There’s been a whole lot of talk about bailout options for the airline industry as our economy grinds to a halt, and naturally, there are differing opinions. There is no question in my mind that a bailout is necessary, but I would structure it in a way to get money to those who need it most.
The starkness of the situation is incredible. United led the charge with what seemed like big cuts early on, but those have been overshadowed quickly. American is running fewer than 3 daily long-haul widebody flights into May. Delta just announced it would slash 80 percent of its international flying and 70 percent overall. Airlines all over the world are in desperate need of money. They are already digging into their cash reserves, and those aren’t going to last long enough.
This event is, of course, outside of airline control. Travel has disappeared due to fear but also due to government regulations which are preventing travelers from going on trips even if they wanted to. Some will argue that this doesn’t matter at all. Airlines suck, and they should be punished. No bailouts.
Those arguments are being backed up with the usual angry rants. The most popular complaint these days focuses on the fact that airlines bought back a ton of stock instead of saving all their cash for a rainy day, so they don’t deserve the bailout. I don’t understand this.
This is how businesses work. They are there to make money for their owners, and if there’s enough cash to run the business properly, then it’s a perfectly valid decision to use additional cash to buy back stock. Personally, I don’t like that strategy, but that’s a difference of opinion. It’s certainly still a responsible way to run a company. These airlines have billions in cash, and for any normal downturn, they’d be fine. This isn’t a normal downturn.
The reality is that even the best management team isn’t going to be able to get out of this kind of disruption. Without a relatively quick change in fortunes, every airline will go bankrupt. That’s not good for the economy, and a bailout is well worth it. But how should it happen?
Some proposals have me shaking me head. For example, there was talk about waiving the 7.5 percent excise tax on domestic tickets and diverting the passenger facility charge from airports to airlines. That makes no sense, because people have to be BUYING tickets for those taxes/fees to matter. And if people were buying tickets, then the airlines wouldn’t need a bailout.
One opinion suggested that any bailout should come with strings that require capping fees and a host of other things. That sounds more like a horrible hybrid kind of nationalization than anything. I don’t find that argument compelling. Nationalizing airlines isn’t a good plan, but it’s better to go all the way than to keep them private and over-regulate them.
On the other hand, a bailout without strings won’t work either. The government isn’t going to just hand over money and let airlines do whatever they want with it. They put restrictions on after 9/11, and they will put more on here as well.
The way I see it, the biggest issue today is in keeping all of these hundreds of thousands of airline industry workers gainfully employed. It is without question in the airline industry’s best interest to lay people off as airlines grapple with ways to stay afloat in light of reduced demand. Sure, there is some revenue coming in the door thanks to credit card agreements, and non-air services, but for the most part, without much demand for flights, there isn’t a need for all those employees. That being said, keeping them employed should be the primary goal of the government.
For that reason, if I were the government, I’d just go tell the airlines that all those employees could come work for me for a short time.
I don’t mean that literally. The logistics involved would a nightmare. What I mean is that the government can reimburse (or pre-pay) the airline for employee wages. There might be some discussion around pay caps and rates and all that, but this would relieve a tremendous amount of pressure on the airlines by erasing a huge chunk of their costs. More importantly, it would keep people employed.
We need all these employees making money and spending it. That’s how the economy doesn’t die a horrible death. This kind of bailout would help everyone, and it would be effective. That’s why it probably won’t happen.
87 comments on “How I Would Bail Out the Airlines”
“That’s why it probably won’t happen.”
Yup.
We need all these people making stuff (producing). An economy doesn’t run on money, it is merely the medium of exchange.
The airlines should go to their creditors and stockholders and ask for a combination of repayment delay and additional capital. It’s not like the creditors want the planes back.
The out-of-work employees should do the same regarding rent, mortgage, car payment, etc.
Then, before asking for more dollars (created out of contrails) to chase fewer goods (inflation), see where this lands (intended).
I think the criticism of buybacks (especially mine) is much of it was funded by debt, not actual earnings. That’s across Wall Street, not just airlines. The low interest rate environment created by the Federal Reserve was too good to pass up.
Excellent point about debt-fueled stock buybacks. I don’t follow the airline industry enough to know if they did that, but I know it has happened in other industries a lot recently.
The “debt-fueled” nature of airline buyback was indirect. As interest rates got lower and lower, airlines could lever up and borrow against capital assets like aircraft buildings as incredibly cheap. This freed up cash flow, some of which went into liquidity reserves (i.e. cash in the bank), some went to capital investments, and some was returned to shareholders. Reasonable people can disagree on what the right mix of the three would be, but airlines return on capital invested over the last business has still been less than other industries.
Then there’s the question of returning it to shareholders. Buybacks are simply dividends by another name. They are more tax efficient, particularly for the remaining investors, as they only create a taxable event for those who sell their shares and even then only at the long term capital gains rate, provided they held for one year. In both instances, the remaining shareholders hold a call on the same bucket of earnings minus leverage. I still think dividends are cleaner and more transparent, but I don’t work in finance.
Then there’s the question of what is to be done. Eric makes a good point that a chapter 7 style liquidiation of any airline right now would make zero sense. The aircraft, spare parts, buildings, etc are useless to any other potential buyer so dismantling an airline leaves the creditors with precisely zero. Any fair outcome would have to involve a haircut to the existing equity holders. They chose to risk their capital in order to gain a call on all residual earnings. Something on the order of preferred equity would make sense to me. The airlines would be required to pay back the government plus a reasonable return before returning a dime to the shareholders, without subordinating the existing debtholders.
