COVID-19 Upends the Air Transport Market

The COVID-19 pandemic has had a vast and severe impact on the U.S. economy, and the U.S. air transportation industry has been brought almost to a standstill. While the executive branch moved quickly to address immediate operational challenges, such as waiving slot usage requirements at congested airports,¹ the industry looked to Congress to provide financial relief.

On Friday, March 27, 2020, Congress passed and the president signed the 2020 Coronavirus Air, Relief, and Economic Security (CARES) Act. This law authorizes more than $2 trillion in government spending to address a broad range of economic, health and social challenges. Notably, the measure includes mechanisms to provide economic relief to air carriers, airports and airline contractors during the COVID-19 crisis.² This summary examines the relief measures provided by the CARES Act to each of these industry sectors.

The U.S. Departments of the Treasury and Transportation (DOT) will be overseeing the allocation of relief under this statute. The Treasury Department has issued guidelines concerning the allocation of relief to affected industries,³ and the DOT has started to issue guidance concerning carriers' air service obligations, described below.

Air Carriers

The CARES Act provides three types of direct economic benefits to air carriers:

• Loans and loan guarantees
• Grants to pay employee wages, salaries and benefits
• Tax holidays

Each of these are addressed below.

Loans and Loan Guarantees

The CARES Act makes available $25 billion for Government loans and loan guarantees to U.S. passenger air carriers;⁴ as well as an additional $4 billion in Loans for U.S. cargo air carriers.⁵

For a carrier to be eligible for a loan, the Treasury must determine that: i) credit is not reasonably available to the carrier at the time of the transaction; ii) the applicant's intended obligation is prudently incurred; iii) the loan is sufficiently secured or made at a rate that accurately reflects the risk of the loan; and iv) the losses the carrier has incurred, or is expected to incur, place the continued operation of the business in jeopardy.⁶ The application procedures to obtain a loan will be published by the Treasury no later than April 6, 2020.

Section 4003 of the CARES Act imposes several restrictions on carriers receiving loans from the government, which must be included in the loan agreement between the carrier and the government (i.e., the loans come with "strings" attached).

• The loan must be as short as practicable, and in no event longer than five years.
• The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, until 12 months after the loan is repaid.
• Until Sept. 30, 2020, the carrier must, to the extent practicable, maintain the same employment levels as it had on March 24, 2020, and under no circumstances reduce its employment levels by more than 10 percent from its March 24, 2020, levels.
• In exchange for the loan, the government receives a warrant for stock or an equity interest in the carrier, which can appreciate, be sold or exercised for the benefit of U.S. taxpayers.
• Carrier officers and employees whose total compensation⁷ exceeded $425,000 in 2019 are subject to compensation limits until 12 months after the loan is repaid.⁸
• The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.⁹ The DOT has issued an order that sets forth its interpretation of this requirement.¹⁰

All Loans to carriers will be made public by the Treasury within three days of the transaction.

Grants to Pay Employees

The CARES Act makes available an additional $29 billion for the government to provide grants of financial assistance to carriers for the sole purpose of paying employee wages, salaries and benefits during the COVID-19 crisis. Of this amount, $25 billion in Carrier Grants are available for U.S. passenger air carriers, and $4 billion in Carrier Grants are available for U.S. cargo air carriers.¹¹

A business that is approved to receive a Carrier Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through September 30, 2019;¹² and will receive an initial payment no later than April 6, 2020. The Treasury published its guidance and procedures for requesting a Carrier Grant on March 30, 2020.¹³ Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.¹⁴

As with the available loans, the CARES Act imposes several restrictions on Carrier Grants received from the government.

• The carrier may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
• The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
• As compensation for a Carrier Grant, the Treasury may receive warrants, stock options or other debt instruments issued by the carrier.
• Carrier officers and employees whose total compensation¹⁵ exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.
• The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.¹⁶ The DOT has issued an order that sets forth its interpretation of this requirement.¹⁷

Any carrier that fails to honor these restrictions is subject to audits and the clawback of the Carrier Grant provided.¹⁸ Furthermore, should the amount of relief requested in the form of Carrier Grants exceed the amount available to passenger air carriers and cargo air carriers, the Treasury may reduce, on a pro rata basis, each Carrier Grant to be awarded.¹⁹

Tax Holidays

For the remainder of 2020, no air carrier excise taxes will be charged by the government. This includes the excise taxes normally charged for the transportation of passengers, transportation of property and purchase of kerosene, in accordance with 26 U.S.C. §§ 4261, 4271, and 4041/4081, respectively.²⁰ Unlike the provisions regarding Loans and Grants, which are limited to U.S. air carriers, this provision applies to both U.S. and foreign air carriers.

Airline Contractors

Similar to Carrier Grants, the CARES Act makes available $3 billion for the Treasury to provide grants to airline contractors to pay employee wages, salaries and benefits during the COVID-19 crisis.²¹ The CARES Act defines "contractor" broadly to cover non-airline workers in functions directly related to the air transportation of persons, property and mail. These functions include, but are not limited to: baggage and cargo handling; catering; assisting passengers with disabilities; airport ticketing and check-in; aircraft cleaning, sanitizing and waste removal; and aircraft ground handling; along with any subcontractors employed by a contractor to perform functions directly related to air transportation.²²

A business that is approved for a Contractor Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through Sept. 30, 2019;²³ and will receive an initial payment no later than April 6, 2020.²⁴ The Treasury published its guidance and procedures for requesting a Contractor Grant on March 30, 2020.²⁵ Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.²⁶

As with Carrier Grants, the CARES Act imposes several restrictions on Contractor Grants received from the government.

