Thomas Gallatin / April 7, 2020

U.S. Offers Airline Industry a Faustian Bargain

The CARES Act provides bailout grants to airlines in exchange for a 2% stake in the companies.

With millions of Americans laid off and struggling to make ends meet as the China Virus pandemic continues into the foreseeable future, Congress passed the Coronavirus Aid, Relief and Economic Security Act, dubbed the CARES Act, dropping $2.2 trillion in an attempt to provide help. One of the industries hardest hit by the pandemic has been the airlines, which lost an estimated 95% of traffic as Americans everywhere obey orders to avoid crowds and now, in most states, shelter in place. The airline industry directly represents 5% of the U.S. economy, and that’s not accounting for all other industries and companies that rely upon the airlines for their own businesses to fully function. In other words, keeping the airlines solvent is a top concern.

So, the CARES Act offers to bail out the airline industry in the form of grants. These grants are not loans, so there will be no requirement that they be paid back. There has been debate as to the wisdom of this move. Allowing airlines to skip the bailout and file for Chapter 11 bankruptcy protection instead would effectively allow them to continue to operate as many did between 2002 and 2011 until they return to profitability. The obvious problem with this approach is that it would necessitate significant layoffs, thus risking exacerbating the pandemic fallout. The grants, on the other hand, would preserve workers’ jobs.

However, one major problem baked into this deal has many rightly objecting. It’s a classic example of the government taking advantage of a crisis to expand its power. For every airline company that takes grant money, the federal government gets up to a 2% stake in the company. The Washington Examiner’s Matthew Whitaker explains why this is a problem: “Why would airlines not want the government to own stock? For the same reason any other business would be uncomfortable with the idea: It is hard for the government to be a neutral, private sector owner of equity. This is a particular problem for the airline industry. After all, this industry is heavily regulated by the government. If bureaucrats in Washington, D.C., are now partial owners of our airlines, they are in the difficult (and possibly unethical) position of regulating an industry in which they have a financial stake.”

This is a setup that’s rife for abuse — both for those airline companies that take government grants and also for those that choose not to. The government will inevitably seek to regulate in a manner that favors the companies in which it is invested. Whitaker offers an example of this potential government abuse, writing, “Consider this: Would the government have a shareholder vote if two airlines decided to merge in the coming year? And if it did vote for the merger, how would that square with the Federal Trade Commission’s merger approval process? Which government agency, the Treasury Department or the FTC, would win out?” That is just one example of the can of worms this situation presents.

If the government makes the rules, it effectively gets to legalize its own cheating. Americans need to keep a close eye on this Faustian bargain with an aim to, if at all possible, undo it in the future.

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