This Is Why Southwest Turned Down $2.8 Billion in CARES Act Aid

(Reuters) - Southwest Airlines will turn down $2.8 billion in federal CARES Act funds, it quietly announced this week.

The airline said that it can do without the loan from the Treasury Department, citing its ability to fund-raise elsewhere.

The airline's short-term outlook remains bleak, however, with air travel demand still down significantly amid the coronavirus pandemic.

Southwest Airlines will turn down a $2.8 billion loan from the federal government through the CARES Act.

The airline's leadership believes it has enough liquidity in the form of cash and short-term investments, and potential future access to additional financing, to help it weather the COVID-19 crisis, according to an investor update filed with the SEC on Wednesday.

Southwest has raised about $18.7 billion net in 2020, and currently has about $15.2 billion in liquidity available.

The CARES Act, which was passed in late-March, offered the airline industry $58 billion in aid — half in payroll support grants, meant to help airlines continue to pay workers through at least September, and half as low-interest operational loans.

Southwest received $3.3 billion in payroll support, of which it must repay $990 million. Although Southwest agreed to terms for the loans last month, CEO Gary Kelly had previously characterized the conditions attached to CARES Act loans as onerous. 

In exchange for the payroll support funding, airlines including Southwest were required to agree to avoid furloughs until at least October, suspend stock buybacks, and issue warrants for equity to the federal government. Similar terms — including equity requirements — were attached to the operational loans.

Despite the airline's optimism over future funding, it made it clear in this week's investor update that the overall business environment remains bleak. Although Southwest saw travel demand begin to improve through May and June, a resurgence of COVID-19 cases in the US led that modest recovery to stall by July. 

The airline said that while there has been a modest improvement in August, mostly in the form of last-minute bookings, traffic remains low.