Airlines want to cancel rule requiring them to refund fares for canceled flights
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Ultimately, I think large scale personal air travel (or mass transit in general) isn't feasible in all economic climates. By definition, it's high upfront costs and low margins. The only airlines who seem to always make it work are regional and shuttles between high-income cities (Alaska, JetBlue.) As for why don't we just nationalize them, I'd say we de facto have already. Airlines know bankruptcy-level downside is covered by the government.
It's not all bad though; there's an argument to be made that this system is pareto efficient. During bull times, you want private operators pushing for network expansions and price efficiencies, even if that means levering up. But these are a de facto utility, so having the government pinch their nose and cover the downside in a bear market is an efficient use of dollars. You could try and put in regulation to force them to reserve X months (years isn't realistic) of operation costs, but you can't get around the basic unit economics of the problem: planes are expensive, even if they're grounded and don't make money if they can't fly.
Washington State nationalized the ferries, and they now run at massive losses a system that used to run at a profit.
Because history shows they can be run at a profit with the same fare, at no cost to the taxpayers.
> For anyone living on an island, they are the only 'road' in or out.
Evidently this wasn't a problem when the system was a "mosquito fleet" of private ferries.
So can highways; Private toll roads are a thing. Doesn’t mean the National Highway System is bad.
If you have a point to make, make it.
Care that becomes faster, cheaper and better is a goal. With the exception of some pharmaceutical regulatory capture shenanigans and administrative bloat due to growing regulations, the healthcare system actually does a really good job at achieving at least two of those goals. Pretty much every treatment available 20 to 30 years ago is faster and better today. Some are cheaper, and some are more expensive.
Saying the ferries were "nationalized" makes it sound like the government forced a bunch of operators -- or, well, that single operator -- to quit and just took over their business, but again, it looks like it's a bit more complicated than that. That remaining operator, the Puget Sound Navigation Company, got into a big fight with their union when they were demanding higher wages -- and the one point the state can be blamed for in this original saga is that they refused to let the operator raise their fares, although they were largely responding to public demand, according to the Seattle Times in 1951 (when this happened): the public didn't actually like that private operator, and thought they had raised their fares too much over the past decade while providing increasingly worse service. PSNC decided not to restart service, and the state offered to buy them out -- again, not what most people would call "nationalization."
If the state did a bad job running the ferries for the subsequent decades up until about the 2010s, there's no immediately accessible litany of complaints I can find. An investigation in 2017 seems like it's led to a lot of accusations about how the ferry service's labor costs had been managed since 2012.
In any case, this is fascinating history -- but it doesn't seem like a resoundingly knockout argument for "private monopoly good, government-run service bad."
The government forced the private ones out of business by setting fares, rates, schedules, routes and pay. It didn't add up.
If that's the case, then it wold be more efficient to remove the "de facto" and operate as the reality.
https://www.singaporeair.com/ https://www.qatarairways.com/ https://www.koreanair.com/ https://www.jal.com/ https://www.malaysiaairlines.com/
That is, make it so they can't compete on "whether they anticipated a global catastrophe".
Once you have a national carrier they want bailout after bailout. Politically it looks bad to let your national airline fail, and they know it.
[1] https://www.bloomberg.com/news/articles/2020-03-16/u-s-airli...
Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almost the same financial thing. Shareholders 'own' the $1 in the company's bank, or they 'own' it if it's paid back to shareholders.
Stock buybacks or dividend payouts should basically have a null effect on the value of the company. They are kind of 'neutral' exercises.
Edit: 'null value' obviously taking into consideration fewer shares, i.e. if the company buys shares from the market at market prices, it shouldn't directly affect the value of the other shares it's financially neutral.
That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average.
Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation.
The question of how much cash on hand certain businesses should have to have ... is a separate issue.
If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times.
If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1.
Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.
Every financial decision does.
I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all.
The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal.
Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
If every business had to consider every possible risk scenario (WW3?) then nothing would function. We need a kind of 'insurance' that nobody else will provide. The government is well-positioned to do that if they do it responsibly.
These companies are generally not getting free money - they are getting loans, or in some cases the gov. is getting equity. The government could have actually made a profit were they to have held their auto-bailouts a little longer.
The reality is, Auto Companies cannot prepare for an 'apocalypse' in an adjacent, much bigger market - banking.
Credit is the right thing to do to keep that system going, again the government did loose a few billion, but it was small in the grand scheme, moreover, they should have broken even.
There are quite a few social programs provided by gov for individuals, moreover, those are 'freebies'. The gov is not taking a chunk of 'ownership of you' and they're generally not extending loans.
Banks also paid back their loans, the sneaky thing there was when the Fed allowed banks to dump mortgages on them at face value - which was a 'bailout' of banks and home-owners.
Of all the things that drive unfairness and inequality - these are not them. These are generally good bits of intervention.
Low-interest rates that drive massive home inflation is a primary driver of inequality. Lack of some kind of socialized medicine. Lack of reasonable healthcare regulations. Garbage public schools in some areas. Prison Industrial Complex. These are much more obvious areas for reform.
the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits.
and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying).
the benefits are not uniform to every shareholder, especially through time.
How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting.
Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
All this "we are doing it for shareholders" tripe is nonsense. Buying back stock at all time highs is the most idiotic thing a company can do because it says the business has no better use for said money, which imo is one of the dumbest conclusions a company can come to if growth is the goal (is your R&D department so useless that giving the money back to shareholders is the best allocation choice? Silly)....I'm including companies with a huge war chest like Apple, they are not an exception to this truth.
Many companies (run by idiots) have concluded that financial engineering is more useful than R&D, these badly managed companies should be left right in front of the "market firing squad" when the market turns against them inevitably... No bailouts.
So you buy back shares when they are at the 52 week high and sell more shares when they are at the 52 week low... that's brilliant.
Share buybacks make sense for companies with strong balance sheets and little/ no debt load. For example: Apple. They make zero sense for companies with weak balance sheets and tons of debts (e.g. Most of the airlines).
[0] https://www.macrotrends.net/stocks/charts/AAL/american-airli...
https://americanairlines.gcs-web.com/sec-filings
Here's their latest quarterly filing:
[1] https://www.macrotrends.net/stocks/charts/AAL/american-airli...
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[0]: https://www.cnn.com/travel/article/airport-slots-ghost-fligh...
Because it makes little sense to compare a corporation's finances to your own, especially in a low margin industry, and it would completely stifle growth.
Edit: Why should I, as an individual, be held to a higher standard than a group of individuals who have come together in the name of profit (most of which goes to those at the top) and have limited liability in case of failure?
As to why it's a different standard, it's different for the same reason baseball doesn't use the same rules as water polo. Both sports, but very different.
I'm not here trying to defend poor management, but it's hard to take your "maintain a massive emergency cash fund" idea seriously.
You’re actually proving my point when you say our expenses are high relative to net profits. If we can do it, and still be growing at an adequate pace (we grew earnings at, IIRC, 8% last year), what can’t other companies? Before, you claimed it would stifle growth We have way more software engineers on staff than financial engineers. I find it hard to believe we can do this and other companies can’t. You haven’t given me any reason why they can’t, either.
And, BTW, if repurchased stock is so liquid, why are these airlines crying now? It’s because either they didn’t adequately insure against a systemic risk to their business, or they canceled the shares.
My guess is: (1) The long period of relative peace post WW-II and (2) the collapse of the Soviet Union, and (3) the ever-expanding size and liquidity of global financial markets, have led to slowly dwindling cash reserves for all non-financial, publicly traded companies. (Especially if you exclude the most profitable tech companies)
I'd also love to see the trend in cash reserves post 2008 bailouts.
