If you had hoped that 2023 would represent a cooling down in partisan political rhetoric, think again. Although far from being a victim, Southwest Airlines has become the pawn in a partisan blame game that pits counter-narratives over the recent meltdown from the left and right.
Partisan Blame Game Makes Southwest Airlines The Pawn
Independent Senator Bernie Sanders of Vermont, a self-labeled “Democratic Socialist” who caucuses with the Democratic Party, blames the Southwest Airlines meltdown on stock buybacks.
Corporate greed is Southwest getting a $7 billion bailout during the pandemic & spending $5.6 billion on stock buybacks to enrich wealthy shareholders, while stranded passengers are threatened with jail time for the crime of trying to rebook canceled flights during the holidays.
— Bernie Sanders (@BernieSanders) December 29, 2022
Says the man who voted for said bailouts and worked to include verbiage in the final bailout that prohibited stock buybacks for an 18-month period…
View From The Wing eloquently explains why blaming the meltdown on buybacks is so foolish on both a practical and theoretical level.
“Businesses with cash that they can’t productively invest to earn high rates of return should not be holding that cash. They can pay dividends or buy back shares. Buybacks are more tax-efficient. The money then gets invested in companies that have a better opportunity to earn returns. And it is better to transfer assets from low return businesses, back to shareholders to invest in higher social return opportunities…
“Whether a business is holding sufficient cash to operate is ultimately a reasonable question. Whether they’re investing their cash well and growing where they have opportunities, is important for boards to consider when evaluating management. As an issue for a Senator, however, it’s ill-informed nonsense.”
Then again, airline CEOS seem to think that future bailouts are a sure thing. If Congress wants to ban buybacks, will it guarantee in writing those future bailouts?
That said, Southwest has failed to invest in its infrastructure, to its great detriment. And was there greed at play? Absolutely. Did that “cause” the meltdown? The answer is more complicated. Nobel Laureate economist Paul Krugman, an ardent liberal, blamed Southwest’s point-to-point network in the New York Times this week:
But point-to-point turns out to be especially vulnerable to extreme disruptions. Snow and bitter cold evidently left most of Southwest’s planes and personnel stranded in scattered locations.
Antiquated technology that left Southwest unable even to find many of its crew members, plus the absence of agreements that would have made it possible to rebook passengers on other airlines, made it worse. A system that has some real advantages in normal times fell apart when it encountered, well, a perfect storm.
Are there any broader lessons from this disaster?
…What happened at Southwest is another reminder that, for all the talk of an information age, we’re still living in a material world. Notably, there’s a clear family resemblance between the Southwest meltdown and the supply chain crisis of 2021-22, when a constellation of unusual events left many of the shipping containers central to modern commerce stranded in the wrong places.
Certainly, point-t0-point networks can leave airlines prone to disruption, but they can also insulate an airline if horrible weather strikes a major hub, suspending traffic. A point-to-point network seems more apt to a diversified stock portfolio that can withstand hits better than networks that concentrate their planes in a small handful of major weather-prone airports.
So Krugman does not convince me either, but at least he doesn’t foolishly assail stock buybacks as the root cause.
Then there’s Fox News, which seemed to blame Transportation Secretary Pete Buttigieg for the Southwest Meltdown. That happened on the Ingraham Angle, The Five, and on Hannity:
Is Fox News suggesting that the government should take over operations for private airlines?
Part of me just sits back and chuckles at all of this tomfoolery, but what a sad reflection on the U.S. political culture and media. Before I am charged with making a “false equivalency” please realize I am simply pointing out two different reactions on opposite sides of the political fence to the same core issue, both of which I find baseless.
Should Southwest do a better job of investing in its infrastructure? Yes. Should the Department of Transportation do more to hold Southwest and other airlines accountable? Yes. But blame and the root of the problem are a bit more complicated than the talking points from Hannity or Sanders.
Because only “wealthy” people own stocks, right Commie? Working Americans don’t have 401k’s Bernie? Regular Americans aren’t upset looking over their 2022 statements and seeing how much they lost?
