Treasury, USDOT Set Rules and Conditions for Coronavirus Aviation Aid
April 3, 2020|Jeff Davis
Seven days after President Trump signed the $2+ trillion coronavirus response bill (H.R. 748) into law, the Treasury Department and the Transportation Department are poised to start distributing some of the $88 billion in financial relief provided by that law for the aviation sector as early as next week.
Airline grants. The Treasury Department on March 30 issued guidance to air carriers wishing to access the $32 billion in direct grants provided by the bill ($25 billion for passenger carriers, $4 billion for cargo carriers, and $3 billion for contractors who provide ground services directly to carriers) to these businesses for the purpose of continuing to pay employee wages, salaries and benefits.
The guidance document restates all of the restrictions on the funding that were laid down in Subtitle B of Title IV of Division A of H.R. 748, then provides a form that can be filled out for carriers to apply for the aid (an online version of the application was later released). The law requires that initial amounts of grants be made by Monday, April 6, so the application deadline for the initial round of grants is 5 p.m. today (April 3). The guidance document says “Applications received after 5:00 p.m. EDT on April 3 will be considered, but may not receive approval as quickly. Applications received after 11:59 p.m. EDT on April 27, 2020, may not be considered, but the Secretary of the Treasury may, in his discretion and subject to the availability of funds, consider such applications for approval.”
At the April 2 White House press briefing, Treasury Secretary Steven Mnuchin said that the Treasury Department has retained three Wall Street investment firms to advise on the aviation aid grant and loan programs – PJT Partners for passenger carrier aid, Moelis & Company for cargo carrier and contractor aid, and Perella Weinberg Partners for aid to national security firms.
Mnuchin was also asked at the briefing (starting at the 20 minute mark here) about whether Treasury would demand warrants or other equity in air carriers who receive the grants. Airline unions and Congressional Democrats have been publicly petitioning Mnuchin not to ask for warrants – see the Association of Flight Attendants statement and the statements of House Speaker Nancy Pelosi (D-CA) and House Transportation and Infrastructure chairman Peter DeFazio (D-OR) on April 1. Pelosi and DeFazio say that since the grants are simply pass-through salaries and benefits for employees, they shouldn’t be considered a benefit for the airline itself, so the airline shouldn’t have to give up partial ownership to Treasury.
Mnuchin said yesterday that he had talked to Speaker Pelosi about this issue on the night of April 1: “This was something that was highly negotiated between the Republicans and the Democrats – the President was personally involved in this, he was on the phone with us many times, Mitch McConnell, Mark Meadows, Senators on both sides. There is a specific line in the bill that says that the Secretary, meaning me, will determine proper compensation so this is not a bailout for the airlines…I will be working closely with the President and we will make sure to strike the right balance – not a bailout, taxpayers get compensated.”
(Mnuchin clearly has the right to ask for warrants or other equity – section 4117 of the law is as plain as day: “The Secretary may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by recipients of financial assistance under this subtitle which, in the sole determination of the Secretary, provide appropriate compensation to the Federal Government for the provision of the financial assistance.” The subtitle in which this section appears is Subtitle B, the $32 billion in grants – not Subtitle A, the $46 billion in loan authority. So when AFA says “Congress did not intend for this to work this way,” their argument falls flat – if Congress did not intend for Treasury to do something, they shouldn’t have written a law explicitly authorizing Treasury to do that exact thing at the “sole determination of the Secretary.”)
Aviation sector loans. Also on March 30, Treasury released another guidance document explaining the application process for up to $46 billion in federal loans and loan guarantees for aviation sector businesses (up to $25 billion for passenger air carriers, up to $4 billion for cargo air carriers, and up to $17 billion for “businesses critical to national security” which has been assumed to be Boeing but for which other companies may also qualify). The guidance document is preliminary and “will be supplemented promptly with additional terms and a loan application form.”
The law did not set a specific deadline by which Treasury has to start making loans – only that the application procedures and minimum requirements have to be published by April 6 (which, arguably, has already been done), and that the authority for Treasury to make new loans and loan guarantees expires on December 31, 2020.
Minimum service standards. Both the Subtitle A loans and loan guarantees and the Subtitle B payroll and benefit grants require that air carriers receiving assistance must “maintain scheduled air transportation service as the Secretary of Transportation deems necessary to ensure services to any point served by that carrier before March 1, 2020.”
To help define that, USDOT published a “show cause order” on March 31 with its preliminary determinations on how to interpret and enforce the law. Comments were due by last night, and a final order could be published as early as today.
- What carriers are covered? “direct air carriers accepting financial assistance under the CARES Act that hold certificates of public convenience and necessity for scheduled passenger air transportation pursuant to 49 U.S.C. §§ 41101 – 41102 or that hold a Commuter Air Carrier Authorization pursuant to 14 C.F.R. Part 298 (covered carriers). Because they operate largely on an on-demand basis, the Department has tentatively decided to exclude carriers with certificates of public convenience and necessity for charter operations and air taxi operators registered under 14 C.F.R. Part 298 from Service Obligation under Sections 4005 and 4114(b)…”
- What countries are covered? “the Service Obligation under Sections 4005 and 4114(b) will pertain to only U.S. points. On March 19, 2020, the U.S. Department of State issued a global Level 4 Health Advisory urging all U.S. citizens to avoid all international travel. The Department, therefore, tentatively determines not to require covered carriers to serve international points, at least during the duration of the Health Advisory.”
