The money was loaned to provide liquidity, and paid back with (low) interest.
I would need to look it up, but IIRC overall the feds made money on the bailout, especially to the banks, but took a slight haircut on the money they lent to automakers. Of course, that haircut doesn't factor in the benefit in keeping those industries alive and keeping those people employed (IMO very worth the price), but that's a bigger question.
This is a canard for a lot of reasons, first and foremost because the government has not charged one penny for the enormous subsidy it provides in the form of a now-explicit backstop which allows these companies to borrow at much lower interest rates. Those lower interest rates translate directly into less income for pension funds and savers.
But it never was about making a return on profit. The solvency and economic growth enabled by these overnight loans (assuming it doesn’t cause bigger problems down the line) is absolutely worth it.
That's a completely different and opposite point to "the government made money on the bailouts, actually."
> (assuming it doesn't cause bigger problems down the line)
We're dealing with those bigger problems now, today. The moral hazard created by the 2008/2009 bailouts is a big part of why executives could leverage their companies to buy back stock throughout the 2010s with confidence they would pay no personal price if it ended in tears.
There’s really no such thing when you’re talking about a modern economy. Sure, compare in 2020 dollars (or 2019 dollars, to bypass all this recent volatility) if you must but the real value of a nominal dollar amount is directly affected by the strength of the economy and that is contingent on the bailouts and short-term loans. It’s very circular.
> TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.
Executive compensation is tied to stock prices. By buying back stock, they are increasing demand and decreasing available supply of their stock. This results in the stock price rising, along with executive compensation going up as well.
By allowing stock buybacks, we are directly incentivizing this perverse behaviour.
Sure — what are your other options if you have lots of cash?
1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage.
2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk.
3. Buy back your own stock, which gives back to shareholders.
I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency.
I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.
And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...
You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.
Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.
Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time:
* Government regulation impacts
* Union strikes
* Aircraft groundings due to faulty (or less-long-lived than anticipated) parts
* Ticket search companies undercutting their profits
* Oil (and thus fuel, one of their main costs) price surges
* Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world.
* Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust.
* Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc)
* Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower.
2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.
United went bankrupt in 2002. Air Canada, 2003. US Airways, 2004. Northwest and Delta in 2005. American in 2011. This pandemic may be a once-in-a-century event, but "we're out of money" is not, especially for airlines.
If that is the lesson that businesses learn from this, the recession after this will last a lot longer than it needs to, as companies hoard more emergency cash than they need, instead of it flowing through the rest of the economy. A better solution is to cover higher likelihood emergencies and for governments to step in (as they are doing) for very rare emergencies like this one.
Many companies still pay dividends as well. But, yes, functionally both dividends and stock buybacks return money to shareholders, i.e. the owners of the company. However, as you say, in the US the tax code tends to favor capital gains over dividends.
Yeah what I keep not being sure of with this whole debate is: are people mad about companies using buybacks instead of dividends because of the tax avoidance angle, or are they mad at the entire idea of companies giving back money to shareholders either way? It seems like buybacks are the boogeyman, but that an argument like "if they had kept their $45B over the past few years, they wouldn't need $50B now" applies just as well to dividends.
Sure, maybe it's both. What I'm saying is that it seems muddled to me in these articles, I can't quite tell which thing is actually the problem, or whether it is both.
For the line of thought in articles like these, there's no difference if airlines had spend $45B on dividend payouts in the past four years rather than on buybacks.
No, because dividends don't benefit from compounding stock prices.
If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.
> Increase pay/benefits to your rank and file employees for helping you get so much cash
The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.
> Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund
What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?
> The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.
I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much...
No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either.
> What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole?
First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.
Option 4 is clearly a good one, more companies should pay dividends to employees in addition to (or instead of) shareholders. Employees have a stake in the company and the usual way of doing this (by giving employees stock so that they get the same benefits as shareholders do) doesn't align risks well. These are called bonuses, and yeah, big companies should pay more bonuses when they are performing well. I'm all for any company that does that and any policy that incentivizes it.
But I'm a lot less convinced by your other two points.
I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.
