Discover more from Hill Heat
The climate-induced airline industry meltdown
Why one million Southwest Airlines passengers may wish Congress would reconsider its position on a federal bailout manager
At the height of the Covid-19 pandemic, Congress hurried to authorize trillions of dollars in corporate assistance and emergency lending. Some of the most attention-grabbing relief went to the airline industry, and although this money came with provisions restricting stock buybacks and granting stock warrants to the government as a way of ensuring a “healthy return” to the public, calls to use the emergency to institute broader changes for the industry were largely rejected. Throughout 2022, the airline industry made it painfully clear that broader changes had been needed, culminating with a catastrophic December for Southwest Airlines, which one expert described as the “worst meltdown of an airline we’ve ever seen in this country.”
The meltdown came as several crises—all of which were foreseen and ignored—converged. The understaffed, undermaintained airline shuddered to a halt when extreme winter storms, worsened by the fossil fuels burned by the airline industry, struck.
The recovery from the pandemic has revealed gaping flaws in our supply chain and a general failure by airlines and other businesses to prepare for an era of rapidly accelerating climate change. In this era of constant crisis, the assistance extended to help corporations get through the pandemic will hardly be the last.
Who Manages the Bailout?
Current answer: BlackRock, mostly
When the pandemic crisis first unfolded, conventional wisdom held that 2020’s corporate bailouts would be an unpopular lightning rod, much like the bank bailouts from a decade earlier. In May 2020, professor Saule Omarova was brought on Chris Hayes’ podcast to discuss “Saving the Economy,” and she highlighted her proposal for a National Investment Authority (NIA), which would serve as a “bailout manager” during crises, ensuring that emergency assistance is spent in the public interest. 1
The contemporary playbook for economic crises is having the Treasury and the Federal Reserve step in. The Treasury oversees programs that Congress approves to rescue certain large employers, as with the Troubled Asset Relief Program to bail out banks after 2008 and the Payroll Support Program supporting airlines in 2020. Meanwhile, the Federal Reserve has used its emergency authority to lend to nonfinancial companies in increasingly expansive ways.
But neither institution is well suited to ensure that this public money is spent in an economically sustainable or just fashion. Treasury’s ad-hoc emergency programs are designed to stop the bleeding in whatever corporate sector needs help, but don’t address the underlying problems. In its reluctance to blur the lines between fiscal and monetary policy, the Fed’s supposedly neutral emergency interventions can end up running counter to its maximum employment and financial stability duties.2
Under Omarova’s proposal, this “institutional gap” would be filled by publicly accountable leaders of a National Investment Authority that has already been tasked with addressing major social challenges. The NIA’s board would be required to have specialized expertise in financial markets, labor markets, and corporate governance. Years before a crisis, they would be engaged in identifying federal investment imperatives, such as responding to the climate crisis, addressing the shortage of affordable housing, or bolstering supply-chain resilience.
Having a federal “bailout manager” would remedy past instances where public money was spent to protect corporations but not the public interest. The NIA’s bailout manager would have the power to take equity stakes in corporations receiving federal assistance, and could engage in restructuring to minimize job losses and reduce financial stability concerns. Especially as climate change emerges as a major systemic risk, a bailout manager would ensure that public money does more than just rescue industries in trouble, but puts businesses in a healthy position to serve the public long-term.
How the Airline Bailout Went Bad
They took the money and kept it
Although an October 2020 Congressional Research Service report observed that “it is likely the airlines will need to restructure for survival and long-term growth,” the $54 billion in federal pandemic aid was not tied to restructuring. This was a major missed opportunity. Ever since 1970s deregulation helped spawn dramatic and harmful consolidation in the airline industry, the airline industry has counted as one of the most miserable industries to deal with, and is badly in need of reform. Throughout this period, airlines have also stood out as a key example of shareholder primacy, with lavish executive compensation packages and capital distribution plans leaving airlines poorly positioned to encounter sudden shocks like a pandemic.
Congress initially responded to the financial market turmoil brought on by the pandemic with uncharacteristic speed and scale, but the CARES Act passed in March 2020 entrusted much of its corporate assistance to open-ended emergency lending facilities run by the Federal Reserve, and in turn delegated to the asset manager giant BlackRock. These facilities succeeded in soothing Wall Street, but they contained worryingly little in the way of guardrails or conditions.
The CARES Act’s Payroll Support Program (PSP) for airlines did have restrictions related to workforce maintenance and stock buybacks, but it was set to expire in September 2020—a date so precariously close to a national election that it left thousands of airline workers subject to to the whims of a dysfunctional Congress. Indeed, the PSP briefly lapsed in September 2020, and although it was revived through the end-of-year spending package, 30,000 airline workers were furloughed and went multiple months without a paycheck.
Initially, this led some in Congress to worry about public backlash. With the pandemic still raging and the economy still stressed, Rep. Jim Himes (D-Conn.), who was first elected in 2008, used a September 2020 CARES Act oversight hearing to observe that his time in Washington had been “bracketed by bailouts,” and asked then-Treasury Secretary Steve Mnuchin what he thought about the idea of a federal bailout manager.
Once the economy was recovering faster than expected one year later, however, there seemed to be much less appetite for reform. When Rep. Himes presided over a September 2021 Financial Services Subcommittee hearing reviewing the Federal Reserve’s emergency lending facilities, witnesses were mostly laudatory of the Fed’s crisis response. Even some liberal economists who had been vocal critics of the 2008 bank bailouts defended the Fed’s approach to emergency lending in 2020, while other commentators hailed the PSP as a success.