That data might help settle this debate.
Are companies taking advantage of bailout culture?
E.g. there is a social safety net for large companies that doesn't exist for small companies.
As that safety net has formed, has that led to no change in net cash reserves, an increase, or a decrease?
My guess would be that it has led to a decrease.
Because, it seems safe for the largest companies to understand that every 10 years or so, they will need a bailout for unexpected global turmoil. (A war, a man-made disaster, a pandemic, etc.)
This should properly incentivize everyone for the next round. I don't understand why more people don't propose something along these lines.
2. Haven't they put a lot of people's retirement benefit savings into this kind of stock? I guess that could be an excuse.
The answer seems pretty obvious. If you don't believe that any company should be "too big to fail", that's valid, but it's not exactly the situation we have today. Secondly, those shareholders you speak of aren't just a small group of billionaires. Many of these companies make up substantial portions of people's returement savings, not to mention the knock on effects of huge businesses going under.
If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
I'd rather not have everyone else's retirement-savings-to-be bail out those bad investments.
Index funds go down with the market... but perhaps more importantly, there _has_ been a massive shift to index/ETF trading. You know what that did? Pumped up the market as a whole. Now individual business assessment is less valuable because businesses with crap fundamentals go up and up and up due to index buying. Just another bubble.
That’s also why you see so often companies with “no profit”. If a company is operating efficiently, they wouldn’t be turning a profit (they’d have already reinvested profit).
Basic profit-seeking capitalism incentivizes companies to either invest in productive areas or to return capital to shareholders so shareholders can invest in more productive areas. Taxes only effect those incentives at the margins, and the past several decades of increasingly corporate-friendly tax reforms don't excuse or justify the decisions that have been made by CFOs.
> If a company is operating efficiently, they wouldn’t be turning a profit
But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently. The ones taking on debt to fund buybacks are beyond any sort of reasonable justification from a public policy perspective.
We can quibble over the scope of unpredictable downturns, but AFAIU the airlines returned much more capital than would be reasonable in expectations of a 10-year event. 1980s deregulation, 9/11, 2008 recession, and now 2020 pandemic... at some point you can't say that this stuff is "unpredictable" with a straight face. Something always happens, and even if you don't know precisely what or when, it's regular enough that you can substantially insure yourself. There's obvious moral hazard at play here, even though some public support may have been justifiable in this particular case.
Even worse, AFAIU once upon a time airline union retirement funds were major purchasers of airline bonds. There was a sort of quid pro at play that more closely aligned unions and airlines during downturns, as unions were more incentivized than usual to return the airline to profitability through cost-cutting measures. The downside was, at least hypothetically, greater moral hazard--more pressure for government bailouts because more low- and middle-class employees were effected. But these days airlines have increasingly spurned unions and these sorts of arrangements, so any bailout directly lines the pockets of wealthy investors. There should be much less urgency to bailout the industry, especially without an equity exchange.
By your definition any company that didn't see the coronavirus pandemic coming would be not operating efficiently, but the reality is even if your company was operating efficiently your company may be killed by it.
That's like saying a healthy person shouldn't need to be put on a ventilator because if they took care of their body well they wouldn't need it, but the reality is this virus is not something anyone could have prepared for.
Even if they had only kept, say, $20B of that money—reducing their buybacks by less than half—that would surely be $20B they would not now be asking us taxpayers to spot them, and it's possible they would even be able to make a different kind of plan using that $20B to stretch them over at least some significant part of the gap.
Yet instead of liquidating their assets once their incompetent management hit a sand bar, US tax payers have been required to bail them out with loans and grants.
Or here's a simpler mechanism-- the airline should sell stock to the public markets to raise capital. It's the natural response to running out of money because you spent it buying stock. The fact that this is a market downturn is something they'll have to deal with.
I'm tired of corporations doing this, and people making excuses for them. It's all about the free market when they're raking in money and paying off investors, but the second they run into any problem that costs them money they want another bail out or for the government to change the rules in their favor.