And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
The (flawed, but not entirely) idea of buybacks and dividends is that they also achieve the function of getting cash out of the hands of big corporation managers. When that cash ends up just sitting in another bank account of a rich person (or in a yacht) that is a shame, but it is its own problem for which there should be different solutions, but when that cash ends up flowing into other investments, that is much better than it sitting in the bank account of an already-huge corporation or being funneled into doomed business lines outside that company's area of expertise.
> I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.
I would agree that an emergency fund likely would have still run out in this scenario, but I don't think that invalidates the idea of investing back in the business does it? It's just more that the caveat is debatable / easier said than done.
> And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
Honestly fair point, I agree generally with who is allocating. I guess the question is how do you execute getting it in the hands of individuals or government for philanthropic purposes though? I wouldn't actually mind seeing a system for that where you can pay into a government controlled philanthropy fund that voters help allocate on ballots during voting but that type of system doesn't exist now, and getting it to individuals is typically limited to your employees which then just turns this into option 4 but with the likelihood that they money goes into other businesses instead of the original intended purpose.
This whole thing could just be a poll on the website or a matching campaign that customers engage with where they choose from a wide variety of sources. That's a major philanthropic activity by the business but then not allocated by the business itself, assuming the options are sufficiently ranging.
I was using "philanthropy" in a broad sense. A large portion of what the government does is akin to philanthropy. So I just meant taxation.
And yes, I think it just boils down to option 4: more money to individuals through employee bonuses. I trust the individuals more to support good causes than a corporation with its own agenda.
But note that I also think dividends are a good thing too, for the same reason I think bonuses are a good thing. I think it is generally better for most corporations to pass their cash onto other stakeholders. I wish it was more balanced toward employees rather than shareholders, but I think both are usually better than the corporation holding onto it themselves.
You could also look at it the other way (the correct way):
Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class.
We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so.
Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.
And as has been said on other threads about this topic - were the individual airlines to have saved that money (taking the hit on interest rates before deploying it now), the amounts we're talking about would barely cover a few months of total operations per airline.
Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.
6a. Buy a company to get into a new line of business (Comcast/NBC, Yammer/LinkedIn/GitHub), a transformational divestment followed by rebirth (IBM, Nokia)
6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.)
6c. Buy competitor and dismantle it to consolidate and reduce competition.
The most convincing argument I've heard is centered around just how much cash flow and expenses goes through the airlines on a daily basis, meaning they'd need some extraordinary amount of cash in the bank to weather something unprecedented like this. If they _did_ have that much cash, it'd be bad for the economy since that capital is effectively "locked up". Instead, give the proceeds back to the shareholders that will likely do something else with it - invest in new businesses, buy more goods and services, etc. I don't have any links handy, but Ross Perot railed against companies hoarding cash for decades.
Cash in a bank isn't "locked up." The bank uses it to make loans. In a sense, it expands the supply of money because a bank isn't required to have 100% cash reserves. So $50 billion in bank accounts generates more than $50 billion in loans.
Holding cash does not lock it up. Banks make deposited funds available as capital for investment. This can lead to a liquidity problem during a crunch, but that's literally why we have a central bank.
There are plenty of companies that have large cash reserves.
Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.
interest rates have been so low that biggest players have infinity money and nowhere to invest it ... which also explains venture capital activity of the last decade
The reason most people invest money in public companies is because they expect to get money back at some point. Otherwise, why invest at all?
There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.
I mostly agree. Although dividends arguably are a bit more reliable than stock appreciation because of buy backs. However, the basic point is entirely correct. If you think stock buy backs are evil then you must logically agree that dividends are also evil. Which doesn't really make any sense given that, under classic finance theory, the share price is the discounted present value of dividends.
At a meta level i am shocked this is getting downvotes. It is a legitimate question that pokes around what could be considered generally accepted wisdom. It concerns me that HN is starting to frown upon this sort of thing.
Sure. When you combine hyper-competitive capitalism with a market that lacks regulation - taking steps that ensure you are privatizing profits and socializing losses is just good for business. Arguably, some of these corporations believe it is also necessary to stay in business.
Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.
Buybacks serve the same role as dividends. A company takes money they have no need for and instead of giving it to investors in the form of dividends (which is taxed) they buyback stock. As a shareholder you don't end up with cash but the value of the stock increases by the same amount but there is no tax.