I don’t have a good answer on labor. Ideally, everyone should get a paycheck until this passes. I would rather give the airlines the ability to furlough people to match their workforce with actual operations and then have a large unemployment for everyone, not just airlines workers, to pull from the make sure rents get paid and food gets bought.
Full disclosure, I work for one of the big three airlines.
There is an argument to keep airline employees in place for a few months – but only a few months. If this goes on for a year or more, Govt will have bigger problems – namely major civil unrest
If Covid will last just 3 months, then better to keep the airline employees largely in place so an economic revival can happen quickly, in the expectation that staff needs will be maybe 25% lower in July compared to now.
However, what Govt pays should be less than what the airline normally pays – maybe Govt pays 66% of normal pay check – this would encourage many people who airlines won’t really need for a long time, to find alternative jobs instead.
Assistance or not, there will be a fair percentage of people who leave altogether if there are pay cuts or layoffs, even if it’s short lived… I know pilots and FA’s who are today questioning the health risk and increasing exposure to disease they face on the job, and for some, it’s just not going to be worth it anymore.
The FT (subscription required) had an interesting article a few days ago under the heading “Let’s redeploy airline workers to help national health services” Perhaps this has some merit?
Yes it does as serving those struck by Covid 19 is far more important.
This is such a quintessential leftist, statist, central-planning attitude. Exactly what would you have these airline employees do to help “those struck by Covid 19”? What if airline employees prefer to do something else? Here’s an idea: let’s redeploy all the (fill in the blank with your industry) workers to help with national health services because serving those struck by Covid 19 is far more important than whatever it is you do. Your lack of self-awareness is laughable.
Thank you for taking the time to read the headline! Now, if you take the time to read the rest of the article mentioned, perhaps you might learn something about the more noble characteristics of the human race! END
Cranky Flier, the big unknown in your plan, and all plans for that matter, is how long can you pay everyone with 60, 70 and 80% flight reductions? An unprecedented unknown.
I think the points you make are fair, but short-sighted when taken in context of the past 20 years. Airlines are not normal enterprises despite ‘deregulation’ occurring in the 20th century. These companies are more akin to quasi-private public utility companies now that they are coming back to the governmental trough for the 3rd or 4th time. We had the 9/11 bailouts, then bankruptcies (the 2nd or 3rd in some cases), rubber-stamped consolidation, and now another round of money requests from the government for this pandemic.
The issue with that is all the carriers have commoditized their product, treated the flying public extremely poorly, and made short-term decisions (stock buybacks) to try and bolster their self-fulfilling prophecy of somehow being ‘undervalued’ by investors. Spending 96% of cashflow on buybacks points to a broken system, and that HAS to be addressed before any further money is doled out to these companies.
You forgot General Motors, FCA, all the banks in the country, AIG, Freddie Mack, and Chrysler about 30 years ago with Lee Iacocca, to name only a few. Sorry, can’t agree with you in terms of the singular focus on airlines. Even airports are asking for support now, to name one of a boatload.
Remember that overall, the government made a substantial amount of profit off of the auto industry and bank bail-outs (TARP). If the government actually took lessons learned and provided some form of lending that was easily accessible to companies, but at rates and terms very favorable to the government over the long term (5-10 years), there could be a winning situation for all involved.
Except when airfares and fees skyrocket (again) later as the airlines look to recoup those interest costs.
The buybacks were only truly egregious from American, spending 13 billion over the last 10 years when they had -8 billion in free cash flow. Removing them from the equation the rest of the industry only spent 60% of free cash flow on buybacks and no other carrier did it with negative free cash flow.
Regardless, it’s a bad optic.
it just means that one company severely skewed the industry statistic.
Report on a carrier-specific basis and make decisions accordingly.
Brett:
Here’s the thought I have. At the end of the day, equity holders are paid to take risk. Period. They have to bear the brunt of this because, well, that’s the way capitalism works.
But we can’t let one of the Big 4 airlines fail. So here’s the idea:
1) The government issues convertible preferred stock to the airlines at a dividend yield of 0.02 percent for 24 months.
2) At the end of 24 months, the dividend yield increases to 5 percent.
3) The preferred sells at $1000.00 per share and the covert price is the average daily closing price of the airline’s stock from February 1 to March 1.
4) The government has the right to convert and sell the equity securities at any time into the capital markets.
5) The government agrees not to vote its shares apart from M&A related issues.
In this scenario, the government bails out no one. In return for the very low dividend rate, the government gets the right to sell common equity securities in a good market. The risk is two-fold. One, the airline fails anyway. Two, the airline’s stock never trades again at where it did in February.
Those who think this is a bail-out, think again. The common shareholders of an airline would be badly diluted but the employees would survive. So would the airline service. The airlines would be free to take as much, or as little, as they want.
You beat me to this, but yes, a market solution with the government as an investor of last resort will help the airline industry, and help the government over the long term pay off some of the other spending we are about to embark on.
I think there needs to be a distinction between loans and bailout.
The primary focus of government aid should be to people (ie: individuals) since the economy is about people, not businesses. People create things, sell things, spend money on things. Without people, there is no economy.
