U.S. airlines want a $50B bailout. They spent $45B buying back their stock
stamfordadvocate.com
stamfordadvocate.com
The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
The shareholders would protest, and should be allowed a right of first refusal. Put in money at the same price per share to avoid dilution if you want to. Their alternative is bankruptcy, so they don't have much other options.
The idea that the airlines could issue $50B in shares is a fantasy.
Of course, that's not politically popular, which is why the government is becoming involved.
If that were true, the price wouldn't have tanked so much?
Historically this kind of deal has been profitable for governments in the cases that I know of (in banking), while at the same time keeping more jobs and thus reducing economic impact of unemployment.
https://www.businessinsider.com/saudi-arabias-sovereign-weal...
I corrected my terminology faux pax above.
Here's a link to CCL on EDGAR:
https://www.sec.gov/cgi-bin/browse-edgar?company=carnival+cr...
The filing date for the 13G was yesterday. Link to said 13G:
https://www.sec.gov/Archives/edgar/data/815097/0001011438200...
They don't really need a bailout to stay in business. The grant money for employees is contingent upon them keeping open flight routes that they'd otherwise close. Sec. of Transportation wants low traffic (small) cities to have access to medical supplies and whatnot (at least that's what she says, of course she's pro-business as well).
It's like your parents buying stock for you and promising it to you in your inheritance versus buying a stock yourself. Sure, you can say that you own the stock if your parents promise it to you(In the sense that you will benefit from it eventually), but you don't own the stock simply because mom and dad do. They can change their mind, or decide to give all the money to your awkward brother.
If their businesses are solid, sound businesses, major lenders will not have an issue with offering good terms on whatever it is that they need to bridge the gap.
Other than a firm understanding of what that gap is, am I missing something obvious which makes bank loans not the go to solution here?
You have lots of options to get better service - economy plus, priority boarding, buying food onboard that you no longer get by default. And of course upgrading to business class.
All these things cost more and you could either pay for it by default on every ticket like in the old days, or you can purchase them separately. Consumer demand has overwhelmingly indicated a preference for the latter. Sure the airlines could lower their margins and drive down prices on these things for customers slightly. We'd be in the exact same situation now though without any cash reserves so I don't see how that would have helped.
Also the prices don’t go down when oil prices do.
If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why should we have to fix their mistake?
Yes. When you have a business in an industry that is in the political or regulatory eye, you should prepare. This is historical prudence.
> this is a teachable moment > No its not.
I would treat it as such and that's the problem, isn't it? The model didn't become illegal, it became impractical for an extended duration of inactivity. This isn't an unexpected natural disaster, it's a rather regular event. Something something The Ant and The Grasshopper. Maybe another incarnation will show better judgement by holding more reserves and point backward.
The inability to consider history is a trend of the USA, politically and commercially now.
"MBAs think companies make money. Companies make shoes."
When you abstract the details away again and again and again, eventually you forget that the details exist and matter.
No. People make it sound like they were buying back their stock as they were not using that money to increase worker salaries and benefits. Nobody would complain about necessary bailouts if the organization shared profits with its laborers instead of lining executive pockets.
The best thing we can do is let them and their bad debts die. We have private bailouts they're called acquisitions.
Maybe a smart airline should. Because people have been issuing warnings about a possible pandemic for many years.
A business that operates as if it's always going to be sunshine and rainbows is not a properly run business.
Aren't there a number of companies that have been hoarding cash for some time? [1]
1. https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet...
This is the same as scolding a child hitting their sibling and then giving them a fucking cookie. Then when they keep hitting people, at least have the sense not to be confused why they don't learn.
The people American Airlines employ to predict future risks to the business.
Their SEC filing:
> Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:
> • outbreaks of diseases that affect travel behavior
> In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior.
https://americanairlines.gcs-web.com/node/37211/html#s1E0EED...
You really don't have to look too far in the history of the airline industry to see examples of black swan events.
Independent of the COVID-19 pandemic, I can think of at least two other scenarios that would destabilize the revenues of airlines:
(1) A catastrophic airplane crash that disrupts air travel and/or changes consumer sentiment towards airline safety. Consider that US aviation is in an extended safety streak and most Americans cannot quickly recall a time other than 9/11 when an airplane crash resulted in death.
