Despite What You May Read, Airlines Have Not Been Run Recklessly

Mergers/Finance

There’s a nasty virus going around that seems to be infecting people at a rapid rate. I’m not talking about COVID-19; I’m talking about “airlines-suck-itis.” This latest resurgence of the virus is currently best embodied by the rantings of Tim Wu, a Columbia law professor and New York Times opinion columnist who has written a book on antitrust issues. Sadly, this virus seems to thrive on misinformation. Let’s set the record straight and see if we can make it disappear before it becomes a pandemic.

In a PBS Newshour story, Tim said this right before I was interviewed.

[Airlines] have been running their businesses completely recklessly. They have been running a game where they squeeze people into tiny seats, do everything they can to extract every last dollar out of everybody, to make the most profit they could, and then thrown that all into stock buybacks. And to realize, after all those billions being spent, they didn’t keep anything for a predictable event like this.

This general vein has been echoed in many other places, including in Tim’s March 16 op-ed in the New York Times. In fact, this belief received so much traction that restrictions worked their way into the CARES Act stimulus requirements. It’s also completely false.

Part I: Airlines Have Been Profitable, But Not Insanely So

Compared to the period before 9/11, airlines are now (or were before this month) in much better financial shape, are more consistently profitable, and have far more cash on hand or available through credit lines. Let’s start with profitability.

To make things easy, I’ll focus on American Airlines, because that’s the one that Tim targets in his op-ed. It’s also the airline most widely considered to be the weakest of the big three thanks to its high debt load, and it has the highest bankruptcy risk of any of them. To tear the airline down, Tim had to start by making it a corporate villain.

…American began reaching stunning levels of financial success. In 2015, it posted a $7.6 billion profit — compared, for example, to profits of about $500 million in 2007 and less than $250 million in 2006.

This was cherry-picked to make the numbers look as evil as possible. Here’s a chart to help put this in context.

Yes, American did have net income of $7.6 billion in 2015, but as you can see that is quite the anomaly that hardly represents the business overall. It’s also obviously including one-time benefits that boosted the net profit above the operating profit. Still, let’s stick with that number for demonstration purposes. Or really, let’s take that number as a percent of revenue, because the raw number means nothing without knowing the size of the business. It translates to an 18.5 percent net margin. That is a healthy profit. Is that insanely good for the airline industry? Oh, heck yeah. But in the scheme of things, there’s nothing out-sized about this.

For comparison, Apple posted a 24.2 percent net margin in its most recent quarter. Coca Cola was at 24.1 percent for the previous year. Alphabet (Google’s parent) was at 21.8 percent. I could go on, but you get the point. (For the record, excluding a one-time tax benefit in 2013, Delta never passed 20 percent.)

The ability to earn “stunning” profit is more a way to set the stage than a central criticism. The next step is to chastise the airlines for how they spend that money. So, we move on….

Part II: Airlines Actually Have Done Good Things for Passengers and Employees

With all this money flowing in from profits, Tim asserts that “at no time during its years of plenty did American improve how it treats its customers.” Further, he says American has done nothing to help its employees, saying “[American] might have tried to decisively settle its continuing contract disputes with pilots, flight attendants and mechanics.” If PolitiFact were rating these statements, they’d belong in the “Pants on Fire!” camp.

The industry at large has made massive improvements over the last several years. Airlines have invested in fast internet, added power outlets (except for you, Southwest), and provided a massive entertainment library for free. They’ve bought new aircraft that are better for the environment and, as in the case of the 787, have a better cabin environment. All of this has been done while keeping fares in check. Several airlines have invested in technology to track checked baggage. Baggage-handling rates have improved. Denied boardings have plummeted. And airline operations have improved overall, though there are obviously some notable hiccups.

I’m not suggesting airlines have done nothing bad here. Have airlines increased the number of seats on airplanes and ripped out seatback screens? Yes. But until the feds decide there is a safety issue here, this is simply a business decision. Critics may not like it, but that doesn’t mean it’s reckless by any stretch.

On the flip side, employees have seen dramatic improvements. Pilots and flight attendants are making far more than they were during their bankruptcy contracts at all airlines. Take a look at total salaries/benefits per employee from the DOT Form 41 data.

Just look at that growth, and it doesn’t include any work rule gains that are non-economic. Further, we had entered the pattern-bargaining stage where employees were seeing their wages and benefits improve significantly as each contract came up. The most recent contract for American’s maintenance and ramp workers was outstanding from an employee perspective to the point that it had me wondering whether American could even support it in the long run.

If someone wants to make the argument that American gave TOO much to employees, that would hold more water than saying it gave nothing. I would think even the most hardened, angry front line workers would begrudgingly admit that to be true.

Part III: Hate the Stock Buyback Game, Not the Player

The argument, however, is not just that the airlines failed to invest in their people and customers but rather it’s about exactly what the money was spent on. The current bogeyman is the dreaded stock buyback. This is the trendiest rallying cry against corporate America today.

The idea is that companies can buy back shares using their own cash or debt to help prop up stock prices. Like it or not, companies are beholden to their owners. You have shareholders who want higher returns. You have Wall Street analysts banging the drum on how important buybacks are. And you have executives who are compensated on rising share prices. Put it all together, and stock buybacks have infected most big companies.

The most hated move isn’t just buying back stock; it’s taking out debt to do those buy backs. See, money has been cheap for a long time. With low interest rates, that means companies find it appealing to borrow cheap money to improve shareholder returns. It’s a calculated risk, but that obviously carries more risk than just using cash from operations… or not doing it at all.

I’m not here to support stock buybacks. I tend to think companies put more money into these than they should. This would be really blatant if, as Tim noted, airlines have done nothing for customers or employees. That’s not true, but it also misses the point.

This isn’t an airline problem. This is something that major companies do all over. For example, at the end of 2014, Apple had 5.9b shares outstanding. By the end of 2019, it was down to 4.5b.

If there is action to be taken here, it should be broadly against all of corporate America. Ban buybacks, ban borrowing for buybacks, or put restrictions on if you want, but if you just single out one industry, you’re hurting that industry’s ability to become an attractive investment compared to other companies.

What we have here is an airline industry that’s generally following what other companies are doing. And to that, I’m sure the response is, “but airlines are different.” Yes, they are. They are very capital-intensive with, for the most part, high fixed costs. They should have more cash on hand in general, so if they’re spending on employees and customers, should they not buy back stock and instead just sit on cash?

Part IV: When Is Your Cash Balance Not Enough?

Figuring out the right amount of cash to have on hand isn’t easy. Ever since 9/11, airlines have bulked up their cash positions to create more cushion.

For example, back in the second quarter of 2001, the last normal quarter before 9/11, American had operating expenses of $5.1b and cash/short-term investments of $1.4b. In the third quarter of 2019 (the last quarter DOT currently reports), American had operating expenses of $11.3b with cash/short-term investments of $5.2b. That is a far higher amount of cash on hand, and it’s double the percent of expenses. But that doesn’t even tell the whole liquidity story. American also had undrawn lines of credit as well as enough mojo to enter into a new line. As it reported last month, it had $8.4b of liquidity available on March 18.

That is a lot of cash, but it’s not enough to survive a year without any revenue. If Delta’s burning through $60m a day, that’s more than $20b a year. Tim seems to argue that its irresponsible for airlines to not have cash on hand to be able to weather this storm. He says this was entirely forseeable and in fact, some airlines warned of a possible pandemic in their financial statements. Yes, they did, but that’s because it’s their job to think about all possible disruptions. There have been pandemics in the past, but no pandemic has ever come remotely close to having this kind of impact on the airline industry.