That being said, I have no issue with the government loaning money at market rate interest rates. Airlines should first go to creditors and seek relief as well as capital to weather this, also loans. Realizing that beyond convincing creditors to delay payments on existing debt, there will not be much of a market to lend to airlines, the government can become the lender of last resort. Market lending rates (I know that is open to interpretation) would make it less of a bailout and also encourage airlines to seek other sources of funds. Also, this will allow the government to make money on it’s investment over the long term. The auto industry bailout was a long term money maker for the government, and those were loans at extremely favorable rates. Lending at something more akin to mark rate could be a win-win for everybody involved.
Shane:
This actually makes sense. Too much, if you ask me.
Asking creditors to forbear short-term on principal and interest payments is a shrewd way of getting through the crisis. If it’s short-term, forbearance makes everyone whole with a minimum of disruption. It also beats bankruptcy (again).
If I was Oscar and Scott and United or Dougie at American, I’d be taking to my banks post-haste. Same for Delta.
Not exactly my original idea. I saw something similar written by Robert Reich. Make the government’s deal just painful enough that companies go to creditors first, but attractive enough for companies so that they don’t decide to close up shop. Of course to make this happen, you need people at the top who truly understand the situation and want to protect the long term interest of the US Government almost as much as alleviating the short term crisis (ie: avoid adding crushing amounts to the debt that will last for decades).
By all accounts, each of the Big 3 have already raised at least a billion from creditors. I think even B6 just took out a loan for $1B.
FYI
In the past week to 10 days AA, UA and DL have essentially mortgaged assets for 364 day loans of:
AA $1 billion. Closes this week, secured by slots, facilities and route authorities UA $2 billion. Closed last week, Secured by older, owned aircraft DL $2 billion. Closed two weeks ago, secured by aircraft across the board
All have a average collateral to loan ratio of roughly 1.63 All loans are payable in full within 12 months.
“The primary focus of government aid should be to people (ie: individuals) since the economy is about people, not businesses.”
To which Citizens United comes back to haunt us once again.
I read the Tim Wu article. What a total mess. What a lot of the people in that camp don’t realize is that if you kill seat densification, bag fees, and all the other things people complain about, that just kills the ULCC model that’s been driving inflation-adjusted airfares downward this century, something the genius NYT author implies didn’t even happen.
Cranky, what you mentioned sounded like something Sara Nelson from the AFA pushed for. Honestly, I think something like employment subsidies are a good prescription nationwide. Low-interest loans like what’s on the table in Congress right now for businesses make sense for the airlines and they’ll absolutely make Uncle Sam money once we get out the other side of this, but for someone like a small restaurant, using a low or even no interest loan just to keep payroll when no one’s eating out will kill them.
The thinking is that we cannot let airlines fail. (Remember Lehman Bros. You don’t. Well then, that proves my point).
As I read what everyone is saying, one way or another, I, and every other citizen will pay for this proposed bailout. And, the airlines will impose some “short term” fees that wind up being permanent. And after a suitable amount of time, the Boards will raise the salaries for all senior executives for their heroic actions. Of course they will have short memories that many of these same senior executives were proving worthless in running their airlines.
And don’t forget, Boeing wants a piece of the action. Yea, right. The entire management team (from the entire Board to all the executive management) should be sacked for allowing Boeing to run its self into ruin by running a piggie bank for itself, while screwing employees and their customers.
No, I do accept that some sort of arrangement must be made. But, please bare in mind that “too big to fail” just happened 12 years ago. Have you all forgotten?
The thinking is that we cannot let airlines fail. (Remember Lehman Bros. You don’t. Well then, that proves my point).
Actually I do & as a result I still say no bailouts. If the result is the industry fails, then so be it. I know that’s an unpopular opinion around here, but I’m tired of entire industries that ride high for a decade & then when they get caught with their excesses call upon us the citizens to make them whole again just so they can rinse & repeat. I suggest watching the film “The Big Short” to get a better understanding of this concept & it’s a dam good movie to boot.
Also we’re going to need workers to make things that will combat the spread of this virus such as masks, medical devices, construction workers to construct hospitals & so much more that the passenger airline industry becomes less Important when you look at the big picture.
You, and I, and every other citizen will end up making money when the airlines pay back their loans being negotiated in DC right now. Just like what happened after America West and the ATSB and just like what happened with the automakers.
The Lehman comparisons are neither helpful nor accurate. The airlines aren’t in this mess due to to financial mismanagement any more than hotels and manufacturers are and all three sectors will likely see significant support on the table. And government support won’t lead to moral hazard with the airlines any more than it would with restaurants or museums.
Itami has it spot on — moral hazard. How much of the pain should the airline industry (i.e. stockholders and shareholders) have to bear for this? If this was a garden variety recession and say demand drops by 10% over six months that’s a highly conceivable par tof business and there should be no assistance. So the airlines shouldn’t get a $1 back for every $1 they lost. This is something akin to a natural disaster. My only concern is the bottom of the economic ladder — cooks, waiters, retail, child care — is absolutely destroyed by this. Where is their bailout?
Keep the airlines afloat? Fine — but remember the other people also. You have to have some equity if the Treasury gun is whipping out the bills.
Well, do we know that they are going to be helped through loans?