I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money.
One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them.
I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.
Correct me if I'm wrong but isn't it also a bet on the future in the sense of "I think our stock is undervalued right now and that it will go up in the future, so I should buy it cheap right now and then I can reissue the stock and raise a significantly more amount of money"? At least that's how I've thought about it
It's the exact same thing as dividends, with slightly better tax implications (you can choose when to receive them, rather than be taxed whenever you do receive them).
Investors invest in companies because they expect to receive money back in the future. Therefore investment won't happen unless companies have ways to pay back investors.
When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it.
Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company.
Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion.
You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same.
The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.
Stock buybacks are touted as a tax efficient means of providing returns to shareholders as capital gains. The other option being a dividend. If you don't think dividends are evil then you shouldn't have too much problem with buybacks.
The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.
I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buying back their stock as they were cutting flights and laying off employees. No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
The right way to structure this is to issue $50B worth of stock to the government. The airlines can buy it back with future profits to prop up the price once things are back to normal, while keeping the company afloat and retain jobs now.
The shareholders would protest, and should be allowed a right of first refusal. Put in money at the same price per share to avoid dilution if you want to. Their alternative is bankruptcy, so they don't have much other options.
No. The right way is to issue 50B of stock back to the public. The shareholders who received 50B and are holding it in their personal emergency funds can buy it back, or new investors can. There's more than enough private capital available without requiring the government to step in.
I believe the 50B is for keeping everyone employed. That is what is fantasy. Most people ought to be laid off in these times. That is what unemployment insurance is for.
Of course, that's not politically popular, which is why the government is becoming involved.
The public currently wouldn't buy the stock due to bankruptcy risk. If the government commits to buying what's left at the same terms the public would start buying as well reducing the burden on taxpayers.
Historically this kind of deal has been profitable for governments in the cases that I know of (in banking), while at the same time keeping more jobs and thus reducing economic impact of unemployment.
Oh i have no doubt the government will make money from this. I was saying what i thought the right way to finance this is. You say the gov will make money -- certainly true. It would be much better for the airlines to issue to the public though so the public can make money
If the public wouldn't buy airlines stock because of "bankruptcy risk" then why was Carnival Cruise Lines able to raise more than $6bn in debt and equity recently?
Because Saudi Arabia bought a lot of that equity. Not who I want being a majority (EDIT: s/majority/substantial) owner in my country's airlines if they need a bailout; have the US Treasury own them.
That's incorrect. PIF's stake was as of 3/26 while CCL did the equity deal on 4/1. I don't know if they participated in that equity deal but they would have to disclose if they increased ownership. The equity deal was only $500mm vs $5.75bn in converts and 1st lien bonds. Non-insiders did not know PIF invested in the company when they raised this recent $ so it's not like that was some sort of anchor. Also, given their recent investments, PIF owning a significant stake in anything should make you run the other way.
I'll have to go through the disclosures before I speak more confidently about the recent equity activity in CCL, but PIF did very recently disclose they acquired 43.5 million shares, a 8.2% stake in CCL. This makes PIF their second-largest investor. This surely contributed in CCLs ability to do a rapid raise right after.
Delta and United were each able to raise over $2B in credit. They have plenty of airplanes and facilities to use as collateral. Coming out of 2019 United had about $29B equity (assets - liabilities).
They don't really need a bailout to stay in business. The grant money for employees is contingent upon them keeping open flight routes that they'd otherwise close. Sec. of Transportation wants low traffic (small) cities to have access to medical supplies and whatnot (at least that's what she says, of course she's pro-business as well).
NO the government is the government. A company issuing shares to the public means that any individual can choose to buy them or not. Issuing them to the government means the government buys them. The government is representative of the people but is not simply just the people in aggregate.
It's like your parents buying stock for you and promising it to you in your inheritance versus buying a stock yourself. Sure, you can say that you own the stock if your parents promise it to you(In the sense that you will benefit from it eventually), but you don't own the stock simply because mom and dad do. They can change their mind, or decide to give all the money to your awkward brother.