Buybacks increase the share price, which is a typical metric for executives. This leads to a situation where it is in the interest of the exec to increase buybacks in order to drive the price up, even if the company performance is not that good.
Personally, I'm neutral except for this one thing.
The challenge is that most investors don't bother to do such tracking. And thus most investors are buying stock at prices much higher than they would have originally bought it at.
The enormous majority of US publicly-traded stock is held by institutions who have the resources to monitor the buybacks and sell off stock, if that's what they wanted. Buybacks aren't a scheme where companies or hedge funds make money off careless retail investors.
This is what everyone means by "privatize profits, socialize losses". Pay back all profits as dividends/buybacks and when losses mount from a recession then get bailed out by the government.
IMO the bailout should take the form of an equity investment from the government. Investors get diluted, but the company survives. Government gets a profit if things go well.
Privatizing profit and mutualizing risks is an insane moral hazard, we have to shake it off.
Truly getting rid of the mutualizing of risks would be letting the companies just collapse. But for various reasons (wanting banks, plane flights), we've decided to not do that.
The main thing is that airlines transfered their capital to their shareholders. So now they have very little. If they want to keep operating, they will have to ask for some more capital, maybe from their shareholders, maybe from others.
This strategy has already been kneecapped by plummeting share prices, and trying to sell massive amounts of shares right now would only lead to even further diminishing marginal returns.
Airlines are a crucial national infrastructure, and they know this, which is why they've been incentivized not to give a shit about recession resistance. Bailouts are fine, as long as they are coupled with corrective action. Those who accept them should be unable to buy back stock in the future, and required to build up the capital reserves necessary to weather another pandemic.
American Airlines alone has a market cap today of $4.7B.
They could dilute by 20% and stay alive.
Bankruptcy.
United Airline's value is not in its people, or its service, or its business model. The value is in its airplanes, its exclusive rights to fly to some airports and lobbying prowess (Ever wonder why flights to LaGuardia don't fly to the west Coast? United).
The creditors who take over United Airlines will not take the majority of these airplanes and send them to another country.
If there is any value to United as an entity at all, Chapter 11 bankruptcy is what they need to go through, not congress. In chapter 11 bankrupcy new creditors will come in and punish the existing investors/executives who got United in this situation.
If United truly has no value, chapter 7 is the way and United's assets will be repurposed the most efficient way possible for United's creditors and the economy as a whole.
I frankly cannot think of a less sympathetic organization.
Sell stock to raise capital after airline stocks have dropped 70%? Usually you want to raise capital when stocks rise ( like tesla did ).
Also, if airlines start increasing float during a market selloff, it would put even greater downward pressure on their stock price and it would make their financial data ( EPS, etc ) look that much worse.
Your idea is one of the worse things airlines could do, but given their awful track record, they might do it.
They're also making the calculation that the people are leaving the market and selling under value. This makes sense. The market is low right now because of COVID-19, people need liquidity to handle underemployment and low-spending.
Profits are down and money isn't coming in, and treasury stock is an important counter-balancing force on a receding market. Airlines don't see any major opportunity to make money off of new infrastructure, so they're injecting that money back into the economy.
A pet peeve of mine, but you lump together investors and executives together as if having money in the financial markets is something reserved for the elites, and not inherent in every pension and 401(k) plan.
It is so exhausting to deal with - I don't have the energy to dispute every single time a company pulls one of these stunts to fight for myself to get the baseline level of not being treated like trash. This is exactly what consumer protection agencies and regulations and other laws are meant to protect against, but these institutions are failing us daily.
Air travel is already all about waiting, and much of it is already fully government run or heavily regulated. Not sure what you expect to get worse.
Turns out the true opiate of the people are... well, opiates and other drugs.