United said demand is down 97 percent. Delta is burning through $60m a day. No amount of rational preparation can get you ready for that kind of loss. Could you hold on to $20b in cash to get you through a year with no revenue? In theory, but you don’t build the church for Easter Sunday, right? In the same vein, you don’t hold on to cash for the worst possible scenario.

If owners see an airline holding on to more than $20b in cash, they’ll assume the company is being mismanaged. Even if they don’t, it won’t matter. A company with that much cash is ripe to be taken over using a leveraged buyout.

So what is the right amount? There isn’t a hard and fast rule, but there’s a good chance that those numbers will change once this crisis is over, just as they did after the last one.

Part V: Wrapping It Up

What we have here is an industry that has been making healthy profits. It has invested that money into employees, customer improvements, and yes, stock buybacks. It has bulked up on cash over the years, and it could have weathered a storm like the aftermath that occurred on 9/11 without outside assistance. This pandemic is so much further beyond what happened after 9/11 that it makes it hard to suggest any company should or even could prepare for this.

Certainly in the future, airlines will likely shift how they build their balance sheets once again, now that they’ve gone through this. That doesn’t mean they were reckless up until now. It just means they’ll be reckless going forward if they don’t adapt. But holding on to enough cash for a full year of no revenue is just not realistic either. We’ll see how this shakes out.

In the meantime, this “airlines-suck-itis” has already made the government do strange things in the CARES Act. As a condition of receiving the grants, airlines can’t buy back stock or issue dividends for a period of time. I don’t think this will be an actual problem since it’s unlikely airlines will be in a position to do either of those in the near future anyway. But that misses the bigger point.

When investors are looking at where to put their money, they want companies that are going to provide the best return. Airlines had been creeping up on to the radar of people who wouldn’t have touched them previously. But now, if some companies are allowed to do buybacks while airlines aren’t, then that hamstrings the airlines. They aren’t as attractive. This is particularly strange since the government has warrants to purchase stock as part of this airline stimulus. The taxpayers make more money back the higher stock prices rise. It’s strange to single out one industry, especially one that wasn’t being run recklessly but rather was thrust into an impossible situation.

Let’s all just sit back and hope the “airlines-suck-itis” virus disappears soon. It doesn’t make much sense that it’s around now.

Get Posts via Email When They Go Live or in a Weekly Digest

81 comments on “Despite What You May Read, Airlines Have Not Been Run Recklessly

  1. “See, money has been cheap for a long time. With low interest rates, that means companies find it appealing to borrow cheap money to improve shareholder returns.” That is the crux. It shouldn’t be end the airlines, or the end the buybacks, but End the Federal Reserve. In a normal system where the time preference of the actors in the market allow the interest rate to be set naturally, most likely borrowing costs would have been higher, but also interest rates on holding short-term cash. Instead, to “fix’ the problem of government intervention, artificially low interest rates from the Fed, we will institute another series of government interventions, bailouts and then restrictions on stock buybacks, all probably in a zero to negative interest rate environment where the real incentive is to borrow more and hold even less cash!

    1. End the Federal Reserve? You do know that the US regularly had depressions before there was a Federal Reserve? And you do know that it is entirely normal for a country to have a central bank? I’m not here to defend the Fed as some kind of perfect institution, because it’s not. But the idea that we can do without a lender of last resort is truly looney tunes.

      1. Does the Fed do more lending of last resort or more artificially lowering of interest rates? Which one bears on my point about buybacks and cash holdings?

        And I think your point of depressions before and after The Fed more proves my point than yours.

        1. The entire point of a central bank is to alter that which would otherwise be set “naturally”. So yes, congratulations, you correctly diagnose that the result is, in that sense, artificial.

          Much in the same way that if a doctor gives you penicillin to save you from an otherwise fatal disease, the state of your life is no longer that which would have been set “naturally” and so you too, would be living an artificial life.

  2. Thank you for writing what obviously needs to be written. Of course if a Columbia University Law Professor could possess this pathetic level of business acumen — and then get his views aired in the New York Times — what does it suggest about the public’s overall ability to assess the airline industry? I guess it suggests something we all already knew: lots of people “think” they know something about the airline industry — largely because almost all elites do a fair bit of flying — but in reality they generally know very little.

    There is no doubt that no airline, much less a publicly-traded one, could possibly have “prepared” for the current crisis. As you’ve noted, no airline could have realistically amassed the amount of money necessary to “ride out” this crisis. Heck, we don’t even yet have a very good idea how much cash that is. We just know it’s a mind-boggling number.

    At the moment, I can’t say that I’ve see anything particularly wrong with the Federal bailout, except perhaps that the money could have been better spent. Nobody’s ever said that about government spending before, right? :) I kind of think the levels of required flying are pretty dumb, but hopefully that’s just a short term problem. I also think taxpayers are paying too much in salaries to airline workers for the next six months. It feels like a sweatheart deal to me, but I guess that’s politics: the existence of strong airline unions enabled them to get votes from both sides of the political aisle.

    I think we all have to hope that things start getting better in the airline industry sooner-rather-than-later. Humans do have a tendency to worry too much, especially about “invisible things,” so I think a good argument can be made that “worst case scenarios” are unlikely to occur. When we all accept that the mortality rate of COVID-19 isn’t particularly high, especially among those under 60, and that staying locked-up in our homes forever isn’t a realistic or effective strategy to beat this disease, I think good things will begin to happen for the economy, and the airlines, this summer. Still, by no means is it not going to be a quick recovery for the airline industry.

    1. ” When we all accept that the mortality rate of COVID-19 isn’t particularly high, especially among those under 60, and that staying locked-up in our homes forever isn’t a realistic or effective strategy to beat this disease, I think good things will begin to happen for the economy, and the airlines, this summer. Still, by no means is it not going to be a quick recovery for the airline industry.”

      In actuality recent evidence has emerged that if you have an underlying health concern, the mortality rate rises sharply especially among poor & minority populations regardless of age.

    2. “staying locked-up in our homes forever isn’t a realistic or effective strategy to beat this disease”

      It’s not really about trying to beat the disease. That’s not really going to happen until a vaccine is developed and widely available.

      What all this staying at home thing is about is “flattening the curve”. Keeping the number of cases that require medical care below the capacity of our health care system to address it. Because the virus spreads most easily with close contact, if we continued to go about things normally (or if cities and states “open up” too soon), it would spread a lot faster. Then we run out of hospitals beds and things start to get ugly.

      1. Well said David M, but the problem is there’s a small minority that see the shut down as an infringement on their personal liberty & don’t realize or care that the virus will explode if the current measures are relaxed.

      2. Until when? June? August? 2022?

        Whenever we open it up the curve sharpens again. All we are doing is delaying things. The idea that we can hide it home until… Whenever… To beat this thing is wrong.

        And In the meantime, the number of suicides, drug overdoses, new drug addicts, domestic violence victims, and a host of other ills keep getting greater and greater. Are those people not important also?

        We have got to get out of the mindset that we can hide from S and stoppage. The reality is that it is going to suck either way. People are going to die and no, we can’t stop it. We have to find a happy medium in which we protect this acceptable but still allow the economy to move so that we don’t lose any more people that way.

        1. There are a few ways out of this that don’t mean a sudden spike.

          A vaccine could be developed, or at least, treatment options that don’t overwhelm our health care system.

          Enough people get it such that herd immunity develops. This will take a while. It happens faster if the economy is opened prematurely, but with a higher death toll because people who could have recovered with treatment die because the healthcare system is overwhelmed.

