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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 12 minutes read

CARES Act: key considerations for the aviation industry

Perhaps no industry has suffered, and continues to suffer, the impact of the COVID-19 pandemic more so than air transport. The International Air Transport Association estimates that the global airline industry will miss out on $252bn of passenger revenue in 2020. 

With no immediate end to the pandemic in sight and the average North American airline storing cash to cover costs for about one month, on March 27, the US executive branch signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides more than $61bn of financial relief to the aviation industry.

In this article, we outline the major provisions of the CARES Act as it pertains to the aviation industry, and discuss key issues that industry participants have considered, and others they should consider, when deciding whether to take advantage of the financial relief package.

I. The CARES Act financial support program for aviation

The CARES Act offers certain participants in the aviation industry three primary forms of financial support: credit support (loans and loan guarantees), worker support grants, and relief from certain taxes. 

Each are dealt with separately under the Act.

Credit support facility

Section 4003 of the Act makes available $25bn in loans to passenger air carriers, aircraft repair station operators and ticket agents (as further defined in Title 49 of the US Code) and $4bn to cargo air carriers. 

An additional $17bn is made available to businesses critical for national security, which likely includes certain aerospace and defense companies, such as Boeing. 

The program is administered by the US Treasury Department (Treasury), whose authority to issue loans under Section 4003 terminates at the end of the year.

Eligibility: in order to obtain a loan or loan guarantee, an applicant must demonstrate that:

  1. credit is not reasonably available;
  2. the intended obligation is prudently incurred by the applicant; and
  3. the applicant’s business is jeopardized due to the COVID-19 pandemic. 

The loans are not available to applicants organized outside of the US or those without significant operations and a majority of employees based in the US.

Terms: the terms of the loans are at Treasury’s discretion, but must reflect the risk being incurred by Treasury (including interest rates higher than those available prior to the COVID-19 outbreak). The loans must also be as short as practicable (at most five years) and the principal cannot be written down through loan forgiveness. 

Importantly, recipients must issue to the federal government warrants or an equity interest in the company (or, for private companies, a senior debt instrument) as security for the loan; however, the government may not exercise voting power with respect to such equity.

Restrictions: accepting Section 4003 credit support comes with a number of strings attached:

  • A prohibition on conducting stock buybacks (except to the extent required by a preexisting agreement) and issuing dividends until one year after the loan has been repaid;
  • Requirements to maintain existing levels of employment as of March 24, 2020 to the extent practicable, and an outright prohibition on reducing employment levels by more than 10 percent until September 30, 2020;
  • Restrictions on executive compensation until one year after the loan has been repaid: the compensation of employees (which includes bonuses as well as cash and non-cash benefits) who made more than $425,000 in 2019 is capped at that rate, and the compensation of employees who made more than $3m in 2019 is capped at $3m plus 50 percent of the amount of 2019’s compensation in excess of $3m; and
  • Requirements to continue service to any point that a recipient air carrier served before March 1, 2020. On Tuesday, April 7, after issuing a Show Cause Order and collecting comments thereto, the US Department of Transportation (DOT) issued a Final Order, establishing the parameters of the continuation of service requirements. Pursuant to the Final Order:
    • DOT will not require covered carriers to serve international points (however, pharmaceutical and other organizations may petition DOT to impose such requirements if critical supply chain issues develop);
    • where multiple airports serve the same “point”, carriers would not need to maintain service to all such airports, but would be able to consolidate operations at a single airport serving the point;
    • covered air carriers must maintain a defined schedule of flights (based on the number of scheduled flights per week) to communities they served prior to March 1, 2020, even if service to such points has already ceased (although: air carriers may decide whether to maintain their winter or summer seasonal schedules; and such requirements do not apply where direct financial support arrangements between communities and airlines have ceased due to the pandemic);
    • marketing carriers are responsible for the minimum service requirements of their regional affiliates;
    • minimum service requirements do not apply to cargo air carriers;
    • covered air carriers must certify compliance with the continuation of service requirements on a monthly basis, and may request exemptions using a relatively streamlined process; and
    • continuation of service obligations will last through September 30, 2020, and may be extended.

Unrelated to the continuation of service requirements, but of which air carriers should nonetheless be aware, is an April 3 DOT enforcement notice “reminding” air carriers to issue refunds, as opposed to travel credits, when flights are cancelled or significantly delayed due to COVID-19. 

Enforcement action will not be pursued against air carriers that:

  • timely notify passengers provided vouchers that they have the option of a refund;
  • update their refund policies and contract of carriage provisions to make clear that refunds will be provided for cancellations and significant scheduling changes; and
  • review with their personnel the circumstances under which refunds should be made. 

Worker support grants

Subtitle B of Title IV of the Act makes available $25bn in grants to passenger air carriers, $4bn to cargo air carriers, and $3bn to certain contractors and subcontractors. 

The program is administered by Treasury, whose authority to issue grants terminates on March 1, 2022.

Eligibility: in addition to passenger and cargo air carriers, contractors and subcontractors that service the aviation industry are permitted to apply for worker support grants. 

