Opinion: The $50bn US Airline Bailout Is A Bad Idea

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The Trump administration has announced that it is working on a $50bn airline bailout package consisting of loans to the troubled US carriers. It is intended to support airlines in surviving the current industry-wide crisis, a decision deemed hugely controversial due to share buybacks conducted by the airlines over recent years.

The bright times seem to have set down for the American carriers, as the bailout is needed. Photo: Getty

Without any doubt, the current situation is the single most dramatic disruption to the functionality of the entire airline industry in history. The unthinkable has become a reality, with the industry in the midst of a global crisis. Carriers have found themselves short of cash to cover their costs, as demand collapses to practically zero.

Cash reserves and share buybacks

All of the legacy airlines in the US are running out of cash. The key reason is obviously the coronavirus, however, the surprisingly low cash balances of United ($4.94bn), American Airlines ($3.83bn) and Delta ($2.89bn) are definitely not helping them in staving off the crisis. The cash to revenue ratio is alarmingly low for these three carriers, standing at 8.4% for American Airlines, 11.4% for United and 7.2% for Delta.

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What’s interesting is that all US airlines but United have less cash than IAG, Air France-KLM and Lufthansa, despite the significantly more profitable environment in the US compared to Europe. The reality is that, in the last decade, almost all of the US carriers have made enough cash to “fight off the virus”. Cash that they had and could have kept for a crisis like this one. However, they’ve spent it, mostly on share buybacks.

American Airlines reduces international capacity with 10% due to coronavirus
American Airlines is one of the most indebted ones in the world Photo: Getty

Over the last 10 years, the leading American carriers have spent around $45 bn on share buybacks. Data from Bloomberg shows that, between 2010 and 2019, United and Delta have respectively spent 80.1% and 50.4% of their free cash flow on share buybacks. In the last five years alone, American Airlines has bought back $13bn worth of its own stock. All that money would have come in very handy now, wouldn’t it?

Why is a bailout a bad idea

Providing the struggling airlines with liquidity sets something of a precedence, almost incentivizing airline managers to load on more debt and spend all the cash in the future. Why would they do anything different if, in the case of a sudden demand shock (9/11 or the pandemic), the government simply jumps in to rescue the airlines?

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The terms of the bailout itself are crucial as well. How can the government fairly decide how much to give and to whom? Should you reward the ones with stronger books and who preserved their cash efficiently? Or should you give out unilateral loans to everyone?

Let me just point out that American Airlines is sitting on $20.7bn of long term debt and yet it decided to purchase $13bn worth of stock in the past five years alone. By bailing out the airlines, we incentivize such behavior to continue and discourage that of responsible management, like Southwest or Jet Blue. Both have bought back their shares as well, while preserving enough cash too.

Delta has also spent its money on its employees, giving out $4bn after a successful 2019. Photo: Delta Air Lines

It seems as if airlines have forgotten that unexpected events are the ones that they should ultimately be prepared for. An assumption that the world will indefinitely continue on its rosy path is a naïve and irresponsible one. Yes, of course, coronavirus was impossible to predict and is totally unprecedented, but holding more cash or at least spending it more wisely than on its own stock would have provided a fluffier cushion.

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Government support is understandable in such an unusual situation. However, given that one bailout already happened post 9/11 and clearly the industry hasn’t learned from that, doesn’t make me believe that, without harsh consequences, anything will change.

Some say that stock buybacks should be banned; I don’t believe that’s the way to go either. That just makes the entire pseudo-capitalistic industry even more constrained. The real issue is the previously established precedence of bailouts for the industry, and a lack of clear rules based on which these interventions happen and under what circumstances they can be performed.

For example, setting some liquidity minimums that would “qualify” airlines for a potential bailout could be an option. As long as we do not let poorly managed airlines fail, the bailouts will never come to an end.

What other options do we have?

The importance of a strong air travel sector to our economies runs deep. So too does our commitment to the hard work and passion of hundreds of thousands of airline employees. These remain the key factors that will lead to the US government providing financial support to its airlines.

The recently announced bailout has been shaped in the form of loans given to airlines in need, but other options can be contemplated. Some have suggested that the airlines should re-issue the repurchased shares in order to obtain the funds, however, given their currently depressed stock prices and an uncertain future, that’s an unrealistic solution.

southwest 737 MAX
Despite of the MAX crisis and performing share buybacks, Southwest has one of the strongest books in the industry. Photo: Getty

Another option is grants; something along the lines of the 9/11 bailout package. This would provide the airlines with free and immediate cash, however, this has been opposed due to the stock buybacks.

Finally, the state could take equity stakes in the airlines, or could buy a number of aircraft from them, leasing them back to the carrier. This would aviod the handout mentality, while still giving the airlines the liquidity they need.

Feel free to start a discussion in the comments; I will happily respond and participate. I’m curious about what the readers have to say about this issue.

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Rene

I frankly do not see what’s wrong with letting them go bankrupt! In the short term we do not need them and the planes and the staff will be there when we do need them, so that more reasonable investors can take over. This is an industry that has spent the last 50 years living on bailouts, a great opportunity to stop!