          Americans develop a sense of personal responsibility and a willingness to temporarily accept measures they would consider an infringement on their personal freedoms. Like what Taiwan is doing: https://www.nbcnews.com/news/world/taiwanese-authorities-stay-vigilant-virus-crisis-eases-n1188781

          Someone invents time travel and makes sure the US responds competently. Some combination of not allowing pandemic funding to be cut and a proper early response instead of bloviating about how there’s will be a total of maybe 5 cases in the US and it’s totally under control.

          Personally, I think a vaccine is most likely, followed by the time machine.

        2. “People are going to die…”
          Some of y’all make this statement with such ease that as a frontline healthcare worker I wish I could have your level of flippancy – it would make pronouncing deaths and letting families know about them so much easier for me at the end of the day. Others have already tried explaining to y’all why our goal with current measures is to slow the spread enough that we build protections and capacity. So my only goal in posting is to ask that you commit to which one of your family members should be the ones that die? Maybe your aunt Gertrude can go since she’s lived a long and wonderful life? Or let’s choose one of the newborn babies in your family – nobody really knows them yet and they haven’t contributed to society, so they’re an easy pick. How about your spouse – I mean y’all are sick of living together anyway right?
          Enough with the flippant “more will die” that you all use to justify your stupidity. If you want to make that argument from now on, I expect you to list specifically which of your family Members you choose to die because essentially what you’re telling the rest of us is that you’re ok with my family being put at risk.

    3. Blame unions and academia. Toss in a couple of socialists and it’s a WSJ op-ed page hat trick. Damn those smart little people! Stop interrupting my Cohiba and diamond stickpin consumption! How dare you deny the cartel its due! This is what it would have been like if they had airlines during the Gilded Age. (Also the set-up for a new Netflix historo-comedy: Victorian Airlines — “Put some hustle in your bustle.”)

    4. Let’s keep in mind that almost 1/4 of US deaths have been linked to long-term senior residential facilities and a very high percentage of people even in the US have not use one but two or more comorbidities – heart disease, diabetes, hypertension.

      We simply did not know how this disease spread using accurate, western-based data; we have that now. Reopening is based on using appropriate data for each locality to make wise decisions about what types of businesses and what kinds of people can begin some return to normal business, still incorporating social distancing and enhanced hygiene and cleaning.

      controlling a secondary spike is dependent on keeping the most vulnerable away from the disease even though there has been and will be people who are outside of the most vulnerable groups that require hospitalization.

      The original basis of locking down western societies was to prevent overwhelming of health care systems.

      Return of demand for airlines will come from the less vulnerable people and those that have already recovered – a population that is increasingly larger than previously imagined.

      Airlines that can endure the debt and cash needs necessary to bridge the gap to normality is the challenge.

      1. The original basis of locking down western societies was to prevent overwhelming of health care systems. – exactly

  3. Apple earns its money by selling products people love and keep a cash balance for a rainy day; more power to them. Airlines make their profits by sticking it to the consumer and spend their cash to trigger manager’s bonuses — what’s so good about this?

    Are you going to defend cable companies next?

    1. Airlines earn their money by selling travel to places people love and keep a cash balance for a rainy day; more power to them. Apple earns it’s money by sticking it to the consumer overcharging for their products and spending their cash to trigger manager’s bonuses. – what’s so good about this?

      See, beauty is in the eye of the beholder.

      1. @Kevin : you should do stand up comedy.

        Airlines race after one another to give you less for your return. And the oligopoly ensures there are no greener pastures, so your options are just between bad and really bad.

        Since when is Apple and iPhone market operating as an oligopoly ? There are in excess of 3 dozen phone manufacturers of all caliber and price point at any given time.

        You have how many airline options for nonstops from NYC-LAX ? 5 ? AA/DL/UA J on their premium transcon are literally the exact same seat in different colors.

        And let’s not waste time fudging meaninglessly about 31″ versus 32″ legroom cuz that’s like arguing about 6.2″ versus 6.3″ phone screen for superiority.

        1. Happy to oblige!

          “Airlines race after one another to give you less for your return.”
          I completely agree! That’s why JetBlue introduced a premium cabin. United, Delta, and American all launched Premium Economy Cabins. Most of the airlines have refreshed all of their cabins, and had until covid, introduced additional F&B options. They didn’t want to miss out on sticking it to customers. There’s nothing like offering other options to the customer; that’s really crappy of them to do so. Times were better when customers had less options, like an oligopoly or something.

          “And the oligopoly ensures there are no greener pastures, so your options are just between bad and really bad.
          Since when is Apple and iPhone market operating as an oligopoly ? There are in excess of 3 dozen phone manufacturers of all caliber and price point at any given time.
          You have how many airline options for nonstops from NYC-LAX ? 5 ? AA/DL/UA J on their premium transcon are literally the exact same seat in different colors.”

          You have an interesting definition of oligopoly. How many airlines would need to exist for it not to be an oligopoly? You say NYC-LAX has 5 carriers running that route, then tell me that 3 of the 5 do the exact same thing. That’s factually inaccurate, but let’s assume that’s correct for a moment. As you stated, 3 airlines are offering different options for Transcon premium cabin. So my options can’t just be “bad and really bad” as you stated. There has to be at least a 3rd option given your math. In your non-oligopoly world, how many would need to exist for it not to be an oligopoly?

          “And let’s not waste time fudging meaninglessly about 31? versus 32? legroom cuz that’s like arguing about 6.2? versus 6.3? phone screen for superiority.”
          Fine by me. It’s not the size of the legroom that matters; it’s how you use it.

    2. @Jake, I agree 100%, and hope to finish editing a more complete rebuttal as soon as time permits since the “on the fly” types of reader comments posts most are familiar with for many of my posts here and elsewhere that was written and parked in the “drafts” folder deserves to be cleaned up instead of rushed – especially since I could NOT disagree more with Cranky on this and in fact consider myself full-on “Team Wu” instead of “Team Cranky” on what to me is Cranky’s deeply flawed opinion in the above post.

      So, although Cranky knows I have nothing but the utmost respect and admiration for his knowledge and experience, if I’m going to offer a rebuttal to someone I consider among the industry’s best and brightest, one of my usual (infamous? hehehe) “rants” simply won’t do.

      In the interim, since I have much other work not begun yet today after reading Cranky’s column that sent me off the detour ramp from what needs to get done today, all I can say for now is that I find Cranky analysis to be deeply one-sided and biased in favor of management, and the largest airline shareholders – and world renown Professor Wu’s analysis to be SPOT ON!

      Period.

      Sorry, Cranky, you know I hold you in the highest regard, but to gloss over the adverse impacts of excessive industry concentration last decade; the proliferation and successive rounds of cabin densification, implementation of outrageous/spurious fees, penalties and punishments that are only possible in industries that desperately lack meaningful competition (like cable tv as Jake points out) and the many other various and assorted “degradations”; or perhaps the most incredulous, head-scratching, or even odious conclusion that 9-abreast “densified” Boeing 787s (or the equally shameful/horrible 10-abreast “densified” 777s) is an “improvement” for the vast majority of flyers when that especially is so NOT an improvement at all demands a reasoned rebuttal – instead of the “quick and dirty” (and therefore, often muddled) reader comments posts that most have a love/hate opinion of as typically seen authored by me! ;)

      TBH, I’m kinda disappointed with Cranky’s one-sided, “don’t blame us for our orgy of greed” analysis. :(

      But, hey, that’s just me!

