Airlines and Aviation: Emerging Threats for PSP Recipients
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. This was the largest economic rescue package in American history as it included over $2 trillion in government funding for individuals, small and large businesses, health care providers, airlines, and others who have incurred or are expected to incur losses as a result of the COVID-19 crisis. This fund is administered by the Treasury Department and the Federal Reserve in the form of direct payments, loans, loan guarantees and grants.
Under the Payroll Support Program, $25 billion has been set aside for passenger air carriers and $4 billion for air cargo carriers to cover employee salary payments, designed to keep workers on the payroll. In addition, airlines and aviation companies are also eligible to tap into some other programs as well such as the “Main Street Lending Program” for small and medium-sized businesses.
Acceptance of these funds have similar strings attached to those that were given to the assistance during the economic downturn in 2008-2009. Accepting funds will be tethered to government-imposed restrictions on certain business activities, including layoffs and furloughs, stock buybacks, dividend payments and executive compensation limits. In the past, companies accepting government funds saw heightened public scrutiny from voters, elected officials, investors, employees, and customers, and as the relative success of the government relief programs are assessed in the coming months,we expect similar public scrutiny.
The SBA and Treasury Department have already announced their intent to audit any loans greater than $2 million to ensure the loans were used as intended, with spot checks for smaller amounts. Additionally, the select Subcommittee of the Coronavirus Crisis, which was created by Congress with the specific responsibility of rooting out waste, fraud, and abuse in the CARES Act, recently called out four aviation contractors that announced employee layoffs despite receiving some of the largest awards. The committee urged these companies to either rehire laid-off workers or return the portion of the payroll assistance that corresponds to these workers.
Additionally, we are also starting to see media coverage on the over 200 aviation companies that have been accessing the financial support , with the narrative often focusing on “the spirit of the law,” not technical compliance, leaving many organizations vulnerable to political and reputational scrutiny.
Congressional scrutiny is likely to only be the tip of the spear; more oversight and investigations are likely moving forward. We have identified the six risk characteristics for airlines and aviation companies that have taken Federal support to help them avoid both government and public scrutiny.
Risk Characteristics Analysis
Media spotlight industries
The airline and aviation industry is in particular need to tread carefully as their every move is already scrutinized by a traveling public. Additionally, companies may want to think about exercising additional caution if they aren’t being perceived as putting its customers or employees first. This could be through unclear in-flight or gate protocals, cancelling flights without notice, or laying off workers.
CARES Act program double dipping
Companies that received funding through more than one CARES Act program (such as both the Main Street Lending Program and PSP) are already beginning to see increased oversight. This is already being highlighted as cause for concern by the Inspector General from the Office of the Special Inspector General for Pandemic Recovery. He has publicly said that accessing multiple pots of aid creates an enhanced risk of fraud and abuse, stating that “creating multiple programs resulting in multiple forms of financial support to a single individual or entity may well be sound policy,” the inspector general’s office wrote. “But in such circumstances, the risk of fraud and abuse increases and questions arise.”
Corporate governance issues
The populist spirit in both political parties incites extreme reactions when corporate actions are perceived to be insensitive or tone-deaf. Therefore, companies who have accepted government funds should be aware of actions that could be seen as enriching the C-suite at the expense of rank-and-file employees. Actions that could trigger unwanted attention include layoffs, high executive compensation while cutting hours or reducing employee’s wages, and stock buybacks or dividends.
A history of corporate reputation issues
Companies with existing reputational challenges need to be on high alert. With the media waiting to pounce on impropriety or missteps, this can compound prior criticism and cause greater reputational harm. The airline industry in particular is tainted already with a public that is well aware of past customer service transgressions. We also think that airline/aviation companies that are likely to engage in a significant deal in the coming weeks or months (i.e. bankruptcy, merger or acquisition), with a perceived change to their overall business strategy would also fall under this category.
Close ties to a major political party
With an upcoming election, political issues are magnified. As such, it is expected that allegations of cronyism will be used on the campaign trail as an attack against elected officials with connections to companies that received funds—leaving companies in the crossfire. In addition, the airline industry, with their carve out of specific government support has left them vulnerable to increased scrutiny.
Companies that are backed by private funds
With lawmakers prone to using political theatre to make a point, there exists the perception that wealthy, well-connected firms took money at the expense of the “the little guy,”. For aviation, this would include companies that are backed by private equity firms or have a history of venture-capital funding.
Managing the Scrutiny
Here are the steps that a company can take to prepare as necessary for any incoming scrutiny:
- Media Monitoring – Monitor the latest oversight activity regarding PSP and CARES Act funds, paying careful attention to public statements and Congressional responses to mitigate fallout and augment media strategy.
- Create Consistent Messaging – Work collaboratively with your communications and legal teams to develop a comprehensive “four corners” messaging document that lays out the facts, describes the company’s mission, and conveys empathy and cooperation around the broader issue. Additionally, a company should think about drafting a comprehensive Q&A document to address the toughest questions internal and external stakeholders are likely to raise.
- Internal Alignment – Minimize the occurrence of unforced errors by ensuring consistent and vetted messaging.
- Update Political Contacts – Reconnecting with allies on Capitol Hill will help keep an ear to the ground and remain abreast of any pertinent updates, some before it is public.
Here are steps that a company can take to augment a communications response in the event of an investigation:
- Respond Publicly – Augment traditional and social media monitoring to support your team with shaping responsive statements around any development that may occur throughout the investigatory process, including adversary media reports, leaked documents, and requests for comment.
- Fine-tune Messaging Document – Think about whether your firms’ messaging document is adequate and build it up further if it falls short while ensuring that you have re-thought the toughest questions from internal and external stakeholders. Conveying the right tone of message remains important.
- Identify and Reach Out to Third-Party Validators – With the start of a specific investigation, companies can identify and engage specific stakeholders and third-party validators who can articulate supportive arguments. The right identified parties in both the media or on the Hill are invaluable in efforts to correct and balance the narrative.