Here is what “wealthy” people do have Commie…they own 3 houses like you do.
This guy embarrasses himself every time he opens his mouth. Sadly some actually listen to, and believe his nonsense.
10% of Americans have some significant level of investment in the stock market . MANY of those DO have 401Ks and pensions . Do they have Control over those investments or how much of those investments are diminished due to HIGH fees and commissions ? NOPE , so don’t lecture people about stuff you don’t know about . The stock market is NOT the economy and both the stock market and the economy are RIGGED for those who can invest a TON of cash and NOT for the benefit of those who punch a time clock for an hourly wage. A Huge % of American families , households are ONE paycheck from homelessness . And YES stock buybacks are bad for the stability of the stock market and they are especially BAD ( regardless of what the “author of this article says ) when OUR money is used to “bail” them out . Just another example of the rich getting richer and the poor and working poor getting poorer. So tell me another fairly tale about how stock buybacks are GOOD for America .
Over fifty percent of the US stock market is owned by 1) non-profit/charitable endowment funds and 2) retirement plans.
I wish I could ship everyone on both sides who have become so poisoned by politics to an island. I’m beyond tired of people from both sides trying to cram their insanity down everybody else’s throats.
Part of the legacy: https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html
Bernie Sanders is the left-wing equivalent of MTG, Lauren Bobert, Donald Trump and the rest of the far right trash whose moment, judging by the midterm elections, are passing or have passed. The country clearly doesn’t want extremes on either side. Bernie Sanders was never a viable candidate for President and helped to hand the 2016 election to Donald Trump.
Agreed. The truth is in the middle. Which is Southwest. But I disagree this failure can be compared to the global supply chain meltdown
That’s a terrible false equivalency. Lauren Bobert wants to democratic elections and MTG believes in Jewish space lasers. Bernie Sanders wants to fund universal Heath Care and tax billionaires more. Get a grip.
@bee100. Bernie, AOC, MGT and idiotic Bobert ( no GED until after elected which deserves special attention) are all not representative of most US citizens. To hold a party hostage for votes serves no one. Passion is one thing (Bernie) foolish as another. But results of being extreme are the same.
WRONG, Bernie Sanders’ main policy recommendations are SUPPORTED by the majority fo Americans , even the majority of Republicans. IN fact among the OECD nations ( those that operate with a Democratic government , some degree of a free market, modern infrastructure …) the US stand alone WITHOUT those programs such as Higher taxation on those that make SUPER amounts of $ and live like KINGS , have single payer universal healthcare , paid family leave , infrastructure that is functions well and which will last for many decades without crumbling and KILLING their citizens . Instead the US spends its budgets on Half the worlds military expenditure and TRILLIONS annually on tax breaks for the Fabulously wealthy . Great going .
Yawn – these takes are more about catching eyeballs than any truly held belief. Fox is afraid of losing viewers to OAN and Newsmax, and Bernie is afraid of losing influence to the more centrist Dems like Manchin and Schumer. We all know where the blame lies, including those at Fox and staffing for Sanders; and it starts and ends at Southwest ex-CEO Gary Kelly
Happy New Year, Matt! As someone whose experienced in corporate IT systems, but also just hypothesizing about how airline scheduling works, my (hopefully fun) 2 cents: To say that IT hardware is “antiquated” and therefore to blame for a scheduling crisis is misleading. Unless the hardware itself actually broke down, it’s what we in the industry refer to as “technical debt” in that perhaps the software algorithms becomes increasingly out-of-touch with the current business operations. It sounds to me as if when Southwest was smaller, and a flight was cancelled causing a cascade of issues down the line, the solution would be for someone to manually retract flights in the system and enter new ones. After all, the system “worked” for decades and they had flight cancellations before so they certainly were handling it. The problem was that if so many flights were cancelled, and flights requiring those planes later cancelled and so on, it was such a huge problem that the humans couldn’t handle the problem. I’d compare it to this: Imagine you have a huge spreadsheet which works fine for 3 offices but now your company has 12 offices and you just use the same spreadsheet 4 times. But now you want to rearrange the offices and you need to transfer data between all the spreadsheets. That requires re-designing the system from scratch or re-entering all the data manually. Yuck!
