As a devout capitalist, it pains me to say it, but it has to be done. Airline bailouts are immoral but right for this specific situation.
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My Capitalistic Nature Struggles with Government Intervention
Capitalistic systems reward those who think and plan ahead, those that innovate and those that rise in times of struggle. The ultimate reward for tempered business growth should be practical solutions at opportune times. Those that leveraged their businesses out of sustainability shouldn’t be rewarded for spending every last dime and not being good business stewards that pay down their debt, and save for the future.
There are other options besides a taxpayer bailout. For example, Singapore airlines took on a massive $19bn (SGD) debt package because the government (which is the second freest economy in the world) would not bail out the for-profit venture directly, but rather through a state-owned enterprise and the largest bank in Singapore. They sold equity for the deal.
Pretend for a moment that there was no bailout for the airlines. The likelihood that they would all collapse is low. That’s not to say they could keep the current business model and make it through in its current state, however. If Delta went out of business, American and United joined together by scaring the banks that the same could happen to them – we could see a market where a flight from New York to Chicago costs $1200 in coach and the desert is lined with scavenged planes.
That’s really what should have happened. Companies like Delta, who have ownership stakes all over the world, could find buyers for their foreign carrier equity from governments that will play ball and Delta could be the country’s only international carrier.
Airlines Haven’t Made Many Friends
The American public hasn’t been enthusiastic about the latest bailout deal in part because US carriers have not made a ton of customer-centric positive changes since the last bailout following 9/11. Flying on a plane in August 2001 meant a meal or snack, free checked bags, seat selection, earning miles for the flight based on the distance flown, and a reasonable award structure among other things.
The endless nickel and diming of American flyers has worn many casual flyers thin, and the most frequent flyers have been told they don’t spend enough year after year until last year where the requirements for spending nearly doubled on United.
It’s a little tough for the average consumer who flies once or twice annually and feels squeezed (literally, see bathrooms and seat pitch) by the airlines when they were once treated far better. Do those consumers realize that they are paying less than half price including fees and add-ons since 1980? No, but they don’t care either.
Have Airlines Been Responsible Business Managers?
Airline reserves have been pretty limited. Why didn’t the carriers save more money? Many consumers feel chided for living paycheck-to-paycheck and not saving more for emergencies. Many are shocked to learn that airlines and businesses are potentially so cash-strapped that just being down for a few weeks could put $50bn companies out of business.
It would be irresponsible for business managers to keep months of operating capital without revenue just in case a once or twice a century event occurs. In defense of American Airlines (and I am not one to rush to their aid) they had nearly three full years of combined profit in savings, more than any other carrier anywhere in the world. But even more than $7bn in cash reserves is not enough to keep the airline afloat for a quarter devoid of revenue while liabilities remain unchanged.
Many opponents of bailing the airlines out have pointed to what they consider greedy tactics of stock buybacks, whereby the airline uses free cash flow to buy their own stock off the free market and inflate its stock price. But there are two problems with calling this outright greed and irresponsible.
First, buying the companies stock adds more “dry powder” if they need ammunition and equity to sell. To a certain degree, those companies have equity to sell to taxpayers because of stock buybacks, not despite them.
Second, every single 401k holder has benefited from airline buybacks. Airline holdings within their own portfolio have performed very well of late (with the exception of American Airlines) though, over a long enough time frame, even American has had a nice return over the last decade (coming out of bankruptcy and following the merger with US Airways.)
Paying down debt ahead of peers might have made this period a little bit easier, but investors who want to see their money grow through reinvestment by the carrier would have punished these actions, whether right or wrong.
This Bailout Isn’t Necessarily a Hand-out
There are many versions of the bill that have been discussed in recent weeks. However, the bill that passed allows for a number of options for funding companies in trouble. One vehicle is to offer low-cost loans, a portion can be a government grant (that’s a hand-out) and finally equity in exchange for cash. President Trump favors equity for cash the most which is likely to have the largest return on investment for taxpayer funds.
Many have said that the money should go directly to the pay the employees, but that ignores a substantial portion of the company’s monthly expense load. The workers would be paid for a few months, then the entire company would be insolvent, returning the company to the same problem but with no money left to get out of the mess.