(2) A change in the price of oil that drastically alters ticket prices. This is not likely given the current climate and the mitigation that airlines now undertake vis-à-vis oil futures, but a plausible scenario nonetheless.
Given that me, a random guy that knows fuck-all about airlines, can come up with 2 scenarios where revenues are disrupted without any foresight, it begs the question whether the airlines are acutely aware of their "too big too fail" status.
It seems their preference to enrich executives and shareholders all while hedging against any catastrophic events with a government bailout should be on par with 2008-era financial misconduct.
Prediction: Airlines will receive a bailout and face little repercussions for their poor planning.
That just isn't right, for a number of reasons.
First, the 50 billion applies to the entire industry, so the "emergency fund" of an individual company is going to be much smaller. Imagining an airline holding 1 billion in a buffer, rather than using it for stock buybacks, isn't that far-stretched.
Second, 90% loss of revenue isn't the problem, it's how long this revenue stays down that is the problem. The FAA closing the skies for a week should not be a problem, a month is going to be a huge problem, and a quarter might already be fatal.
Third, preparing for such scenarios is commonplace in the financial industry, for example. (I have a sibling comment regarding that). Banks are now expected to be resilient enough to survive another another 2008-like crisis on their own, without taxpayer-funded bailouts. And these expectations are not merely high-level, there are entire hordes of specialists, both in banks and with regulators, that do nothing else other than model various scenarios.
Market downturns tend to happen at semi-regular intervals. It's been 12 years since the last one.
> People make it sound like they were buying back their stock as they were cutting flights and laying off employees.
No but airlines were absolutely cutting the quality of their services. They bought back stocks at the expense of passenger comfort. Anecdotally, from 2015-2019 each flight I took was less pleasant than the last. When I travelled in the summer of 2019 our flight did not have vomit bags. Guess what? Two passengers vomited on the approach. All over the seats. Speaking of the seats, they were so uncomfortable that I actually injured my back as a result of sitting in them.
> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
It is absurd under the incentives that business operate under. It's also absurd that businesses can operate until the point of bankruptcy, stranding passengers like what happened when Thomas Cook went under last year. https://www.nytimes.com/2019/09/23/travel/thomas-cook-airlin...
> I really hate that this argument keeps popping up.
I think the reason this keeps coming up is because regular people are feeling extremely frustrated at the moment. Average people are told they should save for a rainy day. I did and now I have the privilege of spending down my rainy day fund while the airline industry expects a handout for not doing so.
> The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
Perhaps some of the impact can be mitigated by taking a portion of $50B and putting it in the pockets of the employees who will lose wages instead?
That doesn't mean that this time we should let them sink, but perhaps there do need to be some strings attached. Airlines do just lurch from one crisis to the next, and we can't afford to lurch from one bailout to the next with them - else we may as well nationalise them.
This needs to be equally true with large corporations, otherwise contracts lose meaning.
Here's what Matt Stoller has to say about buybacks and bailouts in general:
Fundamentally, mergers, buybacks, and excessive executive compensation are about stripping out resiliency in return for cash, and the lobbying is the political machine to protect the ability to do that. So what to do? The answer is pretty simple. Stop hidden risk pooling.
Financialization and private equity is about loading up corporations with hidden risk. We cannot afford that anymore. So here are the conditions to put on large corporations who need cash from the government:
-No bailouts for shareholders. Shareholders took the risk and upside, they should get the downside too. A bailout means the stock value goes to zero.
-No more buybacks ever, and no more dividends for five years. It’s time to stop asset-stripping, and restore the cushion inside corporations so they can invest in production.
-Strict executive compensation limits. No more get rich quick schemes and golden parachutes. We need long-term leaders focused on building institutional strength.
-No more lobbying, as well as limit public relations spending. The Housing and Economic Recovery Act of 2008 killed the ability of Fannie Mae and Freddie Mac to lobby, and that killed their political power. By contrast, Wall Street got bailouts with no strings attached, so they largely wrote the Dodd-Frank bill. (I was there, I saw it). Don’t repeat this.
-No more mergers and acquisitions for five years. If you get bailouts, you have to run your business as a business, not as an acquisition target. I can imagine an exception if the business fails as a stand-alone, but exceptions need to be very narrow.