I'm not sympathetic to the airlines at all and think they should refund, but I don't think it is universally true that "can't deliver service = owed money back" in this pandemic.
My understanding is Force Majeure rescinds the contract for Act of God (natural disaster) or Government (human-caused disaster). No contract means deposits and pre-payments would also revert.
/ianal
the common law concept of restitution requires that the parties be returned to their original, pre-contracting positions. In reality, this means that the parties must return any prepaid monies or deposits
https://www.agg.com/news-insights/publications/your-event-is...
See this legal article covering schools "https://www.fisherphillips.com/resources-alerts-comprehensiv... -- they aren't legally obligated to refund if they have a force majeur provision in their contract.
That is wrong!
Underlying all this whinging there seems to be a remarkable expectation that the world is supposed to be fair, and when it's not the taxpayer and the Fed should make it so. If the objects of all this fairness were human, I could see the point. However, you're talking about corporations, so there is no point.
Why is this controversial? Seems fair enough to me.
I get the feeling people enjoy beating up on airlines because so many people pay the smallest amount possible, and then are shocked when they're not treated like first class passengers. People pay for McDonalds but expect fine dining.
One could argue it would be useful for another trip to a different location. Sure. But because airflights prices are so shady (prices changing every day, prices that are different if you have a VPN connected, etc etc), the voucher could make you choose for the worst price.
That doesn't seem fair to me tbh
I think 'fraud' has a specific technical definition - it requires 'intentional deception' or 'misrepresentation' or something similar depending where in the world you are.
If they decide to cancel your flight for business reasons and genuinely weren't planning to when they sold you your ticket you can argue that you should get your money back under consumer rights about paying for services provided and maybe contracts I don't know, but it doesn't really make any sense to claim it's 'fraud' - there isn't the deception or misrepresentation required.
It's kind of funny when the shoe is on the other foot. They're upset when they're required to follow the law. They want to sell nothing but refundable tickets which they can oversell, but the minute they can't meet their obligation they're crying to the government.
Sorry airlines, but the company I work for which is quite large has funds to sustain interruptions because you just don't do business otherwise. scrap bonuses, merit increases, all unnecessary expenses, and they borrow, and if you cannot then you were not preparing yourself for much of anything except good times.
Either way it's hard to reconcile C level bonuses with a free turkey every Thanksgiving.
Truly we need to scrap all their bonuses a d parachutes. The entire C level compensation model seems made for Moral Hazard.
For instance my gym went out of business, but hidden in the contract it was written they could transfer my membership to any other gym within 10 miles of the gym. And I was forced to pay a cancellation fee of several month to get out of it.
If you didn't read the contract before you signed it, though, next time you should.
When I bought a house, they gave me a stack of paper about half an inch high to read, including a document for me to sign that said "I have read and understand the documents." So I sat there with the agent and read every word of it. She was clearly quite irritated with me "wasting her time" by reading it, but too bad for her.
A couple issues I was particularly interested in was what happens if I default on the mortgage, and what happens if I prepay the loan.
BTW, I recommend reading the fitness club contracts first. They are negotiable, but if you don't read them you won't know what to negotiate, and will be paying the "sucker price".
Which court is that? The one that finally hears your case three years after the gym has reported the debt to the credit bureaus and ruined your credit?
I've used small claims 4 times now. Each time, I spent less time with the court than I did with customer service prior to the court.
Lesson learned. I ask customer service once, in plain english, on a recorded line. If they don't resolve it at that opportunity, I just go to small claims.
Not really related, but it turns out that calling your American Airlines pilot neighbor a "sky bus driver" is a good way to get kicked out of his Christmas party, even if you were mildly drunk and maybe half kidding.
Airlines and Broadband companies are constantly getting terrible reviews because they offer such terrible quality customer service. But what the fuck are you gonna do, rig up your own ISP or charter a boat across the Atlantic? No, you're going to get reamed in the ass and keep living in the 21st century.