      Back soon – hopefully by Sunday night with a well presented rebuttal…

  4. I mostly agree with the gist of this article. However, I believe the airlines have brought much of the anger against them with some of their actions. Baggage fees, ridiculously high change fees (why when I change a flight 1 day before or 6 months before its the same amount?), cramming more and more seats into their planes, etc. I totally get it – modern America is all about pleasing the shareholders, let the employees and customers eat cake. But I don’t think anyone should be shocked at the distaste people have for airlines.

    1. It’s consumer driven. Look up American Airlines “More Room Throughout Coach”. In the year 2000, American took rows of seats off every aircraft and extended legroom for everyone.

      Didn’t work. People weren’t willing to pay for it, at least on average. American had to roll it back. Point being that time after time the modal consumer votes with their feet towards the cheapest option, however unpleasant it is.

      That doesn’t mean that there aren’t people willing to pay a bit more for a bit more comfort. And for them there’s the ability to pay up for a bit more legroom. But if you want to see who is to blame for tighter and tighter seats, you need to look at the average US consumer. What the modal customer values, above all else, is a low fare.

    2. The question of change fees is a legitimate one. The question should be focused solely on change fees, and not the industry-wide fare differentials which all airlines normally charge.

      For those airlines that charge change fees, there are a few justifications:

      – If XYZ Air lets you buy and change/cancel with no penalty, it becomes more difficult to revenue manage individual flights profitably
      – Increased reshopping and rebooking churn comes with real, tangible costs in the form of reservation system costs, administrative headcounts costs, etc.
      – Change fees represent a significant revenue stream and removing those fees is perceived to be tied to significant revenue risk
      – It would be challenging to manage this across OTAs/agencies

      For those airlines that don’t have change fees:
      – This is a loyalty strategy. If ABC Air doesn’t charge a change fee, you may be more likely to choose ABC Air when you book
      – ABC Air doesn’t charge you a change fee, but it also doesn’t refund your money. Instead, it gives you a voucher, which increases stickiness toward ABC Air, and that voucher has some level of breakage associated with it that is very profitable when you forget about it and it expires
      – Revenue management strategies can be adjusted to account for increased no-show rates and elevated booking churn

      I can see benefits and drawbacks of both strategies, and it isn’t as simple as saying “change fees bad”.

  5. With all due respect, I think that both you and the law school professor miss the point. People are saying airlines suck because they are getting taxpayers to bail them out. The average taxpayer response is predictable; they remember all the times airlines screwed them over, which are very salient (e.g. denied boarding, cramped seats), but not the good things such as WiFi and more fuel-efficient planes (as you mention) which are not very salient, at least not from a psychological standpoint.

    Then you have the issue of the buybacks; it is arguable whether you can say airlines were mismanaged or not because they burned their cash/took out debt to afford buybacks instead of having a stockpile of liquidity to allow it to see them through such a crisis. But there is a lack of symmetry here: if airlines are to be within their right to do buybacks and be as reckless as they wish then the corollary is that they should also be able to see themselves through the crisis. On the other hand, if they want to be able to get a taxpayer bailout, then the taxpayer ought to have some say in how the airline is managed. Shareholders have a say because they invested their money. In a way, this is forcing taxpayers into becoming shareholders but without a say in how the business is run.

    Most importantly, this isn’t at all about airlines. If it was Apple getting a bailout then they would be evil. Banks went through this a little over 10 years ago. The issue is this: had airlines not done buybacks they would likely have more cash to help in this situation. If you’re going to get taxpayer money then you can’t be reckless about how you use the cash you have. Given that airlines being reckless is in the past, then they must submit to not be reckless after receiving taxpayer money because we would like to have it returned once the crisis is over.

    1. He who pays the piper can fairly call the tune.

      The other point is that any govt assistance ought to come with the requirement that existing equity be written down to zero. Or put a different way, govt assistance should only be provided to companies that are in Chapter 11.

      There’s an argument to be made that the govt should ensure an airline industry survives. There’s no legitimate argument for the government ensuring that airline investors survive.

    2. This. Right there.

      That’s the point that Brett doesn’t always get. And that is perception is reality.

      In order to get people to want to help you, the first thing you have to do is get people to LIKE you. And all the graphs, charts, numbers, and data isn’t going to change that. As noted, the image and psychological marketing factor, no matter how fair or not, is the ONLY thing that matters.

      The airlines still have not figured this out. And until they do some damage control in the eyes of the public, nothing else is going to matter.

    3. “Then you have the issue of the buybacks; it is arguable whether you can say airlines were mismanaged or not because they burned their cash/took out debt to afford buybacks instead of having a stockpile of liquidity to allow it to see them through such a crisis. But there is a lack of symmetry here: if airlines are to be within their right to do buybacks and be as reckless as they wish then the corollary is that they should also be able to see themselves through the crisis. On the other hand, if they want to be able to get a taxpayer bailout, then the taxpayer ought to have some say in how the airline is managed.”

      Exactly.

      Most importantly, this isn’t at all about airlines. If it was Apple getting a bailout then they would be evil. Banks went through this a little over 10 years ago. The issue is this: had airlines not done buybacks they would likely have more cash to help in this situation. If you’re going to get taxpayer money then you can’t be reckless about how you use the cash you have. Given that airlines being reckless is in the past, then they must submit to not be reckless after receiving taxpayer money because we would like to have it returned once the crisis is over.

      Again, on the money. When the banks were in crisis a decade ago I said then no bailouts as I knew it was rewarding those who were reckless. The film “The Big Short” shows this in spades. Unless there are tight controls on the aviation industry, you’re going to have a repeat of this & it’s the public who will suffer for it.

    4. What both of them missed is – this is not a bailout of shareholders or management or airline. Government bailed out employees, the funds received are 70% of the payroll for March – September 2019 payroll with a commitment of no furloughs. Government saves the unemployment benefits, workers and airlines get 6 months to figure it out.
      In absence of this “employee bailout” I have no doubt that airlines would have grounded 90% of their fleet and furloughed 50%+ employees. In that world, the liquidity levels airlines had pre-crisis would have been sufficient. the secondary and tertiary impact would have been even larger..

  6. Well thought out. The airlines react to public want of cheap seats. Bigger seats are available at bigger cost. Midwest Airlines had big seats and the best cookies in the world but public would not pay. They are sadly gone.

  7. The whole premise of this article is wrong. The US Government is not bailing out the US airlines, it is bailing out the US airline SHAREHOLDERS under the guise of ‘protecting employees’, and that is blatantly wrong. This dog any pony show of ‘modified capitalism’ in the US is sending the country into financial ruin; companies should have consequences for how they run their businesses. If shareholders are getting the benefit of buybacks, they also should be wiped out when times are bad and need a bailout.

    1. 100%, absolutely correct. Precondition for govt aid should be Ch 11 – shareholders wiped out.

      Biggest mistake govt made in the 2008 financial crisis was bailing out banks without wiping out bank shareholders. Obama administration bailed out Wall St and then Wall St had the audacity to complain that he was being mean to them.

  8. How do I say this nicely: The law school professor is ill-informed and, possibly, very naive. Those are not good qualities for a person whose job it is to train people to pursue knowledge in the name of justice.

    Maybe the guy had a bad flight or, perhaps, he’s been forced to ride basic economy!

    Let’s deal with the facts: In 1978, the airline industry was highly regulated. The government set route, service and pricing parameters because the industry was either too afraid or too stupid to do so. The people that flew were fat cats, business leaders and, frankly, people whose time mattered. Average Americans saw the inside of an airplane maybe a few times in their lives.