High Mile Club

Given how no government is going to let its National carrier go out of business, it’s only natural they’d keep their air travel business afloat. However, I propose that airlines be given the financial assistance IF they can first provide a concrete plan on how they will better their products and improve their customer service. Once this has been submitted, they can be given small cash injections that will flow as needed if they can maintain a better business model. Failure to do so and the aid will cease.

Russ

I like the idea that the US Government purchase airline shares at the current market price directly from the airlines. The taxpayer invests in the airlines, and when the travel industry recovers, the government gets to sell those shares on the open market at the going price. As share values go up, the government profits from its investment today. This will provide the cash needed today to survive, and give the airlines a very real incentive to the airlines NOT to spend their excess cash unwisely in the future. The taxpayer wins from the standpoint that the profits from the sale of these stocks 2 or 3 years from now can, (ok I may not be realistic here but what the heck) be used to pay down some of the deficits being run up today as the government debates a trillion $$$ support package for the economy as a whole.

John

The only logical option for government money going to the airlines is for these corporations to sell stock at market value to the government. Anything else like grants and direct bailouts is more corporate welfare that Americans are getting sick and tired of.

Norm

No more leisurely handing Taxpayers $$$ out of control, as long as you have to deal with the same Management Blunders leading to Chaos, as was 9/11, and the current COVID-19. If any justifiable reason to give any LOAN to any of the mis-managed Airlines, as well as, the Champion of the Fiasco’s BOEING, it should be executed with all the guarantees and with a reliable system of control and audit instituted. It comes to mind that the US government should create a Federal Insurer for Catastrophic events, charging all their Airlines a reasonable premium set forth by a Consortium of Domestic and International Reinsurers who will be able to respond in an orderly manner with all their Systems of CONTROL

Norm

1 out of 7 Comments published? Is it that Bad?

Matty

I may not be the sharpest tool in the shed, but can someone please explain why what applies to the average Joe, doesn’t apply to these, TOO BIG TO FAIL, companies.

If I don’t make my house payment, for whatever reason, I have 2 options. I can short sale my home, or I can allow the bank to foreclose on my home. They will then sell my house and recover their money.

EarthBound

Just saying…

For $50 Billion: Uncle Sam can buy about 125 planes assuming a price of $400 Million per plane spread across 10 airlines, say. Sale/leaseback sounds good. Perhaps a triple net lease arrangement arrangement would suffice.

Add oversight with at least two Federal representatives on the executive boards: Operations/Safety and Financial. Give them power that’s continuous and preemptive.

Task the US DOT with the creation of planning scenarios in case Uncle Sam eventually has to cancel leases and take full possession of planes sometime in the future.

Or, drive an even harder bargain. Buy the planes and a bunch of airport gates, maybe even a maintenance facility. Install wider seats. Improve every tactile experience. How about EZ-pass boarding, too? Use the existing TSA data to create airline “passports.” Eliminate BS fees.

You get the drift. Grants and loans are just lame old ideas in this environment.

Jay

Wow…. Funny how everyone forgets that this is really about the literal hundreds of thousand of human beings with families to feed who would be losing that ability if the govt. lets these airlines fail by no fault of their own… I am an employee of a major airline who like 99% of the rest of the informed workers voiced their opinions vehemently when the airline executives were foolishly spending billions on share buybacks. This however is not exactly the time to “teach” the airlines executives a lesson, this is way bigger than that….. If a half a million fairly well paid employees lose their jobs, again through no fault of their own, this country will have a much bigger economic problem on its hands than a 50 billion dollar bailout package, I can assure you of that! The ripple effect would be beyond imaginable. It is amazing how callous and cold someone can be sitting at their keyboard while lumping the few execs at the top who make the decisions with all the hard working honest Americans who are just trying to keep their families fed and housed. Shame on you all! This is not a bailout of the Companies, it is a lifeline for hundreds of thousands of hardworking Americans who are in the worst positions of their lives. Whats really funny is how I dont recall hearing anything about the stock buy backs from ANY of you when they were actually happening or when the Airlines were abusing the bankruptcy laws to r**e their employees…. How many of you have personally written a letter to their CEO about their concerns and opposition to the very idea of stock repurchase programs or walked a picket line to fight for fair wages and benefits???? I did!

Not qualified

These airlines have consolidated so much to the point of re-regulating themselves. Having so few companies which control the market in any industry is a bad idea. It probably seems like a bad idea now the complaints US carriers argued in court against Emirates and other mid-east carriers that they received government funding. “This is unfair competition”, they said.
I would like to see how the stock buybacks are considered in the legal sense. Rather than a loss due to decreased business or forced government compliance of halting international travel, this is the result of investments gone bad—not only in their own company, but in partners within the same industry. Shouldn’t they assume the risks, as did other shareholders?

justin

they should be investing in the airlines via preferred shares with a healthy dividend. executive bonuses should be forgone and a ban on dividends such as what is happening with Air New Zealand. Also the banning of share buybacks should be forgone forever. Secondly then a plan like the banks to be fully capitalized so in the event of a emergency they are still fully funded. Failure to adhere to these terms they should be allowed to fail. The second option would be to if they do not accept those terms then they should be facing the full extent of worldwide competition and when this crisis is over the skies are officially open and any one and everyone can fly from anywhere in the world and point to point in the country.