Conclusion
These bailouts have to happen (not just because they were approved by Congress) because if the country is to resume after Coronavirus has passed, we will need every worker and company back in place as they were. I don’t like the idea of offering them. I support the idea of putting in protections that say an airline cannot terminate their employees after the agreement is completed (as United has said they will do), and I also support the notion of limiting executive compensation until the loan (if taken) is paid back. This shouldn’t line anyone’s pockets, it should keep employees from the unemployment line and airlines from filing bankruptcy from which they could not re-emerge.
What do you think? Should the airlines be left without government aid to fend for themselves? Are the provisions enough to ensure good stewardship of the money?
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You bailed out the shareholders, the owners.
This is not a capitalistic society. Tbis is a preserve the privileges society. Wealthy people get bailed out even if they screw up. The federal reserve keeps propping up the stock market. People are alreadywage slaves.
One missed paycheck and you can’t pay rent. Enough of such renters and the landlord can’t pay mortgage and enough of such landlords and suddenly the bank needs the fed’s help.
And bailout everyone gets. A capitalist society would have let everyone make their own way. No wonder inequality is rising. Rich people get bailed out and preserve their wealth even when they make bad choices. In the past the wealth would have been destroyed.
https://www.theatlantic.com/business/archive/2017/02/scheidel-great-leveler-inequality-violence/517164/
@debit
Socialism for the rich, free enterprise for the poor.
Airlines will still be going broke and out of business, this bailout delayed the inevitable.
I love how all of you so called “devout capitalists” have conveniently agreed to socialist concepts during these bizarre times
Let the airlines burn. Sure once things normalized we may have had limited options for a bit, but eventually a company would fill the void.
I’d rather endure a time w limited options then give money to these bastards
As far as I can tell from reading this only (part of) one sentence actually addressed why the bailout was ‘needed’, “if the country is to resume after Coronavirus has passed, we will need every worker and company back in place as they were.”
Except this doesn’t support the need for bailouts. Airlines that aren’t operating do take time to start back up (planes coming out of storage, pilots getting current with required takeoffs and landings, simulator time). However you didn’t actually make the case why ‘without bailouts airlines wouldn’t continue to exist.’
First, we do not need the full capacity of airlines back online immediately, there won’t be demand right away for full capacity. There needs to be some capacity.
Second, a bankruptcy first approach would have meant equity and creditors take a haircut before taxpayers. It’s not at all clear a bailout would have been needed even then. Liquidity markets remain open to the airlines, over the past few weeks Delta, American and United have each raised an incremental 10 figure amount of cash (smaller Alaska raised $500mm). None has yet tapped their frequent flyer programs for cash. Why wouldn’t debitor-in-possession financing have been available, though if it wasn’t the question of government funding could be raised at that point.
Many airline workers would be furloughed under this scenario. To use United’s ballpark, 60%. But the bailout then is costing about $13k per month per worker – with management and senior captains making $300k+/yr fully bailed out by taxpayers, where the median US income is $30k – and that only defers layoffs through September. United says it doesn’t prevent them. Furloughed workers need assistance in the same way restaurants do, personal trainers do, movie theater employees do, there’s no reason for a separate $58b bailout for airline workers that’s first a bailout of shareholders and debt holders.
Logic (like your eminently reasonable points above) hasn’t mattered to supposed capitalists and conservatives like Kyle and Matthew since around the Gingrich era. They only worry about socialism and deficits when the rich aren’t benefiting from them. Equity wealth in the US is overwhelmingly concentrated in very high net worth hands, with a few crumbs left in the hands of the middle class. So all US “capitalist” attention is focused on the free call option and monopoly seeking behavior mentioned elsewhere in the comments, where corporations tend to run at the bleeding edge of leverage during good times to maximize profit margins, and then get taxpayer bailouts to cover their losses when basic economic down cycles occur.
And this has happened at least 4 times in the last 25 years, so definitely not twice a century like Kyle claims. No creative disruption allowed for them, just for the regular joe. Of whom conservatives have convinced just enough on the basis of racial and other divisive appeals to elect their crony capitalist candidates, despite their horrific impact on the average joe’s economic security.
