The Government Could End Up with a Big Stake in American Airlines — but Only If Travel Recovers
DALLAS — The U.S. government could end up as one of the largest shareholders in American Airlines as a condition of stimulus grants and loans from the CARES Act, but only if share prices rebound to levels seen before the COVID-19 pandemic decimated the industry.
Airlines weren’t forced to hand over equity shares in exchange for nearly $25 billion in grants and another $25 billion in loans, but the Treasury Department did require the companies to offer special warrants, which essentially amount to stock options based on last Thursday’s closing price.
That would give the government more stock, and therefore a bigger share in the company, as airline shares rebound.
If American’s stock price returns to where it began 2020, the federal government could end up with about 6% of the airline’s shares, worth more than $850 million. But it would be a small reward for the combined $10.5 billion in aid the airline is expected to accept, including $4.1 billion in grants.
“They’re conditions we were happy to accept,” said American Airlines CEO Doug Parker told CNBC Wednesday.
The government’s stake in Dallas-based Southwest Airlines would be much smaller in any scenario. Southwest agreed to take $3.2 billion in aid, including $2.3 billion in grants. In exchange, it will give the government the option to buy about 2.6 million shares at Friday’s closing price any time in the next five years.
Fort Worth, Texas-based American is giving the government 51.7 million shares.
U.S. Treasury Secretary Steve Mnuchin repeatedly said commercial airlines wouldn’t be given a handout and that taxpayers would be compensated for the assistance they gave. But how much they get back depends on how much airline stock prices are able to recover.
“It certainly feels like we’re at the bottom,” Parker told CNBC. “Our revenues are down 90% on year-over-year basis, and they’ve been that way now for a few weeks.”
American Airlines’ stock price has dropped nearly 60% since the beginning of 2020. Airline shares are actually down since the Treasury Department locked in its warrant price of $12.51 for American and $36.47 for Southwest.
But assuming stock prices recover as the COVID-19 pandemic fades, the government could make money back, even if it’s not close to how much it gave out in grants.
For American, a share price of $15 would give the government shares a value of about $128 million, or roughly about 2% of the company’s total market value. The agreement said American could either give the Treasury the profit on the stock increase in cash or in shares.
If American’s stock price rises to where it was at the start of 2019, the government could cash in for about $853 million, or roughly 6.5% of the company’s total outstanding stock. That would make the federal government the fourth-largest shareholder in American, behind investment fund Primecap Management, Vanguard and Berkshire Hathaway.
The government won’t have any voting shares in airlines under the deals, but the stimulus bill already bans dividends and stock buybacks, puts limits on executive pay and requires the companies to maintain pay and employment numbers through September.
The U.S. Treasury can cash in those warrants any time in the next five years.
For Southwest, the government’s stake would be smaller, both because it took less in grants and because the company is worth more. If Southwest’s trading price goes up to $44 a share, the government will get stock worth about $19.58 million. A return to Southwest’s stock price to start the year would net the treasury about $45.5 million. In both scenarios, the federal government would own less than 1% of Southwest.
But all those shares will mean little if the economy doesn’t rebound and air traffic doesn’t start to return in the coming months.
“The leisure traveler will come back when they feel comfortable traveling again,” Parker said in the CNBC interview “I don’t think it’s so much about being on airplanes. It’s about having somewhere to go.”
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