separate US$25 billion government loan package, to finance in the future, experts said.

The Treasury said it is working with 12 passenger air carriers expected to get more than US$100 million "to secure appropriate financial instruments to compensate taxpayers".

The majority of the smaller requests sought less than US$10 million and the Treasury is not seeking compensation in order to maintain "needed air service", avoiding layoffs "and limiting share buyback and executive compensation".

The Treasury said it received more than 230 requests from passenger carriers.

Airlines were told they could apply for the amount they paid in salaries and benefits in the second and third quarters of 2019. American Airlines Group, with the largest number of employees, had said it was seeking around US$6 billion.

A United Airlines Holdings spokesman said the company was reviewing the details of the Treasury's proposal. American Airlines also confirmed it was reviewing the proposal.

Airline boards and officials plan to review the proposals all weekend and it is not clear if they will accept the terms or propose a counteroffer.

Under the terms laid out in the statute, companies receiving funds cannot lay off employees before Sept 30 or change collective bargaining agreements, two conditions for which labour unions had lobbied aggressively.

The bill has restrictions on stock buybacks, dividends and executive compensation.

The choice of grants as a type of support is sensitive in the airline industry after a 2015 spat in which US carriers accused Gulf carriers of receiving US$50 billion of air including grants to set up competing Middle East hubs, a charge they denied.

Under the US$2.3 trillion CARES Act, passenger airlines are eligible for US$25 billion in cash grants for payroll while cargo carriers can get US$4 billion and airport contractors like caterers and airplane cleaners US$3 billion, in addition to a separate loan package for which they can apply in the months ahead.

Reuters reported on Thursday that the six largest US airlines - American Airlines, United Airlines, Delta Air Lines Southwest Airlines, JetBlue Airways and Alaska Airlines - are expected to get around 90 per cent of the US$25 billion package.

Airlines say they are suffering the worst crisis of their history as travel demand has dwindled to less than 5 per cent of normal levels. Several major US airlines filed for Chapter 11 bankruptcy protection from creditors after the Sept 11, 2001 attacks or the 2009 financial crisis.

REUTERS