    Compare that to now. Air travel has exploded for the past 43 years. Everybody flies regularly. If United wants to fly from Dallas-Ft. Worth to, say McAllen, there’s no barriers to stop them. Yes, customer service stinks. Seat pitch was what Frank Borman and Eastern Airlines predicted it would be during the run-up to the 1978 Deregulation Act. Airlines have died and those that survived have given the traveling public what they want — low fares, damn the consequences.

    But to give the public what they want and assure shareholder return, all companies and especially airlines must maintain their capital bases. Maybe they don’t buy back. Maybe it’s dividends. But capital return is a must if an airline or any other company for that matter, is to survive. That’s where the ill-informed professor misses the boat. Keeping multi-billions of dollars sterile on a balance sheet anticipating a pandemic that in 99 years out of 100 doesn’t happen is tomfoolery.

    We have the safest air transport system in the world, largely because of the combination of federal oversight and customer commitment.

    Keep in mind that even before deregulation, the airline business was highly cyclical. The economy goes in the tank and fewer people pay for the 707s and DC-8s, just like fewer people pay for the MD 80s and 737-900s. That hasn’t changed. But what has changed is that some of the calamities of the 21st Century are very difficult to plan for. That would include 9/11 and Coronavirus.

  9. Wu’s message was widely read and got traction in a lot of quarters because there is some truth to it. The criticism requires attention and an honest assessment of what is true and not true. A blanket denial of his charges is not appropriate.

    Second, the airline industry has never been monolithic and even less so over the past 10 years. WN figured out the model to be a profitable and well-liked airline early in its history; others still have not figured out how to do either. The U.S. airline industry has seen the best economic period over the past 10 years. There were valuable lessons that were learned from the Great Recession. However, there was a wide divergence in every one of the statistics that Wu cited. The best way to counter the criticism is to call out the specific players that pulled down each one of those statistics and credit those that figured out how to rise to the top of the airline industry. AA, despite being the most recent airline through chapter 11, was the least profitable for all but the year coming out of C11 when it was able to show very strong profits. AA also had some of the worst service levels, most debt accumulated, and highest buyback levels. As much as some don’t want to hear it, there were specific players that pulled down each metric and it is wrong to paint the entire industry with a broad brush which does not show that many airlines figured out how to do what they should have.

    Third, you are right that corporate America embraced some bad habits including debt driven stock buybacks – but other industries are not asking for specific bailouts. And again, even in the airline industry, AS was well below the industry average for buyback activity relative to FCF while DL’s buyback activity statistically was in line with corporate America as DL generated the highest FCF the airline industry has ever seen. Still, even AS and DL are getting government aid.

    Fourth, the accusation that airlines should be particularly criticized because they are receiving federal aid is flawed. Just about every American and most companies are receiving some form of government aid – much of it direct grants or convertible to grants. Still, there will be varying degrees of reliance on the government for capital in the US airline industry and the government very likely will not approve every request for loans if some airlines can figure out how to survive with the “base level” of government help while others will keep their hand out as long as there is a hint of help from someone else.

    Fifth, Wu has a voice and a right to use it just like every other American – as well as those in countries that enshrine the right to free speech; and you (CF) have demonstrated a commitment to that principle in your forums – sometimes making money on the discussion of divisive topics. However, Wu’s criticism was heard by the Treasury which incorporated some of the complaints about airlines into the bailout bill. Whether Wu likes it or not, airlines were deregulated in the US 40 years ago and there are sets of laws that apply to them as companies and not state organs. Some US airlines will certainly make a trip through C11 just as has happened with every other major crisis that has hit the airline industry; others will be able to restructure their businesses outside of bankruptcy. Rather than castigating the industry as a whole, the focus should be on investors and management teams embracing the principles that have kept some airlines out of bankruptcy decade after decade and will keep others from making repeat trips. Cutting off capital and throwing out managers of poorly run companies is the way to deal with many of the criticisms Wu leveled. If all airlines survive outside of bankruptcy and management teams remain in place, then Wu and others’ perceptions and expectations of the airline industry are out of line with what the free market can be expected to deliver.

  10. Thank you, Cranky. I’ve made many of the same arguments over the past couple of months.

    Something that you tend to see when geniuses like Tim Wu need to unload on the airlines is trying to take as many possible complaints about the industry and force them into the same narrative like so much offal in a sausage grinder. He even tried marrying seat densification and buybacks in the same argument, as if the latter wasn’t the direct result of ULCC competition (which he, the NYT-ordained Captain Antitrust ought to be grateful for). I was almost surprised he didn’t try including something about carbon emissions and FF program devaluation in the PBS bit.

  11. There is something which I don’t understand so somebody please enlighten me: what happens if a company buys back ALL of its stock? Will the company own itself? Or who will own the company in that case? I’m seriously asking, I have no economics/finance degree.

    1. The goal of all publicly traded companies is to maximize stockholder wealth in the form of dividends or stock appreciation which is done in part by buybacks. That is simply the way it works. Unfortunately given the capital intensive and cyclical nature of the airline industry, it has more exposure / risk than other industries. Couple this with the fact that airlines are a critical piece to the economy and way of life, the government has no choice but to bailout.

      This said, I think American’s actions were more risky than the rest of the airlines. Not only did AA spend a lot on new aircraft, but they also bought back an incredible amount of shares while their free cash flow was negative. This was an outlier among the other majors. The other majors that had stock buybacks at least had positive free cash flow. Parker and the management team made the wrong call here, hence the reason AA is in much worse shape than the other carriers.

    2. @LiBerti Pilot – The short answer to your question is yes. The long answer is that the corporation is considered “closely held.” A closely held company is owned by a small number of individuals or families who own all of its shares. Republic Airways is now a closely held corporation. Its stock isn’t publicly traded. It’s owned by its former creditors, among whom are the three major legacy airlines. Most corporations start out as closely-held entities. But at some point, they need outside investors to do grow. Instead of taking out loans, they issue stock to the public to raise the money.

      1. @DesertGhost Thanks for the reply. But I still don’t get who will be the individual(s) who own the company after the company bought back the last piece of its shares?

        1. There’s no simple answer to that question. The exact details vary from company to company. Most corporations have different classes of stock. The people who end up owning the company will usually be those who own the class(es) of shares that weren’t traded publically. If Wal-Mart were to buy back all of its publically traded stock, the Walton family members will most likely own most if not all of the company, as they were the original owners, and probably have shares that weren’t publically traded. But there could be others who bought shares privately. Again, It varies from corporation to corporation. The key is that there’s no publically traded stock. One of the advantages of closely held companies is that they don’t have all of the (SEC – Securities and Exchange Commission) reporting requirements required of publically traded corporations.

          1. Thanks! So apparently not all shares are created equal. But it’s really smart of these individuals that they can become the sole owners of the company using the company’s money instead of their own. And by “smart” I mean “shouldn’t this be illegal?”

            1. Why should stock buybacks be illegal? As I wrote elsewhere, it’s essentially the same as paying back a loan. Stock (especially shares that are publically traded) is a form of financing. The stock certificate is evidence of the money that was invested and confers an ownership share. When it comes down to it, isn’t the company’s money ultimately the owners’ money? No one can be forced to sell his or her stock back to a corporation. There are often a few shares that aren’t sold to the company. There’s just no ready market to sell them in.

    3. Stock buy backs do not result in 100% of the stock being bought back. There are many ways to appreciate that insight – one way is to think about it on a supply-and-demand basis. The more stock you buy back, the more it tends to drive up the price of the remaining shares outstanding. That’s the whole point. I’m definitely not trying to cover all possible cases here, just trying to handle a general case.

