Evaporation of travel sector threatens airlines’ very survival – PBS NewsHour
When PBS reached out for this, it was going to be about passenger impacts from the pandemic. By the time I did the interview, the questions had veered into airlines being irresponsible for not having enough cash (thanks to stock buybacks) to withstand the complete and total disappearance of their business. Apparently Tim Wu, who was before me in the piece, thinks that should have happened, and I’m guessing what steered our discussion. I find Tim’s position pretty strange. The idea that a company should sit on enough cash on the off chance the worst case scenario occurs is just not how you generally run a business. Anyway, click through and you can see my hair starting to grow back in after my buzz cut. It won’t be much longer before we hit the really awkward stage.
Flight Deals Abound For Fall and Winter Travel, But Is It Smart to Buy Now? – WendyPerrin.com
I sat down with Billie over at WendyPerrin.com to talk about some of the trends we’ve been seeing. Is it too early to book travel? I mean, it depends on your tolerance for risk. But there are some opportunities out there for those who want to look further out, especially down to Latin America.
How to get a refund for coronavirus-canceled travel, from hotline help to ‘the nuclear option’ – Chicago Tribune
More talk about refunds, and this one is a good in-depth article about some options out there for people who are not getting the right resolution. I can say, however, that some of these options don’t always give great results.
Crisis Spurs American Airlines Into Being More Customer Friendly: Will Anyone Remember It? – Skift
Here’s a good rundown about what American has been doing that’s far more customer-friendly that what others like United have done.
33 comments on “Cranky on the Web: Airline Survival, Refunds, and a Friendly American”
“the idea that a company should sit on enough cash on the off chance the worst case scenario occurs is just not how you generally run a business.
Anyway, click through and you can see my hair starting to grow back in after my buzz cut. ”
You made your point, they made theirs. The fact is that airlines stopped being in the people business years ago, essentially palletizing pax and skirting safety issues such as efficient emergency-exit capabilities (the next disaster waiting to happen). It’s all cargo to them, and the millions who fly US carriers each year are now not in any mood to be charitable towards them. Certainly not $50 billion’s worth.
This is Spot On. Zero sympathy, except maybe 20% for WN who doesn’t treat its passengers as poorly as all the rest. Let them eat cake.
Totally agree re the American blog.
Same, Tim was on the money. Even if it wasn’t a pandemic, how do you not have enough liquidity to withstand a surprise on this scale. Don’t tell me that’s the way the corporate world works as that is such a cop out. In fact I see that as a failure of the corporate world as it is, but there’s going to be a rethinking of everything once this passes & those businesses that aren’t nimble enough or are too big to fail will see themselves going the way of the caveman in short order.
How do you not have enough liquidity on hand to withstand a surprise on this scale? Are you serious right now? Do you even hear yourself?
If this was a crisis lasting for a month or two, the US4 at least could take it on the nose with what they had on hand or whatever private financing they could find. But right now the airlines have not only been cash negative for months, they’re in a demand black hole that might go on indefinitely for all we know. And that’s not even adding in the recession and probable banking crisis that’s already here.
“A surprise of this scale” would entail keeping something along the lines of $10-20 billion under the mattress for airlines the size of the US4 just to keep payroll intact through the rest of the year. That’s $10-20 billion (really, several years worth of profits in good times) that doesn’t go towards employee profit sharing, aircraft, facilities, or other investments, let alone any schmuck who might’ve invested money into the business.
Maybe you think the S&P500 ought to be more like Japan Inc, where companies are happy to sit on dragon hoards worth trillions instead of investing it in employees or in their businesses, let alone rewarding anyone who might bother reinvesting it in other businesses (aka the hated “investors”). Just know that it’d be burning a hole in the middle of our economy even when time are good.
If this was a crisis lasting for a month or two, the US4 at least could take it on the nose with what they had on hand or whatever private financing they could find. But right now the airlines have not only been cash negative for months, they’re in a demand black hole that might go on indefinitely for all we know. And that’s not even adding in the recession and probable banking crisis that’s already here.