Before the inevitable socialist/communist/leftie name calling occurs, let me specify that I work in financial markets and consider myself a capitalist, but a real one that believes in paying for incorrect decisions, not getting bailed out through taxpayer assistance. Such decisions include not having sufficient reserves or insurance for outlier events, which a pandemic such as this does not even count as given the amount of such scenarios run as risk exercises worldwide. SARS, swine flu and MERS all happened in the last 20 years! A freakin movie called Contagion was made about such spread and disruption!
Jig, you make some salient points, but also some false assumptions. I won’t dispute them one by one but the one I would ask for a little more information would be this line: “And this has happened at least 4 times in the last 25 years, so definitely not twice a century like Kyle claims.” Would you care to remind me of the four events since 1995 that would have caused not one but all of the airlines to simultaneously file bankruptcy from genuine need (unlike American’s filing prior to their merger with US Airways.)? If we count this one, and then once more for September 11th, what were the other two?
Also, you compare SARS, Swine Flu and MERS to this as other pandemics that should have informed management about potential risks. SARS from 2002-04 had 8,098 global cases, 774 deaths (8 US cases, no US deaths.) Swine Flu (H1N1) by comparison, infected 24% of the global population (60.8MM US cases, 12,469 US deaths) approximately 2x seasonal influenza, and MERS 2,494 cases, 858 deaths (2 US cases). Since you chose the examples, which of these most similarly parallel the current situation especially as it pertains to airlines’ ability to operate profitably or in this case, at all given forced border closures?
Source: https://www.healthline.com/health-news/how-deadly-is-the-coronavirus-compared-to-past-outbreaks#Novel-coronavirus-(COVID-19)
TLDR: 4 times in last 25 years followed the reference to crony capitalist bailouts. 2 times in last 20 years directly for airlines is not huge outlier. 9/11 and pandemic scenario planning clearly predicted current issues. Capitalists should be rooting for airline investors to take the hit without taxpayer bailouts, so that new capital takes over the assets and employs the right number of employees vs demand, and the capitalist discipline and lessons are learned by future management.
I noted the general principle of crony capitalism having occurred 4 times over 25 years, of large corporations largely owned by very rich individuals operating for max margins and getting their losses covered by taxpayers. As you note, the airlines themselves (among other industries) were directly bailed out twice in the last 20 years. That is no 100 or 500 year flood. The other 2 instances were the financial institutions in 1997-1998 in emerging markets/LTCM and 2008 with the housing bubble.
During this same timeframe, corporations and high income individuals got 2 very large tax cuts (Bush 2001 and Trump 2017), and the healthcare industry got its own sweetheart deals in Obamacare in 2010 with some minimal tax increases for the rich offsetting it a bit.
As for prior pandemics having exactly the same impact as the current one, that’s not how risk management works. 9/11 is a clear precedent of governments severely limiting air travel for a period of time. Pandemic studies after SARS laid out pretty much the current scenario. I can locate recent articles that outline the US government studies on the subject over the last few years if you like. Similar studies were the basis of the South Korean and Singaporean response.
The fact is that airline managements and other large travel industry corporate managements chose to distribute their very significant profits through buybacks and dividends instead of reserving for events like this one which was predictable in scope but not timing. I don’t have a problem with that decision. I have a problem with them getting special taxpayer funds to bail out shareholders and bondholders, none of whom share the profits with taxpayers beyond typical tax rates in good times. Where is the devout capitalism in that?
Gary laid out very clearly how future resumption of air travel demand could be met by new capital providers taking over the airline assets and employing the needed number of employees. This rewards prudent capital instead of bailing out reckless management and investors, and serves as the discipline that real capitalists should promote.
But that’s clearly not how most avowed “capitalists” behave currently.
Lol – You say TL:DR (Too long, didn’t read) and then respond to every point and then some with a novel-length comment. Weird flex, but ok.
Sorry, the first paragraph was the TLDR version. Should have put “Long Version” for everything after that.
Any thoughts about the substantive points made?
A ticket from JFK to lax. Should cost $1200,, or more in economy, if we put cost of inflation in place. The cost of tickets are cheaper than what they were many decades ago. Everything else have gone up in price. How do you expect them to make money, if it isn’t with fees and reduced service.