- What cities are covered? “The Department intends to use Official Airline Guide (OAG) schedule data combined with T100 traffic data as reported to the Department as the primary data sources for determining the points that covered carriers served prior to March 1, 2020. The Department tentatively determines that it will use week-ended February 29, 2020 OAG schedule data as the primary source and year-ended December 31, 2019 T100 data combined with year-ended December 31, 2019 OAG data as a supplementary source to determine the list of points served by covered carriers.”
- What airports are covered? “because Sections 4005 and 4114(b) refer to ‘services to any point’ as distinguished from ‘airports,’ the Department has determined that, in cases where multiple airports serve the same point, carriers would not need to maintain service to all such airports, but would be able to consolidate operations at a single airport serving the point.”
- How many flights per day/week? “the Department has tentatively determined to implement covered carriers’ Service Obligation by requiring only minimum service levels for each point served as follows. For points that a covered carrier served with at least one flight at least five days per week, the covered carrier would need to provide at least one flight per day, five days per week, for that point. For a point that received service from a covered carrier fewer than five days per week, the covered carrier would only need to serve that point with at least one flight on one day per week. Additionally, if a covered carrier served a point with any degree of scheduled service from more than one other point, it would only need to provide service from that point to one of the previously served points as long as it meets the above frequency requirements. A covered carrier can meet its minimum Service Obligation for a given point by dividing its flights across multiple cities, if it so chooses. If multiple covered carriers served a point, each covered carrier would be required to serve the point in accordance with the above minimum service levels, regardless of the service decisions made by the other covered carriers serving that point. These provisions do not authorize any coordination among air carriers that would violate the antitrust laws.”
- Is this final? “it may not be practicable for covered carriers to serve all points previously served in the prevailing operating environment. Likewise, points that may make practical sense to serve now, may not at a later date…Therefore, the Department tentatively determines to allow covered carriers, at any time for the duration of their Service Obligation, to request that points be exempted from their Service Obligation. Covered carriers should submit a list of points that they believe are not reasonable or practicable to serve and explain why service is not reasonable or practicable. The Department will inform covered carriers of its decision in a timely manner.”
- What about regional carriers? “For regional carriers, the Department tentatively determines to interpret any Service Obligation to apply to the marketing carrier. If a regional covered carrier holds out services under its own airline designator code, it will be the marketing carrier and be responsible for maintaining service at the above service levels. Regional operations operating as a franchise of a mainline carrier will be the responsibility of the mainline carrier as the flights of regional carriers operating for mainline carriers are under the commercial control of the mainline affiliate that schedules, prices, sells, and revenue manages the flight. If a regional covered carrier receives assistance under the CARES Act, its Service Obligation will be considered met if it is operating all flights designated by its mainline affiliate, consistent with the mainline carrier’s Service Obligation.”
- What about cargo carriers? “the Department tentatively determines not to impose an a priori Service Obligation on all-cargo carriers. However, we tentatively determine that all-cargo carriers receiving assistance under the Act remain covered, and the Department may impose a Service Obligation if it determines it is appropriate, including if it is necessary to maintain well- functioning health care and pharmaceutical supply chains, including for medical devices and supplies, as directed by the CARES Act.”
- Does this preempt EAS? “nothing in this order should be construed as affecting the obligations of carriers operating under an Essential Air Service contract or the rights of communities eligible for Essential Air Service.”
- How long does this order last? “The Department tentatively determines that the Service Obligation imposed under this Order will extend through September 30, 2020. The Department tentatively chose this date for the initial term of the Service Obligation because carriers accepting financial assistance under the CARES Act must maintain certain levels of employment until that date.8 If the Department finds that it is necessary to extend the Service Obligation, it intends to notify covered carriers of any extension no later than August 1, 2020.”
A few comments were filed in the regulatory docket. Airlines for America filed comments that were generally supportive of the draft order but which requested that it broaden the definition of “regional airport” and clarify the order so that seasonal service that would normally have been cut off in March or April anyway not be continued over the summer because of the order. A4A also wanted DOT to “expressly confirm that flight cancellations due to operational considerations such as weather, mechanical, or crew time out not be counted against a carrier in meeting its minimum frequency requirement.”
(1:15 p.m. 3/3.20 update: In a COVID-related issue that is not directly related to the recently enacted bill, USDOT just issued a notice to air carriers reminding them that “passengers should be refunded promptly when their scheduled flights are cancelled or significantly delayed…The Department is receiving an increasing number of complaints and inquiries from ticketed passengers, including many with non-refundable tickets, who describe having been denied refunds for flights that were cancelled or significantly delayed. In many of these cases, the passengers stated that the carrier informed them that they would receive vouchers or credits for future travel. But many airlines are dramatically reducing their travel schedules in the wake of the COVID-19 public health emergency. As a result, passengers are left with cancelled or significantly delayed flights and vouchers and credits for future travel that are not readily usable…the Department continues to view any contract of carriage provision or airline policy that purports to deny refunds to passengers when the carrier cancels a flight, makes a significant schedule change, or significantly delays a flight to be a violation of the carriers’ obligation that could subject the carrier to an enforcement action.”
Airport aid. The new law provided $10 billion for the Federal Aviation Administration to use to give financial aid to airports. The FAA posted a notice at 7 p.m. on March 31 describing the way the new law provides the funding and stating “The FAA plans to make these funds available in April, and airport sponsors should work with their local Office of Airports field office. The FAA will provide additional guidance on the CARES Airport Program next week.”