These industries "fail" because they're designed to fail! Nobody wants to admit it, but you need a public option on this shit or else people will just keep being forced to publicly subsidize a select group of private enterprises over and over when shit goes tits up.
Or we can globally live within our means. It is apparently barely sustainable for people to be able to fly anywhere on a whim and a salary. If the globe being able to do this means that airlines must operate at constant arm's reach of bankruptcy and bailout, then we're living beyond our global means and society is ill-structured.
The government interfering existentially to shut down their business isn't quite 'fair game'.
Put another way, the government could ban travel, in which case, the airlines could theoretically offer the flight, but the consumer would have to then cancel their ticket and pay a charge, or not get anything back. Point being the government interference could run both ways.
So it's going to be a big problem clearing all of this up.
If there was real airline competition, sure. But there aren't a half dozen airlines flying between most cities. There are two, if you're lucky. Or one for the majority of city pairs in the United States.
Now I rechecked their website and it seems that I might be able to get a voucher for my ticket value that will be valid until 31 August. They must be joking as I don't think flights will be open (in any meaningful capacity) until 2021 or late 2020.
My sister had Turkish tickets (non-refundable) and she was able to get miles for them.
You can give people an option to leave as credit (e.g., we'll give you $400 of credit instead of a $300 refund) but it should be just that - an option.
I don't think many of us have just thousands of dollars to just not get back.
To be even better, it should not be locked to the same person either. If I have no use to fly (example) Hawaiian Airlines, I should be able to sell that voucher to others.
You can also wait and see if they cancel it. I had 2 more flights this week and they both got cancelled recently and I'm getting refunds. They are probably just waiting until a week before like it was for me in the hopes that people cancel themselves for the BS travel vouchers.
We can't be held responsible for their own financial mismanagement - likewise they should not be eligible for any bailout funds - or they can sell their stock on the market to raise funds.
Many many years ago Air New Zealand essentially went bankrupt (after it had been privatized) so the NZ gov bought it out. Then a few decades later privatized it again at a profit.
Which is the evidence that this can be done.
Why not though? If they go under, someone will step in to buy the assets and hire the employees back. It's not like air travel will go away forever.
They don't need to be indispensable. they just need to be critical enough that not bailing them out is much more expensive than bailing them out.
The solution is to prevent this scenario from ever happening in the first place, by either requiring sufficient competition, or requiring sufficient capital reserves (see: banking and reinsurance), or just nationalizing the thing.
Since when is keeping money for doing absolutely nothing as promised the American way?
> "But instead of honoring their obligation to give refunds, many airlines have only been offering vouchers and credits for future travel, which customers often must use before the end of the year."
This happened to me with Alaska Air on a nonrefundable fare, but I have to use the credit 1 year from the date of cancellation, which in my case would be around March of 2021. My hope is a vaccine will be available by then, or at least by the time I actually fly in 2021.
I originally purchased the tickets with another credit that expired at the end of April 2020. If you try to cancel on Alaska's web site, before you press submit, you have to check a box that says "By cancelling this flight online, I agree to FORFEIT all credits/vouchers I used to purchase the flight." That's when I called a representative and explained the situation - and had a great experience - all credits refunded and extended for another year. Just took one 15 minute call. Happy to fly Alaska again.
And the loans go to the front of the line in any bankruptcy proceedings.
Then I’m okay with allowing them to make their own silly rules.
Every time a flight is cancelled, the CEO and every manager below him/her is required to commit ritual suicide.
I think he just said that it's too financially risky for a consumer to book a flight, lest they be forced to have their ticket converted to an unsecured loan, "secured" with something that they didn't want (a flight next year) that may expire anyway. They're selling you a gift card.
I'm surprised that people are still flying in closed up metal tubes during this pandemic. If anything the airlines should be giving discounts to lure consumers, and even that is morally questionable.
Flights at this point should be freight or emergency only, for national medical needs and repatriation.