“Fare enough Itami, but you are excusing reckless actions by management when they should have been keeping some level of liquidity especially after SARS & MIRS. Sorry to say, but screw the investors… you should have been thinking beyond the earnings of next quarter as Steve Wynn noted several years back & noted in the Las Vegas insiders book “Winner Takes All.”
If this lasted as long or was as limited in scope as SARS or MERS, the airlines probably wouldn’t even need to tap commercial banks! How much extra liquidity should they have!? How much!? An extra billion buys you another few weeks at the most for god’s sake! How can you prudently prepare for something like this!? Nothing would have made a difference!
And sure, screw the investors. As an airline employee, I’d love for them to just give us money without any strings attached, as I’m sure most other industries would. But don’t act like it was buybacks that caused this. If there were no buybacks, most of that money would’ve had to go into dividends or we would never be able to raise the capital we need to operate in this highly leveraged, highly regulated, low margin, labor intensive, unstable industry. And if the airlines decided to keep all that money in the larder for when the next time the world hard resets, it would buy them maybe a couple extra months or so at best before the sky fell down anyway.
Itami, If the industry is too unstable as you put it, then it must shrink to a size where it does become stable… period full stop. I fail to see what’s so obvious about that. Perhaps it’s the illusion that full planes equals profitability?
SEAN, have you even bothered to read any US airline’s financials within the last few years? Full planes does equal profitability and that’s been the cases for years now. That’s been a bloody fact, just as much as a billion being greater than a million. And with load factors hovering under 10% you can see the converse to that just as clear.
“It must shrink to a size where it becomes stable” What in the blazes does this mean? The airlines were somehow irresponsible for growing as big as they are because now no one wants to fly in the middle of a pandemic? We were all finally able to make at least average returns as late as last year! We could be worthwhile businesses! We could finally invest in our product and facilities again! We could do right by employees for once! We could tell investors that we’d stop soaking them for a change! All you have is empty condemnation and I can’t even tell what you want!!
SEAN, have you even bothered to read any US airline’s financials within the last few years? Full planes does equal profitability and that’s been the cases for years now. That’s been a bloody fact, just as much as a billion being greater than a million. And with load factors hovering under 10% you can see the converse to that just as clear.
A bloody fact… really? You mean to tell me that an occupide seat is always 100% profitable & could never sell at a loss? You mean airlines never throw frequencies on a route just to compete even if that run loses money? Come on now… I know you are smarter than that!
“It must shrink to a size where it becomes stable” What in the blazes does this mean? I cant believe I need to spell out something so obvious,, but in order for the big four carriers to survive long-term they will need to shed any routes or number of flights on a route that aren’t consistently profitable except those that are seasonal in nature of course. And since you mentioned being leveraged in an above post I’ll add this… if you as a company are as leveraged as the airlines are considering the state of the econemy, it means you are either foolish or knowing that the tax payer will make you whole again.
Knowing the state of the economy? The economy was strong and interest rates were close to 0! And even then, airlines (some at least) we’re paying down debt. Then everything went to hell. And now we’re fools for being leveraged in the first place? How do you think anyone runs a bloody airline? You can’t not be highly leveraged unless the government is picking up the tab for everything, which you also seem to disagree with. You take on debt so that you can buy airplanes, develop terminals, and do any other number of things you need to stay in business. And you use the debt markets because otherwise you’d be paying for all of that stuff upfront.
And it’s not like we’re even outliers in being leveraged, you who has all the answers. Everyone from farms to manufacturers ends up knee deep in it because that’s what it means to operate in a capital intensive business!
I’m going try not to dive too deep into the question of whether every seat sold is “profitable” because that’s largely an accounting distinction and you don’t seem to have much of a interest in that topic.
Suffice to say, what’s “profitable” could depend on any number of distinctions that internet quarterbacks can blithely disregard. If a 150 seat flight costs $45,000 to operate, that means that the average seat has to sell for at least $300 to break even and that’s if the plane is full. But if you have to choose between selling a $100 seat and leaving it empty, then selling it “at a loss” helps the flight break even. Knowing how and when to make those calls is the art of revenue management which is how airlines make money in the first place.
To expand to other functions, even if that route as a whole loses money, if flying it lets you keep a big corporate client whose travel makes other routes profitable, or if it provides valuable connecting traffic that helps make a longhaul route profitable, what do you do?