A4A said three days ago:
“A4A is recommending the following combination of programs to provide immediate and medium to long-term assistance to the U.S. airline industry and protect their employees: 1) grants; 2) loans; and 3) tax relief. ”
I’m mentioning loans because that’s what’s currently being discussed in the Senate bill, per the NYT. They said they’re removing the paywall for COVID news but sorry if the story below isn’t included in that distinction. Secured loans for airlines are explicitly mentioned further down in the story.
https://www.nytimes.com/2020/03/18/us/politics/donald-trump-coronavirus-trump-stimulus.html
You, and I, and every other citizen will end up making money when the airlines pay back their loans being negotiated in DC right now. Just like what happened after America West and the ATSB and just like what happened with the automakers.
Oh I cant wait for the executives at these airlines to contact me & ask… Hey Sean, where should we expand service? And when I give my answer, they say thank you & here’s a check for your important input.
The Lehman comparisons are neither helpful nor accurate. The airlines aren’t in this mess due to to financial mismanagement any more than hotels and manufacturers are and all three sectors will likely see significant support on the table. And government support won’t lead to moral hazard with the airlines any more than it would with restaurants or museums.
I’ll believe that when I see it. As of now I can only believe top management will do something stupid at best & illegal at worst as management is never the one that takes it on the chin when things go off the rails. I know you are smart enough to recognize that otherwise you wouldn’t be here with good commentary.
Thank you for the compliment. Since we’re all probably going to be online a lot more I’m glad people here are generally so civil. It’s why I always come back to this blog.
And for the record, I’m certainly not advocating anything with no additional strings attached. If assistance comes with something like liquidity requirements like what happened with the banking sector, I think the industry could be end up stronger for in the long run*.
*Provided corresponding changes in the tax code to stop essentially penalizing companies for setting aside cash like what happens now. Also corresponding changes in corporate governance laws to keep Berkshire from sending hit squads against any CEO that tries something similar
“Without a relatively quick change in fortunes, every airline will go bankrupt.”
Can you do the math on this? Airlines and airline sympathizers make this claim, presumably airlines have done the math but nobody has given numbers and dates to back it up.
The current authority is LNC: airlines are good for 4-6 months without staff cuts.
https://leehamnews.com/2020/03/16/us-carriers-not-at-imminent-risk-of-bankruptcy-despite-potential-shutdown/#more-32894
Jon – Well, we can’t do the exact math because booking details aren’t public. But let’s use United as an example since we know a little more about the situation there.
At the end of 2019, United had $4.944m in unrestricted cash, cash equivalents, and short-term investments. It did $43.259b in operating revenue in 2019, so let’s call that $118.5m a day. The average load factor was 84 percent for the year.
Now, United said that it was going to cut 50% of capacity and it expected load factors to be between 20 and 30%. A very conservative way to look at this would be to halve revenue due to the capacity cut. That’s conservative because a higher percentage of cuts are on international flights which bring in more revenue. But still, just do it this way to make it easy. So now we’re at $59.25m a day. Then we have to cut that by a third if we assume a 28% load factor to keep it easy. Now we’re at $19.75m a day in revenue, or we can round to $20m.
That would be great news except for the fact that things have gotten worse. United has announced more cuts already. But let’s just stick with the $18m a day number to demonstrate.
Now let’s look at costs. Operating expenses were $38.958b or $106.7m a day. Let’s just say we can slash salaries by 30% and fuel by 60% (thanks to flying less and cheaper oil). That’s about $25m a day off the top and it assumes a massive job cut. Landing fees and other rents would drop maybe 25%. Sure flights are down but you still have to pay rent. Add another $2m to the pile. Maybe you can round it off and get to $30m a day in savings. That means your costs are at $76.7m.
You are now losing a little more than $56m a day. With that, you’d drain all your cash in under 3 months. Sure, you can take out loans, which United has done. And you can maybe cut salaries more. But you don’t file for bankruptcy when you have zero cash.
This misses a lot. It doesn’t take into account that airlines not only have less revenue coming in but they have massive refunds going out.
Looks like I did pretty well on this back of the envelope. Delta CEO Ed Bastian says the airline is burning through $50m a day.
https://news.delta.com/ed-bastian-memo-securing-deltas-position-during-coronavirus-crisis
> More importantly, it would keep people employed.
Doing what, though? If they would otherwise be laid off because there are no flights for them to operate, just giving the airlines cash and say “keep them employed” doesn’t add work. Do you want them to deep-clean airplanes and lounges? Do training they don’t really need? Fly empty planes?
Or do you mean keep them employed and paid, but sit at home and watch Netflix?
How is that going to fly (pun intended) with workers in other industries? Will they understand that functioning airlines are going to be necessary for a recovery? The laid-off gig restaurant worker on unemployment will have little sympathy for idled 787 pilots getting paid more than unemployment for sitting at home.
Not that I have better ideas, mind you.
There’s something to the tune of $500 billion in assistance for businesses as a whole in the relief bill currently in Congress and an additional $500 billion earmarked for individuals so I don’t think anyone should worry about the airlines getting singled out.
Of which Boeing alone wants $60b, I think?
$60 billion for aerospace as a whole. Presumably Boeing would end up with the biggest chunk of that, but their suppliers and other manufacturers are hurting just as much.
*cough* MAX *cough*
If only the MAX was still the biggest issue in aviation right now.
Oliver – This isn’t about having them do work. It’s a bridge to a recovery. There isn’t enough work for them to all be productive, but that’s ok for 3 months. If it goes longer, this doesn’t work. Does that mean everyone gets their full salary? Not necessarily. Those details can be ironed out.
