Adam Andrzejewski on December 30, 2022
There is a new meaning to the word “stranded” in Southwest’s airports, with passengers sleeping on the floors of terminals across the country, and the airline giving up on normal operations until January.
Meanwhile, Beltway politicians have reinvented what crony capitalism means for taxpayers and individual investors. They’re used to giving tax breaks to favored constituencies and corporations, such as bourbon distilling and private jet ownership.
But the airline industry’s $64 billion in COVID-related bailouts include another novel approach — stock options for the feds! That’s right, the Department of Treasury entered into complicated contracts with individual airlines involving so-called “warrants” to purchase a pre-set number of shares in their company’s stocks.
The warrants are essentially longer-dated stock options contracts, setting the agreed-upon purchase price per share with an expiration in future years. Anytime within the timeframe specified, Treasury can exercise these contracts and own the shares outright. If the stock is trading above the exercise price, they can sell the shares and pocket the profit for taxpayers.
The idea was to partially recoup money that’s been shoveled out to major airlines by participating in market-driven upside if the stock price appreciates.
In the case of Southwest, they received $7.2 billion in support and only 30% of that — or just over $2 billion — must eventually be paid back in cash (like a loan). The other $5 billion might be recouped, in part, by these stock purchases, with the government betting on Southwest stock to rise.
Three rounds of support yielded three different contracts for Southwest, with total warrants for 4.79 million shares. 2.6 million of these warrants (each an agreement to purchase one share) are set at $36.47, 1.2 million are set at $46.28, and the other roughly 900,000 are set at $58.51. The deadlines to exercise these contracts come due in 2025 and early 2026.
At market close on Dec. 28, the stock (LUV) was trading at $32.19 — below each of the exercise prices — meaning none of the contracts are profitable. Before the meltdown, stock prices were above $36.47, making the first tranche of warrants profitable if they were to be exercised for shares and sold back to the company or into the public markets, but the others are far from profitable yet.
The Securities and Exchange Commission has had no filing submitted to EDGAR (their public company filing site) showing Treasury has acted to exercise any contracts yet. If stock prices stay depressed over the next few years, or if Treasury simply fails to act, taxpayers will have foregone any ability to recoup these dollars, forever.
It’s an astonishing thing to consider: government holding millions of shares of stocks in private companies sounds like something that would happen in a command economy rather than here in the free-market United States! Yet these deals are in place across the airline industry.
The Southwest case is particularly frustrating, because according to their own investor report, they finished the year 2020 with $14.3 billion in liquidity, more than enough to pay any outstanding debt.
Southwest was also the first airline to return to quarterly profits after COVID, with $116 million worth of black ink in the first quarter of 2021, thanks in large part to these bailouts.
When you slice up the $7.2 billion of government payroll support, it amounts to $133,000 for each of 54,000 employees. That should have freed up dollars elsewhere for system upgrades that the airline is now blaming for this mess.
Unfortunately, at no point does it appear that Southwest decided to invest in their long-term success or ability to weather economic downturns.
Why would they? Congress is used to funding most everything on an “emergency” basis, and airlines are used to getting bailout after bailout for decades.
Adam Andrzejewski is CEO and Founder of OpenTheBooks.com, the largest private database of U.S. public sector expenditures.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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