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.
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.
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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