I know this goes against the prevailing narrative, but don’t act like we’ve spent the last ten years just being frivolous about everything. NYT geniuses like Tim Wu can pretend like they could easily run our businesses better, but a cursory glance at airline history shows that this industry is nothing but easy.
Knowing the state of the economy? The economy was strong and interest rates were close to 0! Strong did you say? Yeah if you are in the 1%, but for everyone else in realityland that was anything but true. most people were living on the edge financially before the Covid 19 hit & look now in only one months time, the whole thing has started unwinding & unfortunately there’s no way to see how far things will go. I’de be more concerned about average joe than CEO at mythical airline.
I’m not going to disagree about the precarity many people found themselves in before all this because that’s obviously true. With that being said, going to the earlier topic of discussion, before all of this consumer and business spending was still strong, unemployment was relatively low, and the airlines could all make money, at least in this country. Norman Rockwell’s America it wasn’t, but that’s what I meant when I talked about the economy being strong. Rusty under the hood sure, but still in decent shape.
Harp on the general structure of the American economy all you want. I’m sure we’ll share quite a few grievances on that front. But that’s a lot bigger than an airline problem and it’s well above the paygrade of anyone you might see in the safety video to handle.
Tim Wu has been very public in his statements about airline financial management. Problem is that DAL was at the top of the list of world airlines in generating $8 billion in operating cash per year with half of it as free cash flow (FCF); from that FCF, they bought back stock and paid dividends at a ratio that put them in line with most other public companies in terms of shareholder returns as a ratio of cash generated.
LUV and UAL’s ratios were not quite as strong as DAL’s but they still generated more than enough cash to be able to engage in healthy shareholder returns.
The government crushed air transportation demand as part of its social distancing and stay at home orders or suggestions; some industries were equally as hard hit but not many concentrated in the hands of a relatively few players which is what is necessary to run efficient airline operations.
And, in the past, when airlines like Northwest generated large amounts of cash and had low debt, they became targets of leveraged buyouts – debt-driven takeovers of companies that generate strong cash flows. DAL has had to maintain higher levels of debt than it otherwise could and pay out money to shareholders or it would have been the target of a hostile, debt-driven takeover.
Tim Wu, of course, has no clue of these dynamics about the way American business is run; of course, it would be ideal for leveraged buyouts be banned or limited and for stock buybacks to be limited across the board (perhaps as a percent of cash on hand and debt) but airlines engaged in the VERY SAME business techniques that are employed elsewhere in corporate America.
The root of the issue is that America still wants airlines to act as utilities – and they do provide essential services – so there is an insatiable desire by some to regulate them, from how large the seats must be to what fees they can charge to what kind of financial strategies they can employ.
The simple way for the government to resolve the issue is to treat airlines equally in the aid they offer; if the same percentage of aid helps turnaround half of the industry but not the rest, then so be it that the “bad half” is forced into chapter 11 and possibly liquidation. Absent sufficient demand, a C11 bankruptcy could easily lead to liquidation.
then, if the government wants to change corporate laws to limit buybacks and LBOs, do so across the board. But you can’t tell airlines to operate as for-profit companies without government aid and then dictate rules that don’t apply to everyone else.
As for refunds, airlines are no different from any other business in that they cannot stop receiving any revenue, be forced to refund 1/3 or more of their annual revenue, and keep paying employees, even with government aid. The math simply does not work and anyone that remotely looks at airline finances can see that.
People like Tim Wu will continue to run their mouth without understanding basic airline finances but that, unfortunately, is part of the process airlines have to put up with. They simply need to have good communications with government officials that will ultimately make the decisions. So far, that seems to be largely the case.
“The government crushed air transportation demand as part of its social distancing and stay at home orders…”
It’s disingenuous to suggest that the “government” is responsible for that. Had airlines continued operating as usual they likely would have been on the hook for charges ranging from reckless endangerment to manslaughter, depending upon the election cycles of various district attorneys.
“The root of the issue is that America still wants airlines to act as utilities – and they do provide essential services – so there is an insatiable desire by some to regulate them, from how large the seats must be to what fees they can charge to what kind of financial strategies they can employ.”