Banks are vital middlemen between many parties and as such, were already heavily regulated back then, but after the massive tax-payer funded bailouts, regulation went into overdrive.
For example, Banks are expected to survive short- to mid-term dire periods. However, the 2008 crisis showed that most banks were not in that position. So the regulators went into overdrive and regulated most of the weak spots they had identified, and (IMO) most importantly, really stepped up stress tests. Banks have to demonstrate that they can survive interest rate shocks, market crashes, political crises, etc. for a certain amount of time.
And these things get audited extensively. A friend of mine works at a bank under direct ECB oversight, and the sheer amount of data, models, simulations, etc. they need to produce is just staggering.
Perhaps it is time to apply some of these methods to other industries that might only survive with a taxpayer bailout. For example, a global pandemic as we are experiencing right now, is not exactly something that was unimaginable before.
Airlines could be expected to maintain contingency plans for such scenarios, and required to maintain appropriate financial buffers, with stock buybacks, dividends etc. forbidden as long as those buffers are below the levels required by those scenarios.
I feel as though the problem here is that we can't survive losing some of these companies. "Too big to fail" is the problem. There's so little diversity in these ecosystem that losing one company is an economic disaster.
Maybe the regulations around these sorts of things ought to just apply to any company that represents more than X% of a given industry, or any company worth more than Y% of the entire stock market. And these don't even have to be big X and Y values. If you're that big, you've grown beyond being just a simple company and you've become an integral part of society that must remain functional.
Go even further: tax those companies that meet these standards an extra small amount, and then reduce the taxes of their smaller competitors by the same total value. Incentivize competition to increase the diversity, so that there aren't many companies we can't afford to lose.
> The reason that I'm harping on share buybacks is that in theory, money for them is supposed to consist of cash that's surplus to the companies' needs. But in the real world, companies frequently borrow money to help fund buybacks. That works great to prop up their stock prices - until one day, there's a problem.
I've been told by corporate accountants that this is a huge misunderstanding of how corporate finance works. Companies borrow money all the time for everything, because sitting on cash is the equivalent of slowly losing it.
I'm not sure what you mean by this, but if companies are going to hold large amounts of cash, it would be fiscally irresponsible not to seek the best possible tax treatment for it within the law. If people think it's inappropriate for companies to hold cash overseas, those concerns should be addressed towards lawmakers.
I would need to look it up, but IIRC overall the feds made money on the bailout, especially to the banks, but took a slight haircut on the money they lent to automakers. Of course, that haircut doesn't factor in the benefit in keeping those industries alive and keeping those people employed (IMO very worth the price), but that's a bigger question.
Every large investment bank owes its continued existence to the government. Would you say the taxpayers have been sufficiently reimbursed for that? https://www.nakedcapitalism.com/2014/11/aig-bailout-trial-re...
> (assuming it doesn't cause bigger problems down the line)
We're dealing with those bigger problems now, today. The moral hazard created by the 2008/2009 bailouts is a big part of why executives could leverage their companies to buy back stock throughout the 2010s with confidence they would pay no personal price if it ended in tears.
The estimates I've read are that the federal government lost between 9 and 10 billion on the automaker bailouts.
For example:
>...In the end, taxpayers lost $10.2 billion.
https://www.thebalance.com/auto-industry-bailout-gm-ford-chr...
>...the U.S. recovered all but about $9 billion of the auto bailout money.
https://www.marketplace.org/2018/11/13/what-did-america-buy-...
>...(quite apart from all the jobs that were saved).
Yea without the bailout, there would likely have been more job losses as consolidation occurred in the industry.
https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
> TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.
Money has been coming back in two ways: $390B of principal has been repaid, and the Treasury has collected revenue from its investments of $364B.
In total, the government has realized a $121B profit as of March 19, 2020.
* there's a structured process for when a company can't pay its bills but is possibly viable in the long run if it can restructure its obligations called Chapter 11. The airline industry has tons of examples of companies that continue operations through chapter 11 proceedings and end up as profitable on the other side. I don't see why that process is suddenly off limits today. It would require equity holders (and likely some liability holders) to take a haircut, but I'd argue investors knew the risks they were taking given the history of the airline industry.