Somewhat unrelated, but serious question… Are the airlines using this time to “catch up” or “get ahead” on maintenance and the heavy checks for planes?
Sure, depending on how this shakes out longer term, some of the planes may not fly passengers again, but if the airlines have to employ/pay the mechanics for a period of time anyway, I assume they are trying to make the most of the labor by cycling in planes for A/B/C/D checks a little earlier than normal. That may not make sense for some planes, and won’t keep the mechanics busy forever, but if the labor costs for the mechanics is a fixed cost (at least in the short term), I hope the airlines are taking advantage of the downturn in demand to cycle more planes through the maintenance hangars.
@Kilroy: pretty much no. DL said they’re “reducing any maintenance spend that is not necessary to support the safety of our operation.” They’re burning the furniture, not looking for bargains.
https://d18rn0p25nwr6d.cloudfront.net/CIK-0000027904/66eddca5-a6ab-45b6-add8-ff779c8c5c44.pdf
Your statement doesn’t follow from what DL said; don’t heavy checks and the other maintenance “support the safety of the operation”?
Already, the market is separating the winners from the losers, the wheat from the chaff. LUV begins the day with a market cap equal to my beloved Delta and Alaska COMBINED. LUV suffered a downgrade yesterday, but remains solidly (for now) investment grade. They are not immune either. Despite that, they begin today trading off their bottom, unlike the others. As my embarrassingly combative Delta mouthpiece, Mr. Dunn, has constantly reminded our industry friends (United and American): In case you missed it, this is a business! Well, Delta fully capitulated yesterday. Perhaps someone will buy us in bankruptcy. Hollis predicted that to me many years ago. Omaha is watching.
I do find all the comments of “can’t let the Big 4 fail” to be interesting.
Alaska and jetBlue ought to be allowed to live before AA is.
Cranky, sounds like what you are describing in the article is the concept of “Kurzarbeit” in Germany and other European countries. Damn socialists ;)
https://en.wikipedia.org/wiki/Short-time_working
It sounds like you are on the right path. The short-term goals seem to be in order: 1) keeping money flowing to the workers; 2) helping companies weather the storm (other than for employees), and 3) do as little damage to the long term prospects for the economy as possible when handling 1 and 2.
By far, the #1 economic goal at this time is to keep the workers afloat. How to do that is going to take some creative gerrymandering as, of course, who/how to deliver the funds to is an issue. Firstly they have to decide if these are loans to be paid back. Most economists say no otherwise, all you are doing is creating a loan issue later on.
Next, you have to decide who gets the money from the Feds. Do you give it to the company to distribute to the employees, or do you reimburse the companies; or, do you give it to the unions (for those unions involved) to distribute to its members, or do you make direct deposits directly to the employees? While working on that, the Feds and States have to decide if payroll taxes are applicable and whether to tax the income.
There are generally some pretty good comments here.
In summary, the US government should NOT assume the role of bailing out the airline industry and should require that other countries follow free market principles in assisting their companies.
However, airlines are vital transportation links for any economy and even more so given that the US government all the way back to the post WWII period chose to design the US intercity transportation system around highways and airlines. Few other countries have had the free market approach to transportation as the US and that should continue. Yet, many suggestions continue to want to inject government regulation into the airline industry; either the people (government) have to own the airline industry and allow it to be subject to their rules or allow the free market to set market-based rules – which is what was decided 40 years ago.
The Sec’y of the Treasury accurately said that the role of the US government is to provide liquidity to companies that don’t have access to revenues but were strong before.
As much as some want to twist statistics, there were clear distinctions between the financial performance of US airlines well before the corona virus. American was one of the least profitable, most leveraged airlines while Delta, using a similar legacy model, was as profitable as Southwest. The low cost carriers except for Southwest all were less profitable than Delta.
It is not a surprise that the legacy/global carriers will suffer more in the short-term as international demand and capacity is decimated. Many global airlines are shutting down completely. It is not a surprise that DAL’s market cap is lower than LUV’s now given that the US domestic market is open but the international market is heavily shut.
It should not be a given that any airline or segment of the industry needs to be saved; there does not necessarily have to be 3 global, 3 LCCs (ALK JBLU LUV), and 3 ULCCs plus a few fringe players including HA.
The Feds should be making risk-based decisions about which airlines are best positioned to not only weather the storm but also to repay the debts that all airlines will incur; every airline that can pull down money from either private lenders and the commercial market have already done so or are in the process of doing so. Nearly all airlines will apply for government loans unless it becomes clear very quickly that the severe restrictions on the movement of people will be pulled back fairly quickly.
Some airlines like AAL had uncompetitively high debt service costs before the crisis; SAVE’s new fleet gives them very little ability to ground excess capacity without incurring expense that is unrelated to the capacity that is being produced. LCC models are all based on rapid growth which cannot happen in the current environment; their costs will soar.
The Fed is taking a risk in supporting the airline industry but they show no signs of walking away from market based principles – and they shouldn’t. Airlines that were strong and demonstrated an abililty to adapt to and manage well in good times and crisis should be given access to capital; that is no different than what the free market would do. Those that ran risky businesses including high leverage, low margin businesses need to be treated the way many companies will be treated – with a trip through one form or another of the bankruptcy courts.