Eligible contractors and subcontractors are those that provide catering functions (as further specified in the Act) and airport functions related to air transport (such as luggage and cargo handling, passenger assistance, security, ticketing and check-in, ground-handling, aircraft cleaning, etc.).

Terms: worker support grants must be used exclusively for the payment of employee wages, salaries and benefits and their size is capped at an amount equal to the salaries and benefits paid by the applicant during the period from April 1, 2019 to September 30, 2019. 

Additionally, Treasury may demand warrants, options, preferred stock, debt securities, or other financial instruments as compensation for providing grants; however, unlike the credit support program, there is no mandatory equity component. 

Finally, until September 30, 2020, Treasury cannot condition the issuance of grants on entering into collective bargaining negotiations.

Restrictions: like the Section 4003 credit support facilities, accepting worker support grants requires compliance with a number of restrictions, including:

  • a prohibition on conducting involuntary furloughs or reducing pay rates and benefits until September 30, 2020;
  • a prohibition on stock buybacks (with no exception for pre-existing agreements) and dividends until September 30, 2021;
  • restrictions on executive compensation (the same that apply to credit support recipients) until March 24, 2022; and
  • continuation of service requirements (the same that apply to credit support recipients).

Tax relief and other measures

In addition to the credit support facilities and worker support grants, the CARES Act suspends certain air travel and aviation fuel excise taxes, including taxes and fees on airline passenger tickets and the cost of carrying cargo, and increases funding for existing federal aviation programs, such as granting $56m to the Payments to Air Carriers program and $10bn to the Grants-In-Aid for Airports program for airport sponsors. The tax relief measures began on March 27 and will expire before January 1, 2021.

The CARES Act contains several additional forms of financial relief not specifically provisioned for aviation, but that may nonetheless offer relief for industry participants. 

The Federal Reserve’s mid-size business lending facility offers $454bn to mid-size businesses (between 500 and 10,000 employees) in the form of loans offered at below market rates (less than 2 percent) and delayed interest and principal payments. 

However, as is the case with the air carrier credit support facility and worker support grants, applicants should be wary of specific conditions imposed on loan recipients, such as the obligation to remain neutral in any union organizing effort for the term of the loan. 

The Act also provides for a $349bn small business (<500 employees) lending facility available through the Small Business Association.

Finally, participants in the aviation industry should be aware of a number of other potential sources of financial relief, that may entail fewer or different restrictions than those available under the CARES Act. 

On March 23, the Federal Reserve Bank of New York (FRBNY) created the Primary Market Corporate Credit Facility (the PMCCF), pursuant to which FRBNY will indirectly purchase eligible corporate bonds from and make loans to certain eligible issuers. 

Similarly, pursuant to the Commercial Paper Funding Facility (CPFF), FRBNY will purchase from eligible issuers three-month US dollar-denominated commercial paper through FRBNY's primary dealers. 

The PMCCF is not available to companies that are expected to receive direct financial assistance under the CARES Act. 

There is more information about the PMCCF and CPPF in our blog.

II. Key considerations for industry participants

As air carriers and other participants in the aviation industry consider whether to apply for government aid under the CARES Act, boards of directors and other decision-makers should take into account a number of important factors that may influence such a decision.

Issuing equity to the government

In line with the post-9/11 Air Transportation Safety and System Stabilization Act (ATSSSA), the CARES Act contemplates equity participation in private companies as a means of securing loans and receiving compensation for grants. 

As discussed above, equity participation, by way of a warrant or other equity interest, is a mandatory feature of the air carrier credit support facility for public companies, and subject to Treasury’s direction for private companies (which may instead issue a senior debt instrument) and companies receiving worker support grants. 

Companies intending to take this route should carefully consider, among other things:

  • conflicts with or requirements under the company’s organizational documents, which may include shareholder voting requirements or amendments to authorize additional shares;
  • conflicts with material contracts (will a large equity stake trigger a change of control provision?), stockholders’ agreements (are any consent requirements or anti-dilution provisions implicated?), and debt documents (will the additional leverage result in a breach of negative covenants?);
  • potentially heightened scrutiny for transactions subject to review by foreign investment control regimes (the equivalent of CFIUS in foreign jurisdictions);
  • certain stock exchange requirements for publicly-listed entities, such as the requirement to obtain stockholder approval prior to issuing 20 percent or more of pre-issuance outstanding common stock or voting power in a private offering; and
  • government voting power, which is prohibited for credit support but not for grants (although it is unlikely the government will request such power in exchange for grants).

A more complete list of considerations for companies deciding whether to issue equity or equity-like instruments to the government is available in our blog.

Timing and planning

The condensed timeline on which the CARES Act was passed, and its implementing rules issued, signals the need for industry participants to move swiftly. 

The initial application deadline for grants was April 3, and the deadline after which applications might not be considered is April 27. 

