Airline Equity Dilution: A Big Nothingburger

Apr. 17, 2020 7:34 AM ETAAL, ALK, DAL, JBLU, LUV, UAL19 Comments


  • Airline stocks plunged in late March after Treasury Secretary Steve Mnuchin indicated that he would demand compensation for any financial support provided to airlines.
  • Investors' worries about possible dilution turned out to be massively overblown.
  • Many airlines are likely to experience dilution of less than 1%. Even for American Airlines (the worst off), dilution should be well below 10%.
  • Rather than worrying about dilution, investors should focus on airlines' balance sheets, ability to shrink their way back to profitability in 2021, and long-term growth prospects.

When reports emerged late last month that Treasury Secretary Steve Mnuchin wanted the federal government to be "compensated" for any grants provided to airlines to cover payroll costs, it sparked a panic of sorts among airline shareholders.

At the very least, it deflated airline investors' newfound optimism. Many began to worry that the airlines would be required to pay dearly for any aid they received in the form of equity, warrants, or other securities that would dramatically dilute shareholders' holdings. As a result, shares of each of the top six U.S. airlines fell by double digits in the week following the Senate's passage of the CARES Act on March 25.

Data by YCharts

All six (American Airlines (AAL), Delta Air Lines (DAL), United Airlines (UAL), Southwest Airlines (LUV), Alaska Air (ALK), and JetBlue Airways (JBLU)) have reached tentative terms for payroll grants under the CARES Act. And the terms do include warrants for the government. Nevertheless, the much-feared equity dilution has turned out to be quite minimal.

The terms of the deal

Despite lots of pushback from airline executives, labor groups, and Democratic members of Congress, Mnuchin and his deputies held firm on not giving away the $25 billion earmarked for payroll grants to commercial airlines with no return.

The basic structure of the deals being signed with various airlines is that 70% of the money is an outright grant, while the other 30% comes as a 10-year low-interest loan. (For reasons not clear to me, some airlines, including JetBlue and Alaska Airlines, seem to be receiving closer to 73% of their disbursement as outright grants.) The loan can be repaid at any time at par.

To receive the payroll protection funds, airlines must maintain service to every point in their networks (with minimal exceptions) and agree not to conduct any involuntary furloughs

This article was written by

Adam Levine-Weinberg is a value investor who has been researching and writing about stocks for Seeking Alpha and The Motley Fool since 2011. He graduated from Swarthmore College in 2007, received an M.A. in Political Science from the University of Chicago in 2009, and received his CFA charter in 2017. He is always on the hunt for irrationally beaten-down stocks, particularly in the aerospace, retail, real estate, and auto sectors.

Disclosure: I am/we are long AAL, ALK, DAL, JBLU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long Jan. 2022 $10 calls on JBLU and Jan. 2021 $40 calls on LUV.

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