That’s all well & good, but there’s no such thing as “the free market.” It’s a mythical concept that many economists keep pushing time & time again to make false assumptions look smart.
I totally agree with you.
Air transportation has always been something of a hybrid between free enterprise and government owned; the US has been far more intentional about pushing for free enterprise principles even while many (and some administrations) have tried to reregulate as much of the market as they could get by with.
But air transportation could not survive on its own during this unprecedented crisis any more than huge swaths of the economy can. Governments have to step in to stabilize markets and support companies; they simply cannot risk taxpayer resources to support companies that were poorly run long before the virus crisis.
And I agree w/ Alex’ sentiment below. It is not the job of the US government to protect 100% of airline workers’ jobs or salaries. Every airline has had considerable amount of financial success; some people esp. legacy employees know (as CF noted in his great article earlier this week) the airlines are a cyclical business and need to make wise financial decisions. Many airline employees, like many Americans, have limited financial reserves.
Some airline employees will decide this is the time to get out; some might have been close to achieving their goals anyway. The government should not provide an excessively large parachute to prevent people from making wise decisions based on their personal situations- and that is true for airline and non-airline employees.
Haven’t seen anything to convince me that Chapter 11 isn’t the right solution here. All the legacy airlines have operated through Chapter 11 in the recent past, and the public was still able to get where they needed to go.
Asking bondholders for deferrals and haircuts might work in a lower-severity downturn, but this crisis is severe enough that there would still be a substantial likelihood of Chapter 11 even if those were agreed to. Given those facts, holders of airline debt will prefer to hold out to maintain their strong position in bankruptcy proceedings.
I also disagree that “keep all the current workers employed” should be a goal. Some airlines were overstaffed even before this: AA in particular probably has at least 50% more employees than their competitors use to do similar work. It shouldn’t be the role of the government to support this inefficiency on an ongoing basis. Provide UI benefits to the laid-off workers, and allow AA to slim down to a leaner operation that can be more competitive after this crisis has passed. Other airlines have fat to trim as well – this is the time to do it.
This is an absolutely brutal time, and I empathize with the workers whose livelihood is affected. At the same time, this is a boom-and-bust industry, and lots of people in other industries are affected at least as severely. Airline employees deserve the same benefits being provided to affected employees in other industries: no more, no less.
As an airline employee, I agree with everything you stated.
Hey man. Don’t know if you heard yet but Compass is the second airline to close shop now with Trans State shutting down earlier than expected.
They are closing 4/7/20.
Wind – Writing was on the wall when Delta flying went away. GoJet is the last Trans States carrier standing.
As a general note about stock buybacks, they were actually ILLEGAL from 1934-1982. The Securities Exchange Act of 1934 considered large-scale repurchases manipulation. The other day I commented how it benefits the insiders and C-suite while screwing the casual investor, but even worse is it amplifies losses when the stock tanks. Yes, most of the S&P was doing it, and many with debt. It is my firm belief that any company that did this and finds them on the wrong side due to this pandemic deserves to get burned to the ground – airlines and BOEING included. That’s the free market, sucks for you. Also, stock buybacks should be made illegal again.
An older article but very valid.
https://finance.yahoo.com/news/7-reasons-stock-buybacks-illegal-172253787.html
It is absurd to believe that if ALL airlines and Aerospace went BK in this current environment that nothing would be born from the ashes. We will have a commercial aviation industry. We will have aerospace manufacturing. It just might have a different name and very likely will be run by much smarter people.
This industry can only rise from the ashes so many times before people collectively get tired of getting burned. Kids are savvier than I think a lot of people give them credit for. After all the decades of instability in this business look at how few young people are looking at becoming pilots and AMTs for example.
Let aviation and aerospace die because of a black swan? Punish them doing something that’s both legal and incentivized by our tax and corporate governance laws? And you think smarter people will come fill the void? If that happens anyone with a lick of sense will stay the hell away from working or investing in this business. We can all walk to Disney World when this is over.
You see the latest story on Yahoo? If I’m reading it right, free, no-strings-attached cash is *exactly* what they want and are punting on loans.
If that’s true, that’s exactly the kind of hubris that says we SHOULD let them fail. Help the workers, but let the airlines themselves sink and take those executives and shareholders down with them.
The hell with this “greater good” bullshit. We should not and will not tolerate being held for ransom by these suits who get more money in a year than most of will in a lifetime.
Loans. With lots of strings attached. Or no deal.
Let them all fail. Draft every airline employee into health care fields. There will be new airlines to emerge.
Goddamn right. Unlike in 2008, where we were sold a bill of goods and had the wool pulled over our eyes, I think a lot of us got wise and are saying “No way. Not this time. We are fully prepared to see American, Southwest, Delta, and United all join TWA, Pan Am, and Eastern.”.
As you said, new airlines will spring up. The bureaucratic red tape that has choked off all potential new starts since 2007 will ‘magically’ disappear. New airlines will start from scratch and be in the air within weeks.
With public sentiment being what it is vís-a-vís income inequality, disdain from the airlines vís-a-vís how they treat the passengers, no way in hell they’re going to have an easy time getting a bailout. If they succeed in getting one at all.
If there’s a way to ‘rescue’ the airlines while at the same time, throwing the executives and shareholders to the wolves, as it should be? Then yes. Do it. But under no circumstances should we be giving them anything for free.
