I’ve chewed on this issue for several days, trying to place logic over emotion and seek pragmatism over pettiness. But I simply cannot support the sort of widescale bailouts that airlines, hotels, and even Boeing are now seeking.
First, let me note the unique time we live in. Like the events of 9/11/2001 and consequences that followed, this is the sort of black swan event that could have been vaguely imagined, but never predicted. As a general principle, companies should not have to operate in fear of events with a such a small likelihood of materializing that the opportunity cost of preparation presents an unacceptable drag on growth.
Furthermore, stock buybacks are not necessarily evil. Airlines, for example, spent 96% of their free cash on buybacks. That looks very foolish in hindsight. But as a general principal, share repurchases make sense for a number of reasons. Increasing shareholder value is the point of operating a for-profit company.
But without grossly simplifying the situation, here’s what I see. Airlines lived large and elected to use profits and cashflow to juice up stock prices and reward investors, rather than invest in a rainy day fund or a more sustainable future. Concurrently, airlines used consolidation and a strong economy to dismantle comfort and devalue loyalty programs. We were told this was necessary to keep fare prices low and for airlines to stay competitive.
Hotels, despite (or because of) a healthy economy, tacked on “resort fees” and other bogus charges while also devaluing loyalty programs in an era of consolidation. Share prices surged, but consumers were left with a raw deal, paying more for the same thing and being treated as expendable. Hotels also didn’t save for a rainy day.
And then there’s Boeing, the great American aircraft manufacturer who cut so many corners in the name of profit that two aircraft fell out of the sky and a whole fleet of aircraft remains grounded with an elusive fix that may never materialize. Look, I still believe experienced pilots would have avoided the two 737 MAX crashes. But that doesn’t remove the culpability on the part of Boeing nor does it in anyway mitigate the outrageous audacity of asking for a bailout after demonstrating a gross violation of the public trust.
Yes, But Is A Bailout The Least Worst Option?
Ok, you might be saying. The charges are all valid, but are we prepared to accept collapse? Isn’t the alternative worse? Wouldn’t a bailout be better than bankruptcy, considering the multiplier effect of airline and hotel jobs?
Here, I’ll honestly say I don’t know. But I don’t think anyone does. Just like few, if any, would have predicted the unprecedented effects of COVID-19 on the world economy, it is not clear the alternative to bailing out is a worse option. It doesn’t seem, to me at least, we are at that precipice like we were in 2008 after the fall of Lehman Brothers, where without swift and decisive action the global economy falls like a string of dominoes.
Thus, I apply a “he who lives by the sword shall die by the sword” mantra. If airlines and hotels need a bailout, let shareholders be punished first; let bankruptcy be declared.
I realize, of course, that is is not just rich fat cats who own stocks. My mother is a nurse, my father a teacher, my brother an accountant, and I am self-employed. We are all stockholders, either directly or via 401(K), Roth IRAs, or other funds that serve as investment vehicles.
Bankruptcy would hurt employees, hurt “the middle class”, and do far more damage than just hurting the hedge fund managers and 1%.
But this is a better option than using taxpayer dollars to prop up favored industries. Shareholders reap the greatest reward and must now reap the consequences. This is not 2008 and hotels and airlines are not banks; their bankruptcy and reorganization does not present a systemic risk to the world economy.
But If We Embark Upon Bailout Programs…
I consider it a foregone conclusion that the President, out of a desperate lust for re-election, and Congress, because of their ability to add self-beneficial pork, will bail out airlines and hotels.
The question becomes should strings be attached to this bailout? View from the Wing argues eloquently why the answer is no. I agree with him, in theory, but if the U.S. government foolishly embarks upon helping airlines and hotels, it should at least condition how that money is spent.
Take a step back. The U.S. Labor Department just reported that jobless claims rose to 281,000 last week. Those numbers will rise drastically in the weeks and months ahead as the economy contracts. The world is shutting down to a degree I have never seen and it will not be long before vast swaths of the American economy are deeply hurt, with workers laid off or facing dramatically reduced hours. Sadly, 78% of Americans live paycheck to paycheck. What should the federal government do? What can it do? Is embarking upon the next New Deal or helping employees directly a better use than bailing out companies?
With that in mind, any money, if granted, should be directed to care for employees. They will soon bear the brunt of the burden and bail out money should not be used to pay off creditors before taking care of workers.
Also, any bailout money should be granted in the form of loans, not gifts.
We live in a quasi-free-market system. Thus, creditors need to suffer. Shareholders need to suffer. And yes, I know that means most of us, indirectly, will suffer. But throwing money at airlines, hotels, and Boeing strikes me as an unwise approach when the whole economy is shutting down.
My small business is struggling. Our suppliers and customers are hurting. So are local coffee shops and restaurants. What makes big airlines, who have alienated employees and wasted cash reserves, more deserving of a bailout than small businesses? Should I then hire 20,000 people this week and then go begging to Uncle Sam that I am too big fail?
There are no easy answers here. But I find the answer of bailing out airlines and hotels, just because they took an early hit, wholly unpersuasive. After treating us as expendable for so long, I now view airlines and hotels as expendable. Oh, airlines and hotels are vital for the economy. But are any specific airlines and hotels vital? Let the market decide.