      And however much cash you have available to buy back shares, presumably the value of the company in the market also reflects the value of the enterprise itself plus the surplus cash. So, spend all the surplus cash on stock buybacks, it’s not going to be able to buy back 100% of the market cap.

      Think about a company that’s generating a lot more cash than it needs to operate. It can take that surplus cash and, over time, buy back a lot of its shares. Maybe it starts with 100mm shares, perhaps worth $100 per share. Over time, the number of shares might decline to 50mm shares. At that point, based on growth, company success, state of the stock market, etc, it would not be surprising if the price per share was at least $200 per share. Hey, perhaps it is time for a share split. That 50mm shares becomes 100mm shares, the price per share halves – from the standpoint of the number of shares, you’re kind of back where you started. You don’t have to do that stock split, of course.

  12. “This isn’t an airline problem. This is something that major companies do all over. For example, at the end of 2014, Apple had 5.9b shares outstanding. By the end of 2019, it was down to 4.5b.” To say that it is ok for airlines to engage in share buybacks because Apple did it too is ridiculous. Apple is in a many times better financial situation than the best airline. Apple had the ability to buy buck stocks in a fiscally sound way, airlines did not.
    Let’s compare American vs Apple. For American in the publicly available Q4 (more recent than Q3), they had cash/short-term investments of $3.8 Billion, their operating expenses were $10.7 Billion and revenue for the period was $11.3 Billion. However, let’s assume revenue (demand) goes down by 90% to $1.1 Billion and they are able to reduce costs by 50% to $5.3 Billion. Even with tapping credit lines its hard to see how they last much more than a quarter or two.
    Apple on the other hand in Q4 had cash/short-term investments of $100.5 Billion. To put that in perspective that’s probably more than the current market caps of all the US airlines combined (DL = $14B, UA = $6B, AA = $4B, etc.) In Q4 their operating expenses were $48B. So even if their revenue was reduced to $0 and they didn’t cut any costs at all, they would still last longer than American Airlines.
    Finally to the line, “In the same vein, you don’t hold on to cash for the worst possible scenario.” Is this the policy Cranky that you use for your own personal finances? I hope not, and it shouldn’t be any different for a corporation. Airlines nor any corporation should run their business expecting to get money from the government. This creates a moral hazard and undermines the fundamentals of capitalism.

    1. If you think that personal and corporate finance should be approached interchangeably, then you ought to take that up with our legal system, which will emphatically disagree with you.

      There are so many people these days whose preferred soundbites revolve around this and that about the fundamentals of capitalism, from right-wing libertarians to left-wing socialists. It’s ironic that so many of them seem to share the same misconceptions about how businesses and the laws that regulate them in this country actually work.

      1. Itami, I don’t think its bad financial advice whether you are a person or corporation to plan for 6 months of distress. Not trying to make some broad legal statement. Apple could weather 6 extremely bad months. Most if not all US airlines could not. It’s ok to buy back stock when you are in a position to weather a downturn.

        1. “Distress” is a rather wide continuum though. If we had seen industry traffic levels drop 20%, 30%, even 50% for six months, I think we wouldn’t be talking about big industry-wide government support. Delays on capital projects, route trimmings, even layoffs sure, but something like this is in a completely different league.

          For an airline the size of the Big 4, preparing for six months of essentially zero revenues (much of the period actually with negative cash flow given refunds) means keeping upwards of at least $10-15B just in liquidity in order to make payroll and debt payments. That’s several years’ worth of profits at least because airlines operate in an industry whose margins are average at best.

          Apple operates in an industry with much higher margins and can easily come up with that kind of money or whatever amount would be proportional to their revenues and costs, but they’re really not a generalizable example to 99% of corporations given how they’re essentially richer than most countries’ central banks. Apple, Alphabet, and Amazon could probably coast on their fat stores for months on end with no revenues if it ever came to that. The vast majority of normal companies even beyond the airline sector could not.

          And to clarify, when I brought up the legal aspect, that was a reference to how the tax code essentially deters corporations from saving in the way you describe. Preparing for a rainy day is fine and prudent, but this is a lot closer to a typhoon year in terms of scale. Trying to save for that kind of event will get you heavily penalized by the tax man and the law will be on investors’ side when they start clamoring for boards and executives to get replaced. It’s not the same as individuals or small businesses managing their finances because the law itself is different.

          Like Cranky said, if this was something like 9/11 or SARS, we wouldn’t be anywhere near this situation that we’re in right now.

          1. Itami, when you say airlines are a low-margin business that helps my case in saying that they should save more. Additionally as Cranky stated, “They are very capital-intensive with, for the most part, high fixed costs.” That with the fact that everyone knows airlines are highly cyclical business (travel is the first thing that gets reduced during a recession) means holding the amount of cash I advocated for prudent.
            You say that airlines shouldn’t hold $10 Billion in cash because that’s 2 years profits. But that’s what Apple, Google, etc. do in industries with higher margins and presumably more stable income. So if anything that’s saying airlines should definitely be at least matching that. Your argument just doesn’t add up.
            Also I’m not really sure what you mean by saving that amount will get you heavily penalized by the tax man? To my knowledge corporations don’t get taxed on money that they are just sitting on? Obviously they will if they earn interest on that, but please provide information to the contrary if there is some.
            Finally there were airlines that were spending 80% and more than 100% of their FCF on buybacks. That is just reckless given the nature of the airline industry, can’t really slice it and dice it any other way.

            1. Oh, but Uncle Sam does penalize them for sitting on their profits, to the tune of 20% (almost as high as the federal corporate tax rate). Preventing companies from hoarding cash is an explicit public policy goal in order to increase both tax revenues and the money flowing through the economy.

              https://www.investopedia.com/terms/a/accumulatedearningstax.asp

              And think about what you said earlier. Even in the absence of the aforementioned tax laws, it’s harder for airlines or other low margin businesses to save those kinds of amounts because they have to be continuously committed to things like aircraft acquisitions, airport projects, IT developments, profit sharing, paying down debt, and other big ticket items. When your margins are average in the best of years, there simply isn’t a lot of breathing room to do what you said.

              And again, Apple and Google aren’t applicable examples to 99% of businesses. They’re already in an industry with both high margins and high barriers to entry, they have more money than many governments to begin with, and they boast market share figures in their core business that any US airline could only dream of.

          2. Itami, there is no reply button on your last comment so I will leave it here.
            Regarding the accumulated earnings tax, this line is important: “Keep in mind, this is not a self-assessed tax, it can be imposed via IRS review of a corporation.”
            https://loopholelewy.com/loopholelewy/01-tax-basics-for-startups/corporation-16-accumulated-earnings-tax.htm
            I think there are very few situations where this is actually enacted.

            Regarding your second point, it makes no sense. In an industry that is low margin, capital intensive, and highly cyclical…you’re saying that the majority of FCF should be plowed back in share buybacks is mind boggling. If anything it should be the opposite, share buybacks should be pursued with caution.

            Finally I was not the one that used Apple as an example, it was Cranky so I was just going along with it. But Im not sure why Apples enviable position should be viewed negatively. That’s why before this crisis they had an investment grade bond rating and almost no airlines did.

            1. I never said anything about whether the majority of FCF “should” go into buybacks. If anything, I listed out some of the other normal strategic expenses that airlines continuously have to make, money that can’t be put into contingency funds because it needs to go into the continued capitalization of the business.