Many seemingly “technical” issues are actually management and staffing. In the old days, perhaps there were 12 people working at an airline desk who could re-enter the flight info manually and with a large buffer of part-time workers, it wasn’t a “problem” if you could call them to to work overtime. But management gets bonuses for appearing to layoff people and “trim fat”. “Fat” is given a bad name (even as I workout at the gym to lose it). It provides buffer energy when needed. “Lean” environments both in terms of software design and human staffing are inadequate to address emergency issues.
Back in the old days of IT, the Golden Years, staffing budgets were larger including elements that are unheard of today including staff paid to do solely documentation, emergency disaster planning and testing, redundancy scenarios, and so on. Staff were retained for decades who had “institutional knowledge” as a sort of muscle memory to quickly resolve such disasters and cooperate effectively. With “Agile” and “Stacked Ranking” where average retention is less than 5 years, there is little margin for error.
In other words, I hate to sound like an apologist for Skynet, but don’t blame the machines. The machines do what they’re told. This is executive management’s fault and what will happen to them? They’ll just get a big bonus instead of, er, a big bonus? It’s not even a Capitalism vs. Big Government issue since oftentimes poor leadership isn’t held accountable in either.
Yes, totally agree. My daily observation is almost everything nowadays is staffed by “barely adequate less one”. The doctors office, the local bank, customer help desk, post office, etc, etc. It maybe “lean” and “maximizes profit”, but when things go wrong, like a storm strikes, operations fall apart. I am tired of it, have memories of the good old days when there was a “buffer” of “excess” capacity for good reasons. Nowadays everyone seems permanently stressed out, it’s not right….. wish I had the magic solution to go back in time.
Bernie Sanders and Fox News talking heads. Surely the bastions of rational thought.
The premise of View from the Wing’s argument is that “businesses with cash that they can’t productively invest to earn high rates of return should not be holding that cash.” VftW makes the mistake of assuming that investing in technology upgrades and adequate personnel isn’t “productive.” This is nonsense. Most businesses in a competitive marketplace understand that a) upgrading systems and staffing at appropriate levels is vital to continued profitability, and b) that the best time to make those investments is when they have cash on hand so they don’t have to borrow money to do those things.
This is precisely what Southwest did NOT do. It had the opportunity to invest in its intermediate- to long-term future and it chose instead to get the instant gratification of stock buybacks. This reflects a failure of management to think beyond the current quarter. Forward-looking businesses also understand that while they can use excess cash to “earn high rates of return” in one-off transactions such as stock buybacks, it’s wiser to focus on the company’s needs over the next 5 to 10 years than to pursue short-term ploys to goose their stock price.
In many cases it makes sense to borrow the cash based on rates. I believe you are correct on the investment in technology but it doesn’t have to come at the expense of buybacks. A well run company can do both and reap all the benefits.
” VftW makes the mistake of assuming that investing in technology upgrades and adequate personnel isn’t “productive.”
On the contrary, I argue that it was a management error not to make greater faster investment here. But the stock buybacks didn’t prevent Southwest from doing so. After the buybacks they went into the pandemic with a stronger balance sheet than any other carrier.
Sorry Matthew, but Gary Leff still missed the mark on his take. While he admits that not updating the IT infrastructure meant Southwest didn’t have as much excess cash as they claimed, and that they should have done a smaller buyback/dividend, but management made a bad decision.
The problem is that management knew exactly what they were doing when they chose not to upgrade their IT. Shareholder greed (particularly activist shareholders) all but demands that public companies shovel as much cash towards buybacks/dividends even when that cash should be used to hire more employees/shore up operational resilience. Everyone knew a meltdown like what we saw was likely or even inevitable, but they didn’t care. If management had used even part of that money to upgrade IT, the more powerful shareholders would threaten their jobs/seats on the board.