Thank you, it is endlessly frustrating that this debate is always framed as "extraordinarily generous no-strings-attached bailout" vs "allow them to perish in flames," when there is always the alternative of a "bail-in" which requires executives and shareholders to take some of the pain, secures a much more concrete and measurable benefit to taxpayers, and thus helps avoid worsening the moral hazard problem we are drowning in.
That's roughly how the GM bailout worked. 'The government initially had a 61% stake in GM when the company emerged from bankruptcy in 2009, leading critics of the bailout to dub it "Government Motors." It started to sell that stake with GM's November 2010 initial public offering. '
As I understand it the issue here is cash flow; the assets the companies have on their books are still valuable, but there is a cash flow issue right now. Every normal company would approach various lenders to take out a loan - I'm not quite sure why airlines are being treated any differently, or why the government or public needs to receive stock as a make weight.
If their businesses are solid, sound businesses, major lenders will not have an issue with offering good terms on whatever it is that they need to bridge the gap.
Other than a firm understanding of what that gap is, am I missing something obvious which makes bank loans not the go to solution here?
Why not loans? Pandemic is not the fault of the airlines, just like small businesses around the world, most airlines just need a short term loan to resolve liquidity issues while the pandemic blows over. Loans are safer investments than buying stocks.
Sure they could've held it. Apple did it for a while. You could invest it and make even more, or invest a bit in not treating your passengers like f*cking cattle and constantly charging millions of fees, maybe?
Passengers are choosing to be treated like cattle, by aggressively bargain hunting for the lowest available sticker price.
You have lots of options to get better service - economy plus, priority boarding, buying food onboard that you no longer get by default. And of course upgrading to business class.
All these things cost more and you could either pay for it by default on every ticket like in the old days, or you can purchase them separately. Consumer demand has overwhelmingly indicated a preference for the latter. Sure the airlines could lower their margins and drive down prices on these things for customers slightly. We'd be in the exact same situation now though without any cash reserves so I don't see how that would have helped.
You might not expect that some particular disaster is going to happen, but you can expect that some setback is going to occur, eventually. The good times do not last forever. It's not like the principle of having a reserve for bad times is a new idea (see also: ant, grasshopper).
If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why should we have to fix their mistake?
Yeah, but most setbacks lead to a 10% drop in flights, not 99. This is quite material. A company that anticipated up to a 20% drop in flights and saved to last a year with that, will only be able to last a few months with a basically 100% drop in flights. That is exactly what we're seeing now.
No its not. No company should prepare for its business model to be made illegal. The best outcome for shareholders there is to return money to them before the business model becomes impossible and declare bankruptcy.
> No company should prepare for its business model to be made illegal.
Yes. When you have a business in an industry that is in the political or regulatory eye, you should prepare. This is historical prudence.
> this is a teachable moment
> No its not.
I would treat it as such and that's the problem, isn't it? The model didn't become illegal, it became impractical for an extended duration of inactivity. This isn't an unexpected natural disaster, it's a rather regular event. Something something The Ant and The Grasshopper. Maybe another incarnation will show better judgement by holding more reserves and point backward.
The inability to consider history is a trend of the USA, politically and commercially now.
You could always limit it to companies that can show the money which would have been used if there was a limited decline in business. Separate the ones who did indeed behave responsible and were caught by this extraordinary event from those who bought back stock without thinking about tomorrow.
Clearly all of them were prepared for some contingency given that they are still in business several months after a drastic decline in demand for flights.
Financialization requires the money to be used "productively" instead of sitting in reserves waiting. Everyone wants a higher stock price and/or dividends instead of long term stability. I recently came across a saying that summed it up well:
"MBAs think companies make money. Companies make shoes."
When you abstract the details away again and again and again, eventually you forget that the details exist and matter.
> People make it sound like they were buying back their stock as they were cutting flights and laying off employees.
No. People make it sound like they were buying back their stock as they were not using that money to increase worker salaries and benefits. Nobody would complain about necessary bailouts if the organization shared profits with its laborers instead of lining executive pockets.
They won't "go under". Force them into bankruptcy, someone buys them and assets out of bankruptcy. Management learns that there are huge ramifications for poor management decisions prioritizing investors short term wants vs business long term needs.