              As for the IRS aspect, when you’re a Fortune 500 company playing a vital role in the nation’s transportation infrastructure, you can’t really base your financial strategy around the IRS choosing to overlooking what you do with your profits. And the link you cited states what the IRS considers the “reasonable needs” of the business. Saving for a big capital project or market expansion counts. Saving for a black swan event that shuts down your industry for months at a time doesn’t. If anything, even Uncle Sam would prefer putting most of that money towards shareholder compensation rather than just sitting on it.

              And to be clear, I wasn’t trying to use Apple as a negative example or say anything negative about them. I’m just saying that trying to extrapolate their successes into prescriptions for the vast majority of other companies is an apples-to-oranges situation. Apple and its immediate peer set are in a league of their own financially in a way that no airlines will likely ever be able to be so using their cash strategy as a guidepost really isn’t very helpful.

            2. Itami, didn’t mean to imply that you said money shouldn’t be spent on strategic expenses. But what you are implying, is that after strategic expenses there is no problem using that cash to buy back stock. Even if cash on hand is a fraction of 1 quarters operating expenses. Fundamentally you think amount of cash airlines had on hand was ok and I believe they should’ve bought back less stock and saved more. We are just going to have to agree to disagree on that.
              Obviously no company should expect the IRS to overlook anything, but at the same time are airlines being forced to pay this tax on the cash they have/had? There is no way all the cash airlines had on hand was for investments, etc.
              Finally you are exactly correct the Apple is not a fair comparison…they are in a much better financial position and thus could afford to buy back the amount of stock they did.
              I love how you didn’t comment on my point of how almost no airline had investment grade ratings.

            3. Not much of a point to comment re: investment grade rankings. It just reflects how unstable this industry was and is. If I recall, among US airlines it’s only WN, AS, and DL that have it (and I think that latter was recently downgraded by one of the agencies).

              That subject actually brings up a good point related to buybacks. People like Tim Wu will talk about the +90% if FCF spent on buybacks and how that indicts the industry as a whole, but there’s a lot of nuance when you disaggregate those numbers. The fact it even looks like that is pretty much only due to AA taking on debt to buy back more stock. Looking at our investment-grade airlines I recall DL only spent about half, AS something a little higher, and WN at around 60-70%. Much less excessive when you consider that buybacks these days are the primary and preferred vehicle for shareholder compensation in corporate America these days since they’re taxed less than dividends and more flexible in terms of timing and amounts.

              Sure, I think the focus on buying back stock was misguided, but that’s more of a “corporate America” story than an airline one. And even when you figure that some airlines were much less cavalier about it than others, any amount saved, assuming that you still pragmatically invest in the business and at least have something for shareholders lest no one bother investing in you anymore, would maybe buy you a few extra weeks of cash burn in the face of something like this.

      2. let’s make sure that leveraged buyouts are also banned if you (collectively) want to limit buybacks. Remember that Northwest generated a lot of cash and had low debt so was the target of an LBO that pulled billions of dollars out of the business in order to pay back debt which it didn’t ask for. They survived; many other companies that have endured LBOs do not.

        Keeping lots cash on hand is hazardous for a lot of reasons including LBOs.

        Individuals can’t be targets of LBOs.

  13. Wow, everything is rosy for the airlines! Prior to the Covid-19 Pandemic, UA and AA had combined liabilities (DEBT) of $54 BILLION! Airlines not run recklessly?

    The airlines are their own worst enemies! I’m tired of flying on a plane that 10 years ago had 9 seats across, but now they’ve squeezed 10 seats across (777…I would actually prefer the dreaded 2-5-2 seating over 10 across). It’s shameful that a plane was sold as 8 seats across, the airlines cram a 3-3-3 seating and the most miserable experience in long haul travel (787). They cram 162 seats in a plane that originally had 150 (737-800)…that’s 2 rows…62 inches (based on 31 inch pitch)…over 5 feet of space!!!

    And the legacies try to compete with the ULCCs with their “Basic” fares. They SUCK, because you can’t do anything (like reserve seats), and personally, I’d rather fly Spirit and get a Big Front Seat for the same price as the legacy!

    1. The reason airlines fly seats with 10 across now instead of 9 is that the consumer won’t pay to fly on a plane with 9. Don’t blame the airline when the public won’t pay extra for more space.

      1. With all due respect, there are airlines that use 8 abreast 787s and 9 abreast 777s. In the US, DL kept its 9 abreast configuration in its 777s when it refurbished the cabins even though AA and UA moved to 10 abreast 777s.

  14. Your piece sums up the issues quite well. Bravo!

    There’s a lot of misunderstanding about business in both academia and the media. It’s easy to be critical when one doesn’t understand the issues. I’m a big sports fan. There was a gentleman named Howard Cosell who used to do sports commentary and color analysis. He was the first person I ever heard use the phrase “Hindsight is always 20/20.” His point is simple. It’s easy to criticize decisions in hindsight. It’s far more difficult to make tough decisions. No one knows what the future will bring.

    Many people like to think they know more about running a business than those who actually run it. I was in the real estate business for many years. I worked hard at it and kept up with the trends. But about 90% of the people I encountered thought they knew more about my profession than I did. Some of those people were quite knowledgeable. Most weren’t. To be fair, we all see life from our own perspectives. When it comes to the airline industry, a frequent flyer sees the world from an airline seat. A pilot or flight attendant sees it from his or her front-line position. The CEO sees it at the 30,000-foot level. Airline dorks see it from our perspectives. All of our viewpoints have validity, but none tell the whole story. It’s analogous to the story about the eight blind men and the elephant.

    One thing that doesn’t get mentioned is that stock is simply a form of financing. It’s the least risky form of financing from a company’s perspective because it doesn’t have to be redeemed or paid back like a loan. A stock market is simply a place where stocks get bought and sold among investors. Here’s an analogy: When one buys a new home from a builder, one has to have a way to sell it when there’s a need or desire to move. Homebuilders normally don’t buy back their products. There has to be an aftermarket for houses, just like there’s an aftermarket for stocks. I see that United is offering new stock to the public to add to its liquidity. If an airline can issue new stock to raise cash, it can buy it back when it’s flush with cash. It’s really no different than paying back a loan. But a company has no obligation to buy back its stock. The upside (or downside) for the investor is that he or she gets to participate in the company’s success (or failure) as an owner. They also have the right to vote for or against board members. Decisions about capital investments, dividends, stock buybacks, etc. are usually made by boards of directors, not management. Of course, the cynical counter-argument is that most boards rubber stamp what management wants. And there’s often some truth to that view.

    With the advantage of 20/20 hindsight, reasonable people can quibble about the wisdom of any company’s investment or management decisions. It can be argued that some airlines spent too much on new aircraft or stock buybacks. It can also be argued that some were forced to spend money because of past underinvestment. Each situation is different. And much depends on how one looks at the various issues. None of us has the amount or quality of information that an airline’s board and management have. One of the interesting aspects of this situation is that most U.S. airlines are still planning to take delivery of new aircraft, not deferring orders. Instead of hunkering down in fear, they’re investing in their businesses for the long term. Craig Barrett, the former Intel CEO, once was quoted as saying that well-managed companies don’t starve their way out of difficulty, they invest their way out. That is, of course, if the companies see a way out.

  15. Do the airlines suck? Do they deserve all of these grants, loans, whatever? I don’t do finances/financial data well. I appreciate Cranky’s post.

