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Home » Why Another Government Grant To US Airlines Is Good Economic Policy

Why Another Government Grant To US Airlines Is Good Economic Policy

The first CARES Act provided aid to US airlines in three ways: subsidies to keep people employed, loan opportunity for those who couldn’t get enough help in the private markets, and a temporary suspension of the 7.5% excise tax usually levied on all airline tickets. The employment pass-throughs end in just a few weeks, and some airlines have put out Worker Adjustment and Retraining (WARN) notices of large layoffs to come effective October 1 under the assumption that these subsidies are not renewed. Should the government extend this grant and give even more help to airlines? I think the answer to this is yes.

Airline travel is a critical infrastructure industry. Economists call airline travel an “intermediate good”. This means it is an input to a final product, meaning that most people do not fly because they want to be on an airplane. They are doing business, going on vacation, visiting friends and family, and supporting the economy in many other ways. Freight needs airplanes for perishable or quicker turnaround goods. Any economy needs people and goods to move, and so without a rebound in the US airlines it is safe to say that economy will not fully rebound either.

Airlines need airplanes, and airplanes are the country’s leading export with a positive trade balance of over $70 Billion, according to the FAA. The US airline industry supports over 11 million jobs, many of these high paying and thus high tax paying also. Laying off tens of thousands of direct workers will have the domino effect of others getting laid off who support these workers, and is Washington really going to let this happen a few weeks before a national election? I would hope that politics would not play a role in this, but that would be naïve.

I wrote an earlier article about why I felt the first grants made sense. Since then, airlines have been prudent about adding capacity and travelers, based on TSA check throughs, have been slowly increasing though at a choppy rate. It’s hard to be truly optimistic but small signs suggest that there is some discretionary traffic flying again, but the numbers are complicated to interpret because of typical seasonality that the industry always sees from about mid-August through September. Since the first CARES Act, airline employees have stayed current thanks to the subsidies, and with Dr. Fauci confident of a vaccine soon there is no reason to delay an economic recovery by sending thousands of workers home.

Some will question why give help to airlines and not restaurants, or other businesses. The answer is because of the catalytic employment impact of airline flights. It is this foundational structure that transportation plays in making the economy work that means every $1 the government gives to the airlines in this time will result in a large multiple of that $1 in economic benefit. That is not true for many other businesses, even though of course ideally it would great to be able to help all businesses during this crippling time. More people flying means more people eating out and shopping, circulating dollars through the economy in ways that a single restaurant or shop does not.

Another frequent argument is that aid to airlines helps investors and not workers. In the structure of the grants like the first CARES Act, this is simply not the case. Stock prices reflect the discounted value of future earnings, and no investor will think that short term subsidy of wages will contribute to long-term earnings. Rather, employees will not be laid off and will stay on payroll, making their rent and car payments and being ready to launch new flights as demand justifies. This would be a worker-centric policy.

A new pass-through subsidy grant would not stave off bankruptcy either. Airlines have successfully generated liquidity since March, and many airlines did not even take the CARES Act loan because they felt the terms were onerous. This is not about these companies surviving or not. The industry was structurally sound going into this crisis, thanks to significant restructuring and use of the bankruptcy code over a decade ago. It is about employment, and the ability to ignite the economy though more flying quickly without having to re-train thousands of airline workers. Continuing this employment subsidy for a few more months at least gives the economy a chance to start really moving forward again by early 2021. That possibility alone makes it good policy.


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