Do Airlines Deserve the $50 billion Bailout?

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The Trump administration has provided the airline industry with access to roughly $50 billion dollars in both loans and grants which will be used to fund payroll needs and maintenance of aircrafts.

However, individuals argue against the administration’s lenient regulation and excessive spending to be used to bail out the airline industry. 

The pandemic has led to prolonged travel restrictions and a decline in consumer confidence levels which has decimated the revenues of airline companies. Government officials have mentioned that most airports have seen passenger levels drop by 91% from last year. 

Airline executives vowed to return one-third of the funds they receive, suspend stock buybacks and dividends, and limit executive salaries in exchange for the bailout package.

However, Social Capital CEO Chamath Palihapitiya suggests that poor performing CEOs should not be protected and that the money should be used to eradicate any previous losses reported on their balance sheets.

Other research analysts believe that bailouts should only be provided after the airlines declare bankruptcy as it does not present any risk to the economy.

In the past, airlines have successfully emerged out of bankruptcy through merging with others, and bailing them out at this point in time would simply be considered a waste of taxpayer money.

It was revealed that the International Air Transport Association was lobbying political parties to receive additional tax exemptions and deregulatory measures. Historically, airlines have continued to lobby governments to provide them with incentives while repeatedly exploiting income tax payments.

In fact, every time the companies purchase capital equipment, they immediately start accounting for depreciation which eventually minimizes taxes and makes the stock more appealing to individuals.

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Companies including Delta, JetBlue, and Alaska Airlines paid a tax rate close to zero last year

Moreover, after the Trump administration passed the Tax Cuts and Jobs Act, Boeing received an extra $1.1 billion dollars from negative tax rates.

In addition, both airlines and manufacturers have received multi-billion dollar contracts from the government, but still end up requiring their support to bail them out of bankruptcy.

Despite the pandemic’s effect on lost revenue, critics continue to argue whether it is ethical for the government to bail companies that seldom contribute to paying taxes.

Although several politicians have advocated against this bailout, the Trump administration has passed the stimulus package which would provide the airline industry with the sum of money.

As a result, the stocks have been rising since the previous weeks, and are expected to continue doing so as coronavirus restrictions ease in the coming future. 

 

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Nitya Bhatt

Equity Research Analyst

Nitya is currently studying business administration at the Schulich School of Business in Canada. During his undergraduate studies he worked in several business development, sales, and leadership roles. Nitya began investing in stocks at an early age which further grew his interest in finance and trading. He has written numerous articles related to economics and politics. However, when he is not busy writing or researching, he enjoys playing badminton competitively, reading science fiction, and hiking in the wilderness.

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