That brings up a good and difficult point. Once airlines became a mass-consumer business, and once travel (for any and all reasons) became an integral and critical component of GDP (4.2% , as per IATA), airlines were moving inexorably down the same road as cable companies, which are also fighting utility designations. However, as other utilities such as gas and electric have shown (for better or for worse), regulation needn’t be the equivalent of socialism when it comes to pricing. Just limit fees and make all costs transparent and up front.
@Dan
I am not saying the government did not do what was necessary in terms of protecting public health by telling people to stay home which virtually shut down air travel. But, the opposite extreme is for people to be able to make their own choices regarding exposure to the virus and let companies choose to operate or not; I am not advocating either position but rather pointing out that we as a society are somewhere in between leaning right now much more toward government control of the economy via public health policy. As such, airlines really have not been in control of their abililty to serve the public. The chances are the system will flip perhaps as soon as May 1 toward isolating the most vulnerable while allowing those at lower risk to begin re-engaging in economic activity. We will see if that strategy works but that appears to be where we are going – and it will be on that basis that any demand return, diminished or not, for airlines will come from.
Gas and electricity does not lend itself to competition because of infrastructure restraints but there is ample competition in the telecommunication and intercity transportation industries. As long as there is adequate competition, then the free market has to be allowed to work – including pricing and service levels.
Free markets are fine when they’re truly free. As any amount of articulate documentation currently contends, American capitalism is far from fair, and the Big 4 have been rather accurately described as acting as a cartel at times.
Dropping the mic now…
Ah yes, the old canard often repeated and never proven. I’d like some sources for this cartelization please. Even a clown like Tim Wu will do.
I know I live pay check to pay check in order to avoid a leveraged buyout.
I don’t know if anyone’s bothered telling you, but you’re not a publicly traded corporation. Sorry to burst your metaphor.
Well… if airlines are on the same level as Comcast & the like, then the customer has chosen to cut the landing gear as it were. When a growing portion of our population has become concerned about where there next meal will come from, they aren’t making plans to visit Vegas or Disney Weird.
I think you handled yourself very well in the PBS interview. It came across as a well thought out counterpoint to the previous interviewee.
I don’t believe that AA’s new found “heart” is for real. What happened when many of their loyal fliers complained about the MAX lavs and seats? Nothing. When they began cancelling flights due to maintenance issues and would automatically rebook me on a flight 2 days later. They lost my loyalty a long time ago. And I was EXECPLAT or PLAT for 22 years. But last year I had had enough. I moved my flying to Delta and haven’t looked back.
Given the airline business’s long history of crisis and catastrophe, YES they should have saved up money.
The airline industry has a long history of bankruptcy and events like 9/11. They have taken advantage of numerous government handouts and bailouts over the years. They have enough historical basis for having a substantial Black swan fund.
That’s what I’ve been saying here for several weeks now, but I would excuse 9/11 as they too were victimized by that event. However when these airlines were duking it out for market share at all costs, they got reckless on the financial end & that’s what is happening now with this virus circulating. As new info comes out each day, it appears the airlines & the rest of corporate America should have been saving as much cash as possible even if it goes against conventional wisdom.
Bob — Like most normal human beings, you have no idea just how much money the airlines had put away for a rainy day. They all had staggering sums of money in the bank — largely because they had lived through the horror that was 9/11. The average cash on hand was something like 6x what is was back then. But no one could have predicted a disaster of this magnitude. It had literally never happened before anywhere (unless you want to argue the 1918 pandemic, I guess). And no amount of money would likely have been enough.
As has been noted in previous comments, it also would have been impossible as publicly traded companies for the airlines to have kept, say, $25 billion in cash. Their market caps were generally less than that. Shareholders would have, rightfully, demanded this cash back. If the companies didn’t return it, they would have been taken over by activists who would have “freed” the cash. That’s capitalism — it’s not perfect, but it’s better than any other way to organize an economy.