• The contractor may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
• The contractor may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
• As compensation for a Contractor Grant, the Treasury may receive warrants, stock options, or other debt instruments issued by the contractor.
• Carrier officers and employees whose total compensation²⁷ exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.²⁸

Any failure by a contractor to honor these restrictions can result in audits and the  rescission of the Contractor Grant provided. Furthermore, should the amount of relief requested in the form of Contractor Grants exceed the $3 billion available to contractors, the Treasury may reduce, on a pro rata basis, each Contractor Grant to be awarded.

Airports

The CARES Act provides a supplemental appropriation of $10 billion for airport grants-in-aid "to prevent, prepare for, and respond to coronavirus."²⁹ This $10 billion is 100 percent federal share (i.e., there is no local matching requirement), will remain available until it is expended, and will be distributed as follows:

• $500 million will fund the required local shares of airports under fiscal year (FY) 2020 Airport Improvement Program (AIP) grants
• $7.4 billion will be given to airports to use for any lawful purpose; the money will be awarded to airports using the following formulas:
• Half of this amount ($3.7 billion) will be distributed among all commercial airports based on each airport sponsor's 2018 enplanements as a percentage of 2018 total enplanements across all commercial airports
• Half of this amount ($3.7 billion) will be distributed among all commercial airports by reviewing each airport sponsor's FY 2018 debt service as a percentage of the combined debt service of all commercial airports, as well as each sponsor's ratio of unrestricted reserves to their debt service
• $2 billion will be given to airports to use for any lawful purpose and will be distributed through the AIP entitlement formula
• $100 million will be apportioned directly among general aviation airports to use for any lawful purpose

The CARES Act's supplemental appropriation also applies two restrictions to airports receiving the funds. First, any airport development projects using CARES Act funds must comply with the prevailing wage requirements already codified in 49 U.S.C. § 47112. Second, any airport receiving CARES Act funds must continue to employ through Dec. 31, 2020, at least 90 percent of the number of individuals it employed on March 27, 2020.³⁰ However, the DOT may waive this second restriction if it determines that the employment requirement is either causing economic hardship, or reducing aviation safety or security.³¹

Finally, in a separate supplemental appropriation, the CARES Act provides $100 million to the Transportation Security Administration (TSA) to clean and sanitize security checkpoints and airport common areas, pay overtime and travel costs of TSA employees, and obtain explosive detection materials.³²

The Holland & Knight Aviation Team is continually monitoring the impact of COVID-19 on the aviation sector. Our attorneys can assist with questions concerning eligibility for relief programs and changes in the regulatory landscape.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Notes

¹ FAA Notice of Limited Waiver of the Minimum Slot Usage Requirements, 85 Fed. Reg 15019-20 (Mar. 16, 2020) (waiving minimum slot usage requirements for all carriers at JFK, LGA, and DCA through May 31, 2020).

² These mechanisms appear in Title IV of the CARES Act, known as the “Coronavirus Economic Stabilization Act”, which appropriates $500 billion to provide aviation and other businesses, states, and municipalities access to liquidity in order to remain solvent during the COVID-19 crisis.

³ Procedures and Minimum Requirements for Loans to Air Carrier and Eligible Businesses and National Security Businesses under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020) and Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).

⁴ Maintenance stations certified under 14 CFR Part 145 are also eligible.

⁵ § 4003(b)(1) and (2). All references are to sections within the CARES Act unless otherwise specified.

⁶ § 4003(c)(2)(A), (B), (C), and (I).

⁷ "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

⁸ § 4004(a). These employees are capped at their 2019 compensation levels until this restriction expires.  A more restrictive formula applies to employees whose total compensation exceeded $3 million in 2019.

⁹ § 4005.

¹⁰ DOT Order 2020-3-10 (March 31, 2020).

¹¹ § 4112(a).

¹² This figure will be determined using the data reported to DOT pursuant to 14 CFR Part 241.  (§ 4113(a)(1)).

¹³ Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020)

¹⁴ Id, p. 5.

¹⁵ "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

¹⁶ § 4114(b).

¹⁷ DOT Order 2020-3-10 (March 31, 2020).

¹⁸ § 4113(b).

¹⁹ § 4113(c).

²⁰ § 4007.

²¹ § 4112(a)(3).

²² § 4111(3).  In practice, these are functions airlines usually employ third-party service providers to perform because it is more cost effective than hiring their own employees to perform them.

²³ This figure will be determined using sworn financial statements from the contractor.  (§ 4113(a)(3)).

²⁴ § 4113(a) and (b)(2).

²⁵ Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).

²⁶ Id, p. 5.

²⁷ "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

²⁸ § 4116(a). These employees are capped at their 2019 compensation levels until March 24, 2022. A more restrictive formula applies to whose total compensation exceeded $3 million in 2019.

²⁹ CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.

³⁰ Id at H.R. 748-317. Adjustments are made for voluntary employee separations and retirements.

³¹ Id at H.R. 748-317.

³² CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.