The FAs are all registered nurses anyway, right? ;)
Okay, I’m all in. I’ve got zero experience in health care. Where do you put me?
Absolutely comrade, let’s just send them all to “re-education” camps. LOL.
Like I said before, no bailouts if this turns out to be true. I know some here disagree, but as talk show host Randi Rhodes says, “this is socialism but in reverse” & nobody on this site will stand for that.
so your proposal is just to help out the non-management employees short-term and while continuing to give senior management a blank check, carte blanche, for management to do whatever they want, laissez faire style ?
only worrying about “regular downtown” isn’t prudent risk management at all. if you aren’t managing risk to black swans, history is definitely bound to repeat itself.
The very definition of a black swan is something that can’t be practically foreseen or prepared for. And trying to develop contingencies for every possible risk at all times is both impossible and contrary to the very definition of the term risk management.
By all means, if we want the airlines to keep enough money on hand to pay a quarter’s worth of costs and a quarter’s worth of refunds all with pretty much no revenue coming into the business, let’s do it going forward. But let’s apply that standard everywhere else too and see how many businesses can stay open.
“managing to black swan” doesn’t mean knowing exactly which event, but in terms as how much further down the normal distribution.
say if your “regular downtown” is 2 standard deviations, or sigma, above the average/mean, then you make some “black swan” threshold such as 5 sigma and measure that level of projected losses. Then you make your loss reserves being something like 50% the expected regular downtown case and 50% the black swan case.
what you’re describing is 100% for the regular case. that’s begging for bailouts.
obviously no one knows whether “black swan” threshold should be 5 sigma or 7 sigma or 13 sigma . but not knowing does not mean not bothering to try.
And how exactly can a publicly traded company manage half to five sigma and half to seven if the risk we’re talking about is a total collapse in demand like right now? Aim to save a year’s worth of expenses like our financial planners recommend for individuals and you’ll need to save five quarter’s worth to cover a year when Uncle Sam gets his cut. And that’s assuming the board and executive team don’t get immediately deposed by investors who want buybacks or at least capital investment.
Like I said above, I’m sympathetic to idea that big businesses should be more prepared and have more liquidity available. And I think that it’s worth looking at limits on buy-backs though it’s only AA that was really egregious about it by the standards of your average S&P500 corporation. But I’d be curious to see how you or anyone else would’ve managed for this possibility last year when times were good.
> The very definition of a black swan is something that can’t be practically foreseen or prepared for.
They have literally made movies about this black swan. I guess some people just filed them under SciFi …
To which my earlier point stands: How exactly does an airline or any other company prepare for something of this magnitude? As I’ve already said getting corporations to save put out a rainy year fund requires wholesale changes to the legal system. How would you have prepared for this if you were Doug Parker or anyone else in charge of an airline? What if you were a restaurant owner or hotel franchisee and you’re already making crap margins when people are allowed to go out?
Then the airline industry should have been using its lobbyists to change the legal structure around saving money for rainy days like this. Instead, they used their lobbyists for stuff like fighting the Passenger Bill of Rights?!!?!?
Ah yes, it’s ultimately always the airlines’ fault. If the law makes something an issue, they should have just had their lobbyists change it.
This is all very easy for you and the rest of the Monday morning QB bench to say that. Or do you really hold airline management in such high regard that you think they could have predicted the scale of this crisis when every other business was caught equally flat footed?
And this is looking a lot closer to a “rainy year” than a “rainy day” so I’d adjust your assumptions accordingly.
I hope you’ll read Andrew Ross Sorkin’s op-ed in yesterday’s New York Times.
He makes a lot of sense!
Skip the vengeance talk, paybacks for buybacks, etc. Skip the financial talk, loans, interest rates, etc. We have a national emergency that could destroy this country, this world.
Airlines, you are running a business customers don’t need, people they don’t need. Customers have no place to go, no casinos, no buffets, to take in.
So, what can we and the airlines as they are today, do to get us, help us get through this nightmare?
Act smart, coordinate–airline execs, regional and EAS airline execs, too, White House people, legislative people, lawyers, government transportation officials–take the pledge that everyone will not waste time trying to figure out what the country and government can do for us, but what we, all together, can do for the country and the government. Everyone knows what they are good at. Do it! Do everything you can to see that the stuff we need to beat this emergency is made and transported to where its needed. Provide capacity for Public Health Service. Provide cargo, belly space capacity that is going begging this very day. Offer yourselves up to the military, the Guard, State Department, Ag. Department to fill in for where their capacity, their people are doing other things more urgent to their mission. And, if needed, use our capability, people to service some other part of the world.
Of course, zap the existing legal constraints, anti-trust, labor, national-flag, what-have-you, temporarily, with milestones as to when things revert back to where they were.
Our airlines will be busy, their people employed. We will get through this. And yes, we bean-counters and Monday-morning quarterbacks will have lots of fodder for a millon GAO reports!
Many interesting comments here. The emotional part of me says let them all go away, we will have new airlines take their place. But the intellectual part of me says this is not workable.
My proposal is:
1) No stock buybacks until all loans are repaid.
2) No change fees, no baggage fees until all loans are repaid.
3) EU 261 rules adopted in America until all loans are repaid.
And for Boeing, no stock options, no bonus pay for any senior management until loans are repaid.
Note the above talks about loans. No free grants to anyone.
