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The U.S. taxpayer will be a major player in the struggling airline industry, as many carriers are set to receive government aid with conditions as they grapple with the fallout from the COVID-19 pandemic.
The aid will help provide a cushion for the industry in the form of payroll support and low-interest loans, as airlines try to wait out the crisis, which is expected to ease up later this year. But that aid also comes with an obligation to issue warrants to the government to buy common stock. In some cases, the amounts of stock could be sizable, enough to put the government among the largest shareholders of a company.
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Some airlines announced last week their plans to apply for the government aid under the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act. On Monday, United Airlines Holdings Inc. UAL, -4.43% and Hawaiian Airlines parent Hawaiian Holdings Inc. HA, +0.26% disclosed plans to increase the amount of aid being requested, and included details on warrants they were required to issue in exchange for that aid.
Based on current share prices and warrant strike prices where provided, taxpayers could own roughly a little more than $1 billion worth of airline shares, not including JetBlue Airways Corp. The NYSE Arca Airline Index XAL, -3.15% has gained 21.6% since closing at a 6 1/2-year low on March 19 through Monday, but has still lost 60.1% over the past three months, while the Dow Jones Industrial Average DJIA, -2.44% has declined 19.4% this year.
United Airlines
United said on April 15 that it expected to get about $5 billion from the government through the Payroll Support Program (PSP) under the CARES Act, which comes with a warrant requirement. On Monday, the company said it also expects to have the ability to borrow up to an additional $4.5 billion through the CARES Act’s Loan Program, which obligates United to issue warrants based on the amount borrowed.
Under the PSP, which comes with the promise that there will be no involuntary furloughs or pay cuts before Sept. 30, United will issue the U.S. Treasury Department warrants to buy up to 4.6 million shares of common stock at a strike price of $31.50 per share. That price is about 10% above current prices.
And if United borrows the full amount under the Loan Program, it would have to issue warrants to buy 14.2 million shares, also at a strike price of $31.50.
If United takes full advantage of the government aid, the U.S. taxpayer could own as much as 18.8 million shares, or about 7.6% of the shares outstanding. That would make taxpayers the fourth-largest shareholder, according to FactSet data.
By comparison, Warren Buffett’s Berkshire Hathaway Inc. BRK.B, -1.28% is United’s second-largest shareholder with 21.9 million shares as of Dec. 31, or about 8.8% of the shares outstanding.
Hawaiian Airlines
Hawaiian applied for aid under the CARES Act on April 3, and on April 14 told its employees that it expected to receive $290 million under the PSP. That would obligate the airline to issue warrants that would give the U.S. government a 1% ownership stake in the company at $11.82 a share, which is 1.6% above current prices.
On Monday, Hawaiian disclosed in a filing with the Securities and Exchange Commission that it was also seeking a 5-year, $364 million interest-bearing loan under the CARES Act’s Economic Relief Program, which comes with a requirement that the company maintains employment levels that are “not less than at 90%” of levels during the March 24-to-September 30 period.
The kicker is, Hawaiian would be obligated to issue warrants to buy 6.7% of the shares outstanding, also at a strike price of $11.82 a share.
A total 7.7% stake in Hawaiian, which equates to about 3.53 million shares, would make the U.S. the fourth largest shareholder.
American Airlines
American Airlines Group Inc. AAL, -4.40% disclosed last week that it expected to receive $5.8 billion as part of the PSP under the CARES Act, which would require the airline to issue warrants allowing the Treasury Department to buy 13.7 million shares at a strike price of $12.51.
That would give the government a 3.2% stake in American, enough to be the sixth-largest shareholder. Buffett owned 42.5 million shares as of Feb. 14, making him the airline’s second-largest shareholder with a 9.7% stake.
Delta Air Lines
Delta Air Lines Inc. DAL, -2.59% said last week that it reached a deal to receive $5.4 billion from the PSP program under the CARES Act, and will provide the government with warrants to buy a 1% stake in the airline, which would be about 6.4 million shares, at a strike price of $24.39 over five years. That would tie the U.S. taxpayer with Managed Account Advisors LLC for 12th place among the largest shareholders, according to FactSet Data.
In comparison, Berkshire Hathaway owned 58.9 million shares of Delta as of April 2, good for a 9.2% stake, as the airline’s largest shareholder.
Southwest Airlines
Southwest Airlines Co. LUV, -0.41% said last week that it expected more than $3.2 billion in government aid under the CARES Act, including $2.3 billion in PSP support. In turn, the airline expected to issue warrants for the government to buy about 2.6 million shares of its stock, or about a 0.5% stake. That wouldn’t be enough to put taxpayers among the top-20 shareholders.
In comparison, Berkshire Hathaway owned 51.3 million shares as of April 2, or 9.9% of the shares outstanding, to make it the second-largest shareholder.
JetBlue
JetBlue Airways Corp. JBLU, -3.89% said last week that it expected $935.8 million in aid under the CARES Act, including $685.1 million in direct support and $250.7 million in a low-interest loan. The carrier didn’t detail the number of warrants it would issue the government in return, only that it would be a “limited number” to buy stock at a “pre-determined price.”
The company had 282.2 million shares outstanding as of Jan. 31.
Mesa Airlines
Mesa Air Group Inc. MESA, -7.75% said Monday that it expects to receive $92.5 million in PSP aid as part of the CARES Act. Although the airline has agreed not to implement involuntary furloughs or cut employee pay, and eliminate share repurchases and dividends through Sept. 30, the company isn’t obligated to issue warrants to buy stock because the aid requested is less than $100 million.
Mesa said it was also considering applying for loans through a separate program under the CARES Act.
–Victor Reklaitis and Claudia Assis contributed to this report.