Not sure if you meant this sarcastically, but if that happens, fuck it. This is the world we made. To pretend we have free-market capitalism while propping up shitty business practices with tax-payer sponsored bailouts is not free-market capitalism. Institute laws about foreign governments buying up bankrupt assets or something. But for the love of god don't just bail them out.
This is the same as scolding a child hitting their sibling and then giving them a fucking cookie. Then when they keep hitting people, at least have the sense not to be confused why they don't learn.
After seeing how Boeing and American-run airlines operate, I'd have a lot more trust in Chinese-run airlines and airplanes than anything run by American managers.
"It is good to kill an admiral from time to time to encourage the others." It is good to destroy incompetent, short-sighted management from time to time, to caution the others.
No, if the airlines "go under" in bankruptcy, the assets, airplanes, and people remain-- with new leadership and investors. The dynamic, economic outcome is to let them fail and reorganize them.
I agree that a lot of these arguments seem pretty naive and lack understanding about how markets and the economy work. Also there is nothing inherently wrong with stock buybacks at all I think. However, I think everyone would benefit by realizing that these "unpredictable" events are actually not that rare and we should be prepared for them. Companies should keep more cash for unpredictable scenarios. It didn't have to be a pandemic, it could have been war, volcanic eruptions, terrorism etc. Companies should not assume it will always be "good times". Also these types of events seem to trigger chain reactions that make leverage and financial tricks really risky, so keeping cash I think is good.
In addition to all the other issues that people have brought up, the most important thing to remember is that the airline business is extremely cyclical. They know that there are always bad times around the bend. Their total lack of preparation is what's so galling. The management at these companies is simply unfit when they so routinely ignore the history of their own industry.
I seem to recall that total profits for the (US) airline industry from 1960 to 2010 was $0 (dates may be incorrect, but the general timeframes are correct). It's all just bankruptcy, merger, restructuring, and repeat.
You should always be suspicious of claims by or about a company that they made no profit when they were able to throw billions at propping up their stock price. If it's true it's financial malpractice, but it's no more believable than the shenanigans of highly profitable megacorporations that somehow end up paying no federal taxes.
What I said was that total profits for 50 or 60 years, for all airline companies put together, were $0. But any one company, for a period of several years, certainly could be doing well enough to reasonably buy back stock. It doesn't have to be financial malpractice. (It may be, but my statement doesn't mean that it is.)
The problem is all of the people making money on the stock market. The (somewhat shaky) justification for them making that money is that they are taking on risk. If they are not in fact taking risk, because their short-sighted investments are going to be bailed out by government, then we really need to start questioning why the private investors are the ones making the money in the good times, and not the government who is actually taking on the risk.
> who the hell could have predicted the world was going to shut down like this in 2015-2019?
The people American Airlines employ to predict future risks to the business.
Their SEC filing:
> Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:
> • outbreaks of diseases that affect travel behavior
> In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior.
It's very predictable that we'll have major market downturns for various reasons every 10 or 20 years because of history. If you are 25 years old you've lived through 3. I'm older and I've lived through 5 or 6, depending on how you count.
Who could have predicted in August of 2001 that a terrorist cell would hijack airplanes and use them as missiles resulting in a massive decrease in the number of passengers?
You really don't have to look too far in the history of the airline industry to see examples of black swan events.
Independent of the COVID-19 pandemic, I can think of at least two other scenarios that would destabilize the revenues of airlines:
(1) A catastrophic airplane crash that disrupts air travel and/or changes consumer sentiment towards airline safety. Consider that US aviation is in an extended safety streak and most Americans cannot quickly recall a time other than 9/11 when an airplane crash resulted in death.
(2) A change in the price of oil that drastically alters ticket prices. This is not likely given the current climate and the mitigation that airlines now undertake vis-à-vis oil futures, but a plausible scenario nonetheless.
Given that me, a random guy that knows fuck-all about airlines, can come up with 2 scenarios where revenues are disrupted without any foresight, it begs the question whether the airlines are acutely aware of their "too big too fail" status.
It seems their preference to enrich executives and shareholders all while hedging against any catastrophic events with a government bailout should be on par with 2008-era financial misconduct.
Prediction: Airlines will receive a bailout and face little repercussions for their poor planning.
> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
That just isn't right, for a number of reasons.
First, the 50 billion applies to the entire industry, so the "