    The NYT op-ed seems to want to take the airlines to task for some of the ways they have treated their customers. We probably agree their are problems. Certainly, the industry has become very concentrated, in most cases, one airlines does most of the business at a particular city. ost of my airline business goes to one airline, a legacy. It is an excellent airline, but it does things I find crazy, anti-consumer, as deceptive marketing tactics, high charges for making flight or ticket changes, charging for the first 2 checked bags, cutting back on seat pitches, making seats smaller, and oh, those crazy fare-pricing structures, moving more and more flights to those cramped-seating regional contractors and their low-paid and overworked crews, etc., but I have the right to ask DOT to cause the airline to cease and desist from such practices, presuming its agrees with me. But do these things have anything to do with Cares Act.

    Today, we have a very concentrated airline industry. One airline to a major city. I appreciate that Southwest, JetBlue, and Alaska exist, even I rarely use them. As to the other two legacies, nice, but not like that one main airline. There is a vast population out there that lives with the philosophy that “Give me whatever is the cheapest,” if one can tell what that is. I don’t use Spirit, Allegiant, or the new Frontier, and in their current configurations, never will. But, some people do, so fine.

    We got to this type of airline structure over many years, and maybe we’ve gotten too concentrated. What do we want to keep, save? Giving out all of this money to an industry in the structure may be a waste. Do we have a panel to come up with what’s worth saving, what’s not. It would be nice if we had a government to plan out all of this for us. Just keep re-arranging those deck chairs, full speed ahead, and hope your tests come back negative!

  16. If baggage handling rates have improved, how much did that cost? And wasn’t that paid for with increased bag fees?

    How much did the implementation of high speed internet cost, and how does that compare to the money spend on share buybacks?

    Personally, I am one of those odd people who actually can survive 1-12 hrs without being connected the the internet. I can see internet service being beneficial for business travelers, but for me it really isn’t essential. I’d rather have a lav I can fit in without twisting myself into a pretzel.

    Quite frankly, air travel has become less and less “fun” over the last 10+ years. I still enjoy travel, but the time in the airplane or airport is no longer something I look forward to unless I happen to be in an international premium class seat. Tiny seats, tiny lavs, more crowded planes… a large movie library and (expensive) Internet service don’t really make up for that for me. My iPad with movies and Kindle books has all I need. It’s the destination I look forward to. And sometimes looking out the window of the plane and seeing awesome sights from 30k ft up in the air (no WiFi needed for that).

    A lot of small (and large) businesses are going out of business. I can see that their owners and employees are probably not fond of bailouts for airlines. Personally, I believe that a functional air travel industry is important and worth supporting (as a taxpayer). Not sure what the best approach is.

  17. Industry average current ratio was the lowest ever recorded. Delta had less cash on hand than it did before filing its last bankruptcy when it was less than half the company it is now. Lots of good points, but your short term liquidity argument is off.

    1. Miki – Delta is tricky, but be careful with that low cash balance. It simply keeps open revolvers so it can pull down cash if needed, and that’s effectively the same for liquidity purposes. On March 31, it had cash/equivalents of $6b after pulling $3b down from revolvers plus entering into some new loans. So, it may look like a low cash balance, but it’s really not.

      1. correct.
        and they just announced another $3 billion in financing after their earnings call yesterday.
        They said they started with $20 billion in unencumbered assets and still have $13 billion left.

        Cash is not the issue but how much debt each airline can sustain; debt service will be a large part of every airline’s future.

      2. Appreciate the reply and insight. Agreed the balance sheet doesn’t always tell the full story, but even with the recent cash draws Delta’s short term liquidity is comparable to its prebankruptcy balance sheet although much more solvent now. That is all really besides the point though. The real issue twisting panties is the question of whether corporate socialism is the right path period. Should we be doing this whether it is airlines, banks, or car manufacturers. If they are too big to fail then did we fail by letting them get to big. Think we may be promoting bad behavior. Bankruptcy would generally provide the optimum solution but isn’t effective for a mass event like this, so these too big to fail companies either need to be broke up or take better care of themselves.

        1. Unlike with the banking sector in the last crisis, it wasn’t “bad behavior” on the part of the airlines that got them into this situation anymore than it was for restaurants, professional sports, or any other sector that’s gotten shellacked by this. Moral hazard doesn’t really apply when your problems are effectively acts of god. Unless your morals revolve around the more capricious gods of Greek mythology I suppose.

          The whole notion of “too big to fail” gets repeated a lot in these discussions but there’s been little talk of *why* the industry looks like this in the first place. Even in the absence of favorable bankruptcy and merger laws, you would have ended up seeing most if not all of the consolidation you’ve seen in the US so far over the past decades, if only because you’d have seen more airlines being outright liquidated. If people are decrying the instability of the airline sector right now, they should think on how most if not all of the Big 6-7 from twenty years ago would’ve already been at least in Chapter 11 by this point if they were still around for something like this.

  18. I think I’ve gotten sick of articles that say screw the airlines because they don’t offer a full prime rib meal with infinite free checked bags for $200 round trip. Airlines have provided a product the product that people pay for. If more people were willing to pay for a better product, it would have already have happened. Also, corporate America has really been too shortsighted for years now. Everything is about making the most money every quarter to please your stockholders without looking at the longer term. But, that’s not the fault of airlines, it’s the fault of shareholders as a whole.

    No one could have seen this dramatic of a drop off in travel demand six months ago and to plan for that accordingly. I think the only thing that I wish airlines would do is to even further reduce flying so as to lose less money. Every flight is unprofitable right now.

    1. Agreed. The airlines have provided consumers with what consumers have shown that they value and are willing to pay for. Again, not SAID, but SHOWN, by opening their wallets or expense accounts.

      Some are suggesting that airlines should keep (or should have kept) several years’ worth of free cash flow sitting in the bank, just waiting for a black swan event such as this, just in case. You know what you would call a company that did that? Financially irresponsible, and ripe for a takeover, leverage buyout, or acquisition. It would simply be an inefficient use of capital to keep that amount of cash in the bank, instead of using it to pay down debt (thus reducing interest expenses) or return money to shareholders. In addition, any airline that did that would see its unions use that horde of cash as an argument for industry-leading compensation packages and work rules the next time the contracts came up for negotiation.

      To use an imperfect analogy, those who are suggesting that airlines and/or other companies should maintain hordes of cash “just in case” should look at their own bank accounts… What if they had no homeowners’ insurance, their home burnt down, they were out of work for a year or more, and they were hit with big out of pocket expenses for medical bills. Do they have enough money sitting in cash (not in other investments, and not in retirement) to cover all that? Of course not. They have insurance on the home to cover them there, and (hopefully) have some money in the bank to cover unexpected bills and living expenses if they are out of work for a few months, but to have enough money sitting in the bank to cover all of the above and only earning 1% or 2% interest on that money would be ridiculous. This is a similar type of black swan scenario that airlines are facing now.

      There is certainly a very strong argument to be made that most publicly traded corporations are far too focused on the short term. For that, I blame the institutional shareholders (the mutual funds and pension funds that hold most shares) for not insisting on better incentives and controls, such as on bonus incentives, executive and management pay, and so on. Another big factor is the incestuous, “you scratch my back and I’ll scratch yours” rubber stamp relationships between top executives and those on companies’ boards of directors. As you noted, however, this is a common issue with almost all publicly corporations, excluding some corporations that are tightly traded and controlled (such as companies that are publicly traded but where a single family owns a controlling stake), not just airlines.

      1. The problem with your argument is that personal finances are not handled the same way as in the corporate world. Also more evidence has appeared that the virus has been circulating far longer in the US than first thought, therefore this black swan event wasn’t as invisible as we first believed.

  19. The airlines should have had a year’s worth of savings. But they didn’t, so they want yet another bailout. Greedy!!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Do NOT follow this link or you will be banned from the site!