In my part of the world (New Zealand), we have the head of Air New Zealand taking a 30% cut on his salary and the head of Qantas and all of the board taking no further salary for this financial year. Air New Zealand is 52% owned by the New Zealand government. Just today, they have announced that the government will loan Air New Zealand $900m New Zealand dollars at an interest rate between 7-9% (which is quite high). Part of the conditions of the loan is that Air New Zealand pays no dividend to shareholders this year (including the Government who is a shareholder). The result is that just today, Air New Zealand stock has dropped by 40% on the New Zealand stock market. Both airlines have announced massive cutbacks in flights from around 30 March, with Qantas family airlines (Qantas & Jetstar) stopping all International services until June 30, 2020 and reducing domestic Australian services by 70%.
+1 for a loan-only bailout, as a lender of last resort and thus more senior than other equity/debt. That aligns the incentives.
Airline workforce can be eligible for the same stimulus programs the rest of us get. Airlines can decide to furlough or not.
Oh, and for good measure, 31″ minimum seat pitch and fare-difference-only change fees ’til the gov’t is fully paid. Yes, that amounts to preferential treatment for Southwest, which already does both of these things. But dropping change fees across the board should help the economy as a whole get on its feet more quickly (yay flexibility!) and it’s not like any airline is going to need that kind of density near-term anyway (yes, I’m still bitter about AA 319 economy). If a private investor things change fees and/or densified seating is the ticket to untold riches, they can inject enough equity to buy the government’s share out.
Extra bonus: if you’re truly strapped for extra seats, you can always pick up some Mobile-built A220s or made-in-Renton 737s. Or grab used 319s from AA and bump frequency…after taking a few rows out.
Airlines dropping in Ch11 seems reasonable here. Might help clean up labor inefficiencies at AA. Maybe allow for relaxation of scope so the SpaceJet (and E75-E2) can fully stretch its wings here on the Big 3.
I sincerely believe that, even after we come out of this, demand for air travel will be a good bit less than it was, all else equal. Bailouts should take this new reality into account.
Finally, 100% agreed that dropping taxes/passenger fees aren’t the way to fix any of this. A few bucks around the edges isn’t what’s keeping people from flying, won’t be what keeps people from flying when the demand taps get turned back on except in some ULCC contexts, and would end up being a stealth fare hike, all else equal, same as Basic Economy fares.
Personally, I’m appalled by the widespread “general public” comments that the airlines don’t deserve help here because they should have saved more for a rainy day and not bought back their stock. Reality check: no one could manage this business for this ultimate black swan event where revenue quickly goes to zero. It would be impossible. No publicly-traded company could ever hoard enough cash. If they did, they’d be (justifiably) taken over by a corporate raider who would distribute that cash to the shareholders. That’s capitalism. If you prefer socialism, be my guest.
I don’t think letting the “airlines go broke and see what happens” is particularly smart either. Our economy, and our country, benefits enormously from safe, reliable air transport. Does anyone really want to go back to a world of starving airlines? I don’t think so. I would also note that, after the last major black swan event, the government made large amounts of money bailing out some airlines: including, most notably, tiny America West Airlines. The smart, obscure young managers running that airline (Parker, Kirby, Kerr) later single-handedly forced efficient airline consolidation, and gave us our modern highly profitable and high salary USA airline industry — all while reducing airfares for the general public.
Speaking of airline workers, I am a bit concerned that the Feds may be trying to make life TOO good for these workers. The salaries they currently receive are, by any historic measure, extraordinary. Should we really be bailing out these highly paid individuals — and not the tens of millions of lower paid workers who will suffer in other industries — without ANY sacrifice? If the CEOs need to take temporary haircuts, I think it’s obvious that the rank-and-file workers need to do so as well. With private loans instead of government loans, they certainly will, as the force majeure provisions of their labor contracts will certainly be utilized to institute massive furloughs.
I suspect the next few weeks in this industry will be even more interesting than the past few weeks.
Well, don’t forget the many employees that work for contractors. AA may have 100,000 employees, but thousands more work for ground handling companies, catering, fueling, mechanics, etc.
Personally, I don’t think the airlines should be bailed out! The big 3 have already been through Chapter 11 and received bailouts post 9/11. A second round of bailouts is absurd. It’s clear the legacy carriers can’t compete in today’s, like TWA, Pan Am, and Eastern. Darwin’s theory needs to be applied at some point. Norwegian and Air Asia have changed international travel as Allegiant, Spirit, and Frontier have become ULCCs in the US. If paying for meals, bags, seats, etc is now the norm, even on international, the industry needs to transition.
I don’t if you bother to read the news, but Norwegian was already on thin ice before everything went to hell. Now they’ve laid off the overwhelming majority of their workforce and are a steps and a stiff breeze away from the void so holding them up as a superior business model versus the US legacies seems, in a word, suspect.
Speaking of the legacies, I shouldn’t need to point out that their current financial situation (and the situation of anyone in the whole bloody economy not named Clorox or Netflix) is about as related to a failure to compete in the market as I am to the last Queen of Sheba.
Black swan = invasion by extraterrestrial monsters.
Covid19 = one of a dozen biopandemics that have occurred since Kitty Hawk.
Yes, the airline industry could have made better provisions for something of nearly this magnitude. Solution: access to Federal loans solely for employee payroll. Op costs come from leveraging assets like aircraft. C suite takes it on the chin till this blows over.