But the strong leverage that the PSP temporarily gave to the government over the airline business would have been welcome as airlines struggled to deal with the surge in travel demand that followed widespread vaccinations. Over the summer of 2022, airlines set a new record for flight cancellations. Having encouraged many workers to take early retirements during the pandemic, airlines were understaffed and required unusual levels of overtime from their workers during the busiest travel periods. Southwest Airlines in particular expanded its flight schedule without adding staff. Members of Congress and state attorneys general wrote to Transportation Secretary Pete Buttigieg to urge him to issue fines and otherwise enforce the law so that airlines did not sell tickets for flights that weren’t properly staffed.
The actions Buttigieg took in response to these calls were largely cosmetic.
The Climate Crisis, Ignored
“Significant negative externalities”
Reform is especially needed when it comes to improving how airlines respond to climate change. Airlines have been cited as an industry that can have “significant negative externalities” when faced with failings of so-called operational risk—a risk that is expected to increase substantially as climate disasters damage physical infrastructure and place stress on interconnected systems. The entire airline industry has been “overdue for a massive technology overhaul,” in large part because it is dealing with “huge disruptions” from a now-routine slew of climate disasters.
Additionally, after years of failing to deliver on pollution reduction pledges, the airline industry must be pushed swiftly in the direction of lowering its outsized contribution to climate change, including by accelerating investments in lower-polluting fuel and moving toward battery-powered planes. Former House Transportation and Infrastructure Chair Peter DeFazio (D-Ore.) seemed to recognize this in March 2020, when he laid out key principles for airline relief and included mitigating climate change. Ultimately, though, climate provisions were absent from the PSP, in a major contrast with the approach taken by the French government in setting green relief conditions for AirFrance.
The Southwest Meltdown
Pity that Pete didn’t help
At the end of September 2022, the PSP’s final conditions expired, freeing airlines to resume stock buybacks and dividends. Meanwhile, beleaguered airline passengers braced themselves for the 2022 holiday season (which Secretary Buttigieg had assured us airlines would be prepared for). Then, Southwest Airlines kicked off December by becoming the first major airline carrier to resume its quarterly dividend payment, even as negotiations over labor contracts with its pilots and flight attendants were still ongoing. In a statement announcing the decision, Southwest CEO Bob Jordan touted “solid operating and financial results since March 2022” to justify paying shareholders $428 million. Near the end of December, our polluted weather system caused a polar vortex disruption, leading to freakish weather in the days before Christmas, and airlines again saw mass cancellations.
By far, the worst response was the Southwest meltdown. A major factor in the Southwest fiasco was the airline’s failure to invest in upgrading its flight scheduling software, which reportedly “remained rooted in 1990s technology.” Southwest’s crew scheduling software was “nearing the end of its life” by the airline’s own admission, yet that had not stopped Southwest from prioritizing nearly $10 billion in payouts to shareholders in the five years leading up to 2020. This system predictably failed when overwhelmed by the “extreme circumstances” of an increasingly common winter storm, forcing Southwest employees to handle scheduling manually. Roughly 15,000 flights were canceled, affecting over one million passengers, and about one week passed before Southwest restored anything resembling normal flight schedules.
What Could Have Been
The NIA bailout manager could have prevented this by using its corporate restructuring powers to block resumption of dividend payments until needed software upgrades had been made. Because the NIA would be deploying all its powers toward tackling the climate crisis, the public support extended to airlines during the pandemic would have been conditioned on the companies using that support to make themselves more climate resilient. At a minimum, this would have meant increasing airlines’ operational investments and pollution reduction initiatives, but the NIA could have also played a role in coordinating the billions of dollars in federal airline support and the billions of dollars in airport infrastructure improvements.
To ensure that 2023 is a less painful year for their constituents, the Biden administration and Congress have many tools and policy interventions at their disposal:
Secretary Buttigieg can turn his expressed anger at the Southwest meltdown into stiff enforcement action, including revival of the Transportation Department’s consumer protection powers.
The reinvigorated antitrust division at the Justice Department can closely scrutinize JetBlue’s proposed acquisition of Spirit Airlines, as it is reportedly doing.
Congress could finally repeal the federal preemption clause from the Airline Deregulation Act of 1978, thereby empowering all those state attorneys general who wrote to Buttigieg to enforce the law themselves.
And there are numerous proposals for Congress and the Securities and Exchange Commission to curb stock buybacks.
Ultimately though, the airline industry is going to need a holistic restructuring to protect the public from the ongoing shocks that climate polluters are inflicting. As fossil-fueled climate change increasingly poses a threat to the safety and soundness of the financial system, the need for government rescues of vital industries will continue to arise. Corporations receiving public assistance in this context must emerge from the crisis better positioned to weather the storms.
A previous Hill Heat post explored why the Senate rejected Omarova’s nomination to one of the nation’s top banking regulation positions. Omarova’s NIA proposal— which would also be enormously helpful in resolving fossil fuel bankruptcies in the public interest— proved one of the sticking points that prevented her confirmation.
Indeed, notable figures like former Deputy Treasury Secretary Sarah Bloom Raskin and future Assistant Treasury Secretary for Financial Institutions Graham Steele presciently warned early on in the pandemic that “backdoor Big Oil bailouts” might undermine the Fed’s financial stability goals later. Their warnings were not fully heeded.