* if the $45B was returned to shareholders in the form of dividends, would that be somehow less evil? I keep seeing articles citing share buyback numbers, but the whole point of publicly traded companies is to return capital to shareholders.
We could make it illegal, but that seems like it would favor people who want to do corporate takeovers. Also, I've seen legitimate uses of stock buybacks, such as buying it back to give it as a grant to new employees.
We could limit the amount bough or spent, or require that some percentage of stock's bought back be re-allocated to employees as grants or options.
I'm not an economic person though, just spit-balling.
No, I don't think that's obvious. Buy-backs are used that way, sometimes, but they're also used by companies that are doing well to return some money to the shareholders.
Why would they do that, when they could just issue dividends? I can see at least two reasons. First, dividends require one transaction per stock owner, whereas buying stock has much less overhead. Second, dividends create an expectation that you're going to continue to issue them, which is an expectation you may not wish to create.
Given that issue with your starting position, I don't think your conclusions are valid.
I don't own airlines stocks, but when a company where I am a shareholders does a stock-buyback with excess cash I am v=so very happy.
I am OK with banning stock buyback during the period between bailout and full repayment of the loan, but what happened before of after the loan should not be part of the argument for the bailout.
There are no bad politicians, only bad voter.
edit: this was an actual question not a rhetorical one. curious why the downvotes?
By allowing stock buybacks, we are directly incentivizing this perverse behaviour.
1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage.
2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk.
3. Buy back your own stock, which gives back to shareholders.
I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency.
I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.
- Increase worker pay and benefits
* Government regulation impacts
* Union strikes
* Aircraft groundings due to faulty (or less-long-lived than anticipated) parts
* Ticket search companies undercutting their profits
* Oil (and thus fuel, one of their main costs) price surges
* Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world.
* Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust.
* Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc)
* Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower.
2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.
If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.
5. Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund
6. Focus on improving world impact through starting philanthropic activities
The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.
> Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund
What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?
I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much...
No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either.
> What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole?
First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.
But I'm a lot less convinced by your other two points.
I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.
And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
The (flawed, but not entirely) idea of buybacks and dividends is that they also achieve the function of getting cash out of the hands of big corporation managers. When that cash ends up just sitting in another bank account of a rich person (or in a yacht) that is a shame, but it is its own problem for which there should be different solutions, but when that cash ends up flowing into other investments, that is much better than it sitting in the bank account of an already-huge corporation or being funneled into doomed business lines outside that company's area of expertise.
I would agree that an emergency fund likely would have still run out in this scenario, but I don't think that invalidates the idea of investing back in the business does it? It's just more that the caveat is debatable / easier said than done.
> And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
Honestly fair point, I agree generally with who is allocating. I guess the question is how do you execute getting it in the hands of individuals or government for philanthropic purposes though? I wouldn't actually mind seeing a system for that where you can pay into a government controlled philanthropy fund that voters help allocate on ballots during voting but that type of system doesn't exist now, and getting it to individuals is typically limited to your employees which then just turns this into option 4 but with the likelihood that they money goes into other businesses instead of the original intended purpose.
This whole thing could just be a poll on the website or a matching campaign that customers engage with where they choose from a wide variety of sources. That's a major philanthropic activity by the business but then not allocated by the business itself, assuming the options are sufficiently ranging.
And yes, I think it just boils down to option 4: more money to individuals through employee bonuses. I trust the individuals more to support good causes than a corporation with its own agenda.
But note that I also think dividends are a good thing too, for the same reason I think bonuses are a good thing. I think it is generally better for most corporations to pass their cash onto other stakeholders. I wish it was more balanced toward employees rather than shareholders, but I think both are usually better than the corporation holding onto it themselves.
How about spending that money to provide better service?
It's not a revisionist history that virtually everyone complains about the declining level of service and increased fees.
Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class.
We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so.
Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.
Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.
5. Invest it in research
6. Buy other companies to extend your core biz.
6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.)
6c. Buy competitor and dismantle it to consolidate and reduce competition.
You mean props up the share price so board members can hoard more wealth?
There are plenty of companies that have large cash reserves.
Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.
There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.
Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.
I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money.
One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them.
I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.
When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it.
Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company.
Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion.
You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same.
The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.
The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.