Although the deadline for credit support applications has not yet been published, Treasury has indicated that applications (PDF) will entail significant disclosure requirements, such as:

  • a description of the borrower’s scheduled debt service for the next three years;
  • a description of losses that have been or will be incurred due to COVID-19;
  • a description of how the proposed loan fits within the borrower’s business plan for 2020;
  • a description of the financial instruments the borrower proposes to issue to the federal government; and
  • as well as other current and prospective financial and operational information. In the aftermath of 9/11, a number of airlines opted out of ATSSSA due their inability to develop a business plan before the nine-month deadline for applications (which turned out to be flexible). Considering the unprecedented rate of macroeconomic and political change impacting the aviation industry, immediately assessing federal assistance options, incorporating such options into a prudential business plan, and evaluating potentially more desirable alternatives will be essential.

In addition to the application deadline, the fact that Treasury may, after September 30, condition grants on entering into collective bargaining agreement (CBA) negotiations may create additional time pressure for air carriers and contractors. 

Unionized businesses should consider the additional leverage afforded to employee representatives if a needed grant is conditioned on the outcome of negotiations. 

Non-unionized businesses should take into account the risk that Treasury may condition financial assistance on entering into CBA negotiations or otherwise remaining neutral with respect to unionizing efforts (as is currently required under the mid-size business lending facility) after September 30.

Continuation of service requirements

As mentioned above, both the CARES Act credit support facility and worker support grants are conditioned on continuation of service requirements delineated by the DOT. 

Although the DOT Final Order offers air carriers some degree of flexibility, air carriers should nonetheless take into account that continuing to serve routes heavily impacted by the COVID-19 pandemic, restrictions on adjusting routes for annual variations in demand, delays in phase-out plans for unprofitable routes, and resumption of service to pre-March 1 destinations may weigh on the company’s financial health and undermine the effectiveness of federal assistance in the short term (or medium to long term depending on whether such continuation of service requirements are extended). 

Air carriers should also assess how to monitor and demonstrate compliance with continuation of service requirements, which will need to be certified on a monthly basis.

Additionally, mainline carriers should consider their regional franchisees and affiliates when it comes to requesting federal assistance and complying with minimum service requirements. 

The DOT Final Order suggests that if a regional airline receives financial assistance under the CARES Act, the marketing carrier is responsible for fulfilling its minimum service requirements, regardless if the marketing carrier itself received financial assistance.

Employee benefits flexibility

The “status-quo” requirements for employment levels, salaries and employee benefits built into the CARES Act can create significant financial strains for recipients and exacerbate existing liquidity problems.

The financial impact of these restrictions may be particularly acute for grant-seeking companies that offered sizeable increases in salaries and benefits in late 2019 or early 2020, as the size of the worker support grants is capped at 2019 levels of compensation, and 2020’s compensation cannot be reduced until September 30 (although the compensation “baseline” is as of now unspecified). 

This shortfall may be compounded by the fact that headcount reductions are prohibited for grant recipients (whereas loan recipients are offered some degree of flexibility). Contrarily, industry participants who made downward adjustments to salaries and benefits in late 2019 or early 2020 may find the grants more advantageous.

The language of the CARES Act does, however, afford industry participants some wiggle-room: 

  • First, loan recipients are not subject to a salary or benefits restriction, leaving companies with some leeway to modify compensation while maintaining employment levels. 
  • Second, as mentioned, the status-quo compensation requirement for grants does not tie back to a specific date, leaving room for potential applicants to re-negotiate salaries and benefits prior to applying for or receiving a grant. 

However, it remains to be seen whether Treasury will attempt to reduce this flexibility as more specific terms and conditions are promulgated.

Executive compensation

Air carriers and industry participants should also be wary of the restrictions on executive compensation, which apply to both loan and grant recipients. 

Such restrictions may limit a company’s ability to compete for top talent on a going-forward basis and may offer significant advantages to companies that decline federal assistance. 

As mentioned, these restrictions apply to grant recipients until March 2022 and to loan recipients until one year after the loans are repaid. In each case, such restrictions may out-last the COVID-19 crisis by a long stretch of time.

Companies considering financial assistance under the CARES Act should, first, identify employees whose compensation may be subject to these restrictions and, second, carefully review the terms of the relevant executive compensation agreements and arrangements to assess potential issues (as well as certain rights that may be triggered thereunder, such as “good reason” resignation rights). 

Even if an executive voluntarily accepts a pay reduction to enable the receipt of federal assistance, it is possible that the acceptance of such reduction could result in adverse tax consequences that companies should factor into their cost/benefit analysis. 

Grant and loan recipients will also need to establish procedures for monitoring employee compensation and ensuring continued compliance with the executive compensation restrictions.

Additional considerations

Finally, air carriers and other industry participants seeking federal assistance should be wary that Treasury may seek to impose additional terms and conditions as part of a loan agreement or grant. These may relate to changes being lobbied for by passenger advocacy groups, such as no change fees, more routes to under-served locations, carbon footprint limitations, etc. 

Additional terms and conditions may also relate to financial prudence concerns. Considering the widespread public perception that the ATSSSA had been used to prop up airlines with liquidity challenges unrelated to 9/11, it would not be surprising if Treasury implements more stringent solvency standards, collateral requirements, or higher interest rates or fees as part of the credit support facility, particularly for air carriers and industry participants with solvency risk that predates the COVID-19 pandemic.        


covid-19, united states, transportation regulations, finance, transportation regulation