Background: Instead of asking why the government should bail out airline company stockholders, I attempt to be constructive. I propose here an innovative solution that is more attractive to taxpayers than just providing grants or below-market rate loans to fund airlines’ ongoing losses, and is more attractive to stockholders than having the government merely be the post-bankruptcy DIP-financing provider of last resort.

Problem: An acute, pandemic-induced drop in demand for air travel has severely impaired the operations and financial condition of commercial airlines. There is discussion in Washington, D.C. of another round of government assistance for the airlines, which appears to inappropriately benefit airline holding company stockholders while providing appropriate relief to their employees and other stakeholders. Although it is in the public interest to maintain a viable airline industry and keep people employed, the duration of pandemic conditions is unknown, and it is not clear why taxpayers should subsidize public stockholders while facilitating this assistance. This is particularly poignant today since financial markets are quite liquid and buoyant, a condition (facilitated by the Fed and Treasury) that allows airlines access to raising capital on their own. Any role the government plays here should ensure airlines are first seeking to avail themselves of capital markets solutions before putting taxpayer money at risk, and then only with appropriate compensation for taking said risk.

Proposed Solution: The United States Treasury Department enters into agreements with each participating airline, under which the U.S. government would, for a fee, backstop a common stock rights offering made by the airline to its existing stockholders. The offering would entail a tax-free distribution by the holding company to its common stockholders of a tradeable right to purchase newly-issued shares of common stock at a fixed price. That “strike price” would be set at a significant discount to the currently traded stock price. The rights would have a limited duration [e.g., 20 business days] after which they expire. Under the agreement, any expired (unexercised) rights would be taken up by the U.S. government and exercised, ensuring the completion of the capital raise by the airline holding company without it incurring any incremental debt, and the U.S. would become a stockholder to the extent of such exercise.

Existing stockholders can choose to participate or can sell their rights in the open market. If the common stock trades above the strike price at expiration, arbitrage activity will ensure outside investors will exercise those rights and provide the new equity capital. The important point here is the steep discount of the rights strike price is not a transfer of wealth from the stockholders, whether or not they participate, but it does increase the probability that the company will self-capitalize without government assistance. For taxpayers who have complained about some of the airline companies engaging in pre-pandemic buyback activity, this should be viewed as a reverse buyback.

If airline companies feel the government’s terms are too onerous and/or if investment banks offer to provide the same backstops on better terms, and it drives airlines to seek private sector market solutions to recapitalize, that’s a great outcome.

While there are important details to be considered (such as size limits, pricing, backstop fees, non-layoff and other behavioral guarantees, governance/standstill rights/obligations of U.S. government as potential major stockholder, etc.), this could serve as an elegant and straightforward method for solving the current operating and financing dilemma facing the airlines and other prospective strategic industries.