I also see some merit in Senator Sander’s criticism, and am wondering if I am missing something in the counter arguments. It seems Southwest could have used their excess cash to not just upgrade their IT system that they knew needed to be improved, but perhaps also in updating/upgrading some of their planes to make them into more attractive products – this review I recently read is in-line with my experiences on Southwest planes (https://onemileatatime.com/reviews/southwest-airlines-boeing-737/). I would think that investing in these things would yield superior long terms returns for Southwest and its shareholders than share buybacks, so I don’t quite grasp the opposing view and would genuinely appreciate if someone could offer additional explanation.
Very few shareholders care about the long-term value of companies they own anymore (at least the larger ones that actually have some leverage as shareholders). While shareholders shouldn’t be tied to a company forever, the almost pathological degree to which many activist shareholders try to squeeze every drop of money they can out of a company, even when it’s not really in the company’s short-term interests (like what we saw at Southwest) is a huge problem for the economic success of the US as a whole and a large driver of the increasing economic inequality we face.
Thank you. I misunderstood the timeline of the stock buyback, and now understand more clearly the objections to Senator Sander’s comments. While I agree with the spirit of what you said, I am hesitant to assign too much blame to activist shareholders – after all, activist shareholders haunt many public companies – and would hope management takes full ownership.
It’s asinine to say that buybacks were a better use of their cash than upgrading, or better yet, completely overhauling their IT. Southwest needs a lot of help in that area and fast. The winter is just starting, imagine if this meltdown happens again, will the airline even survive?
Of all the people mentioned in this blog post, sanders is probably the closest to being correct in this case
I think he’s saying the two were not mutually exclusive.
Yes they could have done both, but when they did one and not the other, it’s easy to point the finger at management and say that buybacks were their priority over preventing an operational disaster
I agree, but where I think he’s mistaken is when he chalks it up to a mistake on management’s part. They didn’t do both because today’s activist shareholders want as much as they can get out of the company even at the cost of a potential operation collapse like we saw. In most states, corporations are supposed to certify that a dividend/buyback is coming out of surplus cash the corporation doesn’t need. Southwest clearly needed the cash to upgrade its IT and they didn’t.
Also, while the buybacks Sanders referenced were before the bailouts, Leff failed to mention that Southwest declared a dividend December 6, 2022. They haven’t paid it out yet because there’s some time before a dividend is declared and when it is paid, but Southwest obviously didn’t have surplus funds to hand out if it’s operational resilience was so bad that it essentially did not function for a week.
Blame Congress. They gave the airlines $60 billion that did not belong to them and asked for nothing in return from the airlines. Crony capitalism at its worst.
Is buying your own stock ethically wrong? What happens if a company buys all of its own stock? The company disappears up its own orifice? It’s a farce and shouldn’t be allowed.
When you pick one from each side and report on it with equal coverage then it is “false equivalency” despite your weak one-sentence attempt to deny it.
When one believes that Bernie Sanders represents as many Ds as Fox News does the Rs, well this is what you get.
Leff is wrong about buybacks being tax advantaged
He is operating in a pre 2003 environment where dividends were taxed as ordinary income. LUV dividends are qualified dividends (if you hold for the required period around ex dividend date). Thus, they are taxed at capital gain rates. Appreciation from buybacks can often be short term capital gains. Thus, they are taxed as ordinary income
I agree that divisive blame is unhealthy. And that the best answer is in the middle so as to gradually correct the inequities and correct the corruption. With that said, regardless, Sanders is closer to the truth than Fox News ever was.
Hey now, I’m sure Fox News was just as critical of Elaine Chao and Anthony Foxx when they were Transportation Secretary. No reason they’d treat Sec. Pete any differently.
Even post 2003, share buybacks have their tax advantages for company management and share“holders”.
Greed is a big part of the reason why share buybacks happen and money that could be used for investing in technology and people to create for longer term more robust operations instead gets used for share buybacks. Given greed is part of human nature and greed can’t be legislated away, it becomes all the more necessary to: have legislative and regulatory structures in place such that companies are made strictly liable and held firmly accountable for consumers hassled by irregular operations; and remove governmental incentives that encourage greed to be front-loaded.
From what I’ve read, the SW meltdown was self inflicted….now its $840M in the hole and counting.