I would also note that, despite the magnitude of the disaster, airline shareholders are in pretty good shape here — all things considered. The companies are still solvent, thanks to the massive government aid. You could certainly argue that they would have been fools piling up money for the apocalypse, given that the apocalypse hit, and they’re still standing. This would also be a good argument that these companies are undervalued compared to even more risky enterprises that trade at much higher price to earnings ratios.
As has been noted in previous comments, it also would have been impossible as publicly traded companies for the airlines to have kept, say, $25 billion in cash. Their market caps were generally less than that. Shareholders would have, rightfully, demanded this cash back. If the companies didn’t return it, they would have been taken over by activists who would have “freed” the cash. That’s capitalism — it’s not perfect, but it’s better than any other way to organize an economy.
Proof that capitalism is a cancer & must die. Those who advocate for it the hardest are the ones benefiting from it the most, the rest of us be dammed.
Always condemnations and no recommendations. You ought to support the government just taking over the airlines and pumping money into them Alitalia-style since you seem to hate the concept of private investment so much. Although you complained about the relief bill too so I don’t know how that squares off.
Let’s do a bit of role playing shall we. Let’s say I’m ABC Airlines and I make about $3B in profit in a good year. I want to impress all the virtuous people on the internet, so I’m going to try and save $25B (about a years’ worth of my costs) under my mattress to prepare for COVID-25 or whatever the next global pandemic is that shuts down my industry for an entire year so I don’t need to rely on Uncle Sam for protection. Assuming the good times continue, I’ll need to put over eight years worth of profit under the bed for that.
Now let’s say you’re the XYZ Investment Fund. You’ve got hundreds of billions under management and you’re looking for growth opportunities because your clients are saving for their down payments and retirement funds among other things and they need some kind of positive return on their investments to do that. An analyst bring ABC Air to your attention and what do you see?
Well you see that they haven’t actually done much of anything with their profits for the last few years aside from sticking it in a sock. Their planes and their facilities are tired but they aren’t getting refreshed or replaced. Their IT and reservations systems are creaking but there’s no capital budget to upgrade it. There’s unrest with labor because they see Delta and United and others getting profit sharing but not them. They’re not positioning themselves in a way that improves their business in the future and they’ll be weaker for it.
So would you invest in them knowing that they’re not investing in themselves and that they’re prospects will be weaker for it? Knowing that any money you put into them is basically going to be a write off for you because any incremental profit from your investment has to go to the sock? Or would you find some other business to spend your time and money on?
Right now I’m holding my cash as I know that’s king. As for ABC airlines, they can deal with what they have & live with the cash in the sock as once they come out the other side of what ever mythical crisis you present, they will be all the stronger for it. After that they can replace & upgrade what is necessary, but to be safe keep plenty of cash on hand as time goes on the number of crisis events like Covid will increase not decrease.
You can no longer operate a corporate enterprise like an airline the way you could pre-covid & as a result money will need to be spent on priority projects such as constant cleaning & disinfecting & less on stock buybacks, top level management bonuses & the like.
You asked how does my position square from what I posted on the bailouts? If you didn’t save enough cash just in case of a devastating unforeseen event, well it appears Covid wasn’t as unforeseen as we first thought. Recent news items show that the virus may have been loose since last September & according to the Times of Israel high-ranking US officials notified there respective counterparts in Israel’s secret service while telling us it was fake news.
“Right now”? I don’t care about what you would do right now because it’s irrelevant. Hindsight is even cheaper than Jet A these days.
If you were an investor who needs to do something with his money, what would you do at this time in 2019, knowing that ABC Air is sitting on *all* of its profits for *years* on end because of something that *might* happen down the line. All while it realistically falls further and further behind airlines who actually invested money in their businesses and employees. Would you bother with them then? Would you advise your clients to bother with them? Straight answer, please.
No.
As would make sense. No one would bother putting money into ABC Airlines, which means they wouldn’t be able to grow or invest or compete with better run airlines. As their profits declined, they’d have less to squirrel away in the disaster fund too. Eventually, the thousand cuts
would’ve killed them long before a virus could do them in. So that’s why no one runs an airline like that. Keeping a stuffed war chest might sound good on paper, but you need to spend a lot of money to have any chance of making money in this business and our margins aren’t remarkable even in the best of times.