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Comment by noad | Hacker News Reader

After spending hundreds of billions of dollars in share buybacks over the past decade many of the major airlines now look like they are about to collapse.

Those buybacks made a handful of rich executives and shareholders, much, much more wealthy, mostly tax free. Nobody else really benefited.

Share buybacks have been the greatest misallocation of resources in the history of humanity. This was all preventable.

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The prevalence of stock buybacks is a problem but ...

I'm not sure that in the absence of buybacks that they would have just sat on a pile of cash (I bet some of them have some cash on hand) and paid everyone during the COVID crisis until that cash was gone. That just wouldn't make sense business wise either.

A lack of buybacks wouldn't change anything here. If you're not working these employees, you aren't going to keep paying them for long generally. Buybacks or no buybacks.

If you don't like the incentive to layoff people who aren't working for you, that's a whole other topic IMO.

Its not that the companies should have kept the cash, though. Buybacks are not inherently bad. But the US, many buybacks were a direct result of the reduction in corporate tax rate in 2017. Instead of using their greater cash flow to reinvest, raise wages, etc, they bought back stock primarily held by wealthy and institutions. Effectively a transfer from the US Treasury to the wealthy class, leaving the US with fewer options to weather the current storm for its citizens as a whole.

I still wouldn't expect wages to rise just because.

And I'm not sure as far as an airline goes investment isn't going prevent any of this either.

I get the buyback problem, but laying people off who aren't working seems entirely disconnected from those topics.

is public assistance also entirely disconnected?

sure, they will lay people off or furlough them. there's genuine problems with work at the moment. but do they want help beyond that?

I guess for any given public assistance you could demand something about layoffs ... but I would be wary of side effects / worry about killing the company through such policies.

Nationalize them then. Wipe out management and shareholders, and take control for the benefit of workers of the company and customers.

Would they be able to compete with other airlines if they were paying everyone for not working?

One would assume that airlines requiring a bailout are financially marginal, and unable to survive without nationalization, while airlines not requiring a bailout would be in a financial position to weather the temporary black swan event causing the need for bailouts in the first place (for example American Airlines might require a bailout, but Southwest likely will not).

If every airline needs a bailout, you might have to evaluate a program of greater scale; injecting cash directly into every airline in a coordinated effort, but taking equity and putting in place governance (with a board seat or more than one) in those needing the bailout. Those who won't accept such terms would be permitted to fail.

My apologies it's not a binary answer, and more "it depends."

For many businesses, reinvestment would have been a waste because they didn't have any expansion opportunities with strong profit potential. In those circumstances the shareholders would rather get the cash back directly.

I think "buybacks are not inherently bad" is a good point and still true in a theoretical perfect frictionless vacuum. But when we look at the entire economy and how all the money has been flowing mostly tax free from the government and workers to only (literally only) the super-duper rich via this buyback tool, then it's obvious we have a problem.

there's many ways to use unexpected income. share buybacks are one. lower prices and higher salaries are another. pretending that this is about cash reserves is a strawman.

if the company is going to depend on the public teet, it should bite when it isn't hungry.

I wasn't pretending it was about anything. I was nothing if buyback's hadn't happened and they had cash... the incentive is to lay people off who aren't working.

That's just how things work right now.

Same would go with "lower prices and higher salaries"... the result in the article happens just the same.

So if they hadn't done these buybacks, they could have deployed the capital in a number of different areas, including paying down existing debt. They now could add additional debt (bonds, loans, etc) at good rates.

In general in personal finance the first rule of excess capots is to aggressively pay down existing debts, why do corporations do that?

Many of these same companies floated bonds for their buybacks!

Corporations don't do it because they can get capitally more cheaply.

It's all about incentives. Corporations are incentivized to run their operations on cheap capital.

Artificially low interest rates, government entities buying corporate bonds for 'liquidity' (aka, bailing out the banks that shouldn't have ever made the loans in the first place) create the incentives for companies to borrow heavily and artificially boost EPS. There's literally no reason for a company to not do this.

Except for like illicit drugs, they become dependent on it. If the supply dries up they are in serious trouble. Building your business on cheap debt seems like really short term thinking...

They used to teach risk management and disaster preparedness in business schools. They used to teach people that you have a duty to your company and your employees and society.

Now all they seem to teach is how to maximize the stock price for the next 90 days. Just shuffle the cells around in the spreadsheet until the number looks good, that's all we're doing. Zero long term planning, zero long term safety for anyone who isn't an executive.

A lack of buybacks wouldn't have made much difference, Matt Levine goes into more detail on this.

https://www.bloomberg.com/opinion/articles/2020-03-17/the-go...

Darn it. I just read most of that, and I didn't want to agree with his major points, but I ended up thinking he's mostly right.

> Those buybacks made a handful of rich executives and shareholders, much, much more wealthy, mostly tax free. Nobody else really benefited.

I'm not sure you really understand this. If they sold their shares to the company, they'd owe capital gains tax. For the remainder of shareholders that didn't sell, then they are not "much, much more wealthy" given the current stock price. So in one sentence, you have two wildly incorrect statements.

Even if they hadn't done buybacks, it would be very unprofitable to keep paying people not to work for the duration of this crisis. Corporations should generally try to do profitable things, so making staff redundant would probably be a good idea no matter their cash situation. Air travel is not going to return to its previous level for months or even years. It's not efficient to pay staff to be idle for that whole time.

That doesn't take away from the fact that income maintenance is a good thing in a crisis like this. However, this type of public benefit is best provided by the government, not private corporations.

but if we're going to insure them, shouldn't they pay proportionate taxes? it seems like these corporations weren't being taxed enough if they could give themselves such large payouts and then teeter and fall at the next downward trend.

Corporations and their owners already pay the vast majority of all collected taxes in all Western countries, as they should. And at least where I live (New York) they are required to carry/pay for unemployment insurance for their workers. So . . . yeah I guess? We are already doing what you describe.

IAG/BA have a 7.35bn euros of cash in the bank so I think you can probably separate them from most of the others looking for government payouts. It wouldn't surprise me if they buy up some of the competition when they're cheap in the coming months.

The real question is shouldn't they be using some of that 7.5bn to pay their fucking staff. Priorities are all wrong.

Even without the buybacks and a mountain of cash they'd still likely be suspended. Airlines are in a world of uncertainty right now and cutting costs is key. Essentially no one is flying for an indeterminate period of time. You don't keep paying workers to manage a store with no customers, regardless of business or ability to do so.

actually, you might. if you foresee a bad season followed by a quick ramp up, three month redudancy payouts and then talant scouting, you might well pay them to do nothing.

if you forsee a bad year, yeah, i think you probably lay them off under those conditions.

Can it also be argued that share buy backs mean they didn’t spend that money on staff, research and development, and growth efforts, and definitely didn’t save it for a rainy day. I don’t what the name for this would be, but it is a weird thing and the only thing that’s coming to mind is this:

https://en.m.wikipedia.org/wiki/Balance_sheet_recession

It’s different but feels like a class of phenomena the private sector take part in.

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