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The Department of Transportation Just Gave Airline Stocks 3 Huge Wins

After President Trump signed the $2 trillion coronavirus relief package into law on March 27, executives from the top passenger airlines like Southwest Airlines (NYSE:LUV)Delta Air Lines (NYSE:DAL), and American Airlines Group (NASDAQ:AAL) probably breathed sighs of relief. After all, the new law gave them $25 billion in bailout funds to help maintain payroll and another $25 billion in loans earmarked for the industry. 

But three days later, they likely got nervous again, as the Treasury Department issued guidelines for companies that receive that money. In particular, a rule requiring recipients to maintain existing levels of service had some industry insiders worried that they’d have to continue operating expensive empty or near-empty flights to qualify.

Luckily, on March 28, the U.S. Department of Transportation weighed in with new guidelines, which ought to make the airlines — and their investors — relieved again (well, as much as possible in the current economic environment)! Specifically, the guidelines contained three big wins for the industry. Here’s what they were and why they’re important.

A Boeing 787 airplane in flight.

Image source: Getty Images.

Win No. 1: Route consolidation lite

Many airlines have been hoping to get the green light to consolidate routes without penalty. True route consolidation involves removing most of the flights on a particular route — say, Boston to New York City — and allowing multiple carriers to book seats on the remaining flight or flights, which are operated by just one carrier.

So, for example, if every carrier normally operates three flights a day (morning, afternoon, and evening) from Boston to New York, but there’s only enough demand for two flights total per day, maybe Southwest operates a morning flight, Delta operates an evening flight, and any other carrier that used to operate that route could sell tickets through its website on one of those two flights.

The guidelines don’t go quite that far, but they do allow carriers to consolidate flights to a single airport in each city they serve. So in the above example, if American Airlines flew into LaGuardia, Kennedy, and Newark airports — all of which serve New York — it could cut down its flights to just one of those airports and still satisfy the Treasury Department’s “existing levels of service” requirement.

Win No. 2: Spreading out the schedule

The Transportation Department is generously interpreting “service to” a city as any flight from anywhere into that city. It has also imposed the following “tiers” of service obligations:

If, at the end of February, an airline served a city: To maintain its service obligation, it must now offer at least:
With at least one flight on at least five days per week, One flight per day, five days per week.
Less than five days per week One flight per week.

Data source: Department of Transportation.

So, as the DOT says in a footnote, “For example, if a carrier operated seven flights per day, seven days per week to a given point, it would only be required to operate one