Airlines each have billions of dollars worth of assets. Let them borrow against those. Isn’t that why interest rates were cut down to nothing?
To Gary, Robert, and others taking a “let them eat cake” or “lol how everyone has become socialists” approach, there is a fundamental difference between this situation and a normal one.
This isn’t a case where bad behavior caused a financial bubble which then exploded spectacularly, like the Financial Crisis, or even the tech bubble which preceded 9/11. No, here the government has forced businesses into insolvency, and some unknown number (but probably some multiple of 10 million when all is said and done) of owners, employees, and creditors into long-term unemployment and financial ruin by effectively making the transacting of a large amount of commerce illegal under the guise of a “public health emergency”. It may not legally comprise a “taking” under the Fifth Amendment (though I kind of wish someone would sue their local and/or state government for damages as a test case), but as far as I’m concerned, yes, government owes these people some level of compensation for the consequences of their actions.
Now, if you want to argue airlines and their creditors/shareholders should take some percentage haircut due to all the stock buybacks not giving them enough of a cash cushion and for their general anti-consumer behavior, fine. That’s why I would have preferred the “direct grant” not even being an option, and would rather see preferred equity stakes which would dilute existing common shareholders.
You are adding a moralist argument to capitalism. This is not their fault. They should not be responsible. It doesn’t matter. The entire industry is suffering the same consequences. Even the analysts say southwest will do much better because they have been conservative. Why did southwest choose to be risk averse than other airlines? I will tell you why. the executives try to make money on their stock options by buying back stock and raising prices. And now leaving the risky part to the taxpayers with sfl the sob stories. American capitalism is a free call option in the hands of a select few. These executives and their capitalisst enablers are thieves.
Most criminals are criminals because they didn’t get the same opportunity as a rich POS like trump got when thev were growing up. Capitalists dont care for those arguments. But it’s funny to see you guys nake this “we are basically good people” crap now.
I am angry at obama too because he made the same choices. Gave bailout to some homeowners who were reckless. They are now sitting on multi million dollar homes. He gave money for clunkers and now we still have hummers on the road. He chose some people that were reckless over others that were not and the reckless people are much more wealthy today.
At least he didn’t pretend he was capitalist. Though he probably got played too.
Well….I wonder who Kyle will be voting for this November, huh?
I can’t wait to hear this. In the last few weeks I’ve been blasted as a socialist progressive and gun-toting Republican. Who am I this week?
Aren’t you a Republican?
You come across as a card carrying Republican.
I’ve been called a socialist for this very post. Same thing a couple of weeks ago. You’re convinced I’m a republican. The truth is, I just write what I see and try as hard as possible to not let slant come in whether it is for or against my personal beliefs. That’s the honest truth. I don’t profess to be a journalist but the one thing I hold true, is that aside from editorial analysis, no one should be able to tell your personal affiliations by your work.
What I find more often is that people have a world view, read my work and come to a conclusion that fits their narrative, whether I’m too far right or left. And lots of commenters have made determinations that fly in the face of other commenters reading the exact same copy in a completely different way.
It’s the most interesting paradox to me.
Well, considering you’ve said yourself in this post that you’re a staunch capitalist, I probably wouldn’t peg you as a Bernie Sanders supporter 🙂
That’s fair, but I also cited the success of President Obama’s auto industry bailout. I don’t think being a democrat and a capitalist are mutually exclusive.
American Airlines has $7B of cash reserves, squirreled away for a rainy day? Which planet are you from?!
Clicking through on the link documents that a American Airlines spokesperson claimed that they had $7B worth of “available liquidity”- that’s a very, very different thing than cash reserves, and you are being a sloppy blogger just to take them at their word.
American Airlines is a public company- you can look at their balance sheet. As of Dec 31, 2019 they had $3.8B of cash and short term securities available, not $7B. But that is not a rainy day fund- it’s all of their cash. They also had $18B worth of current liabilities, and $21B worth of long term liabilities!
Over the last 4 years, American generated almost $19B from operating cash flows. Yes, they needed to spend on refurbishing their fleet, but they did nothing to pay down their debt during the boom years, instead choosing to spend over 100% of free cash flows on stock buybacks.