Apr 10, 2020 2 min read

Airlines are among the businesses most severely affected by the COVID-19 pandemic’s economic fallout, and they need federal assistance if they quickly are to restore service.

Congress is correct to come to their aid with a two-part, $50 billion relief deal as part of the recent $2.2 trillion recovery package. And, given the airlines’ business practices, Congress also is wise to attach strong restrictions to the money.

Half of the money is in the form of grants, which airlines must use to keep workers on their payrolls. Each airline will be able to request enough to cover employee costs through the end of September, and must agree not to lay off workers.

The other half of the program is modeled on the successful bailouts of big banks and auto manufacturers amid the 2008 financial crisis. In exchange for financing, the government took equity stakes in the companies, which it relinquished only when the loans were paid in full. The government provided $426.35 billion worth of credit to the companies, which paid back $441.7 billion by the end of 2014 – a profit to the Treasury of $15.35 billion. That was only about a 3.5% rate of return, but it was far from a giveaway and the value of rescuing the industries was exponentially greater than that.

The second $25 billion for the airlines will be as loans, which airlines will have to secure by stock or some other means, so that the government is repaid. That temporarily would give the government about 40% ownership of major airlines, far less than the 61% of General Motors it acquired with the 2008 bailout.

Crucially, the rules prevent the airlines from using the money for stock buybacks. Part of the reason that airlines have scant reserves is that they have used so much of their free cash flow to buy back stock over the last decade, which increases the stock price and the executive compensation that is tied to it. Some examples of airline stock buybacks over the decade: American, $12.95 billion; Delta, $11.43 billion; Southwest, $10.65 billion; United, $8.88 billion; JetBlue, $1.77 billion; and Alaska, $1.59 billion.

Strong airlines are fundamental to a strong modern economy, so the program is warranted. But when the industry’s health is restored, Congress should use this experience to severely limit airlines’ ability to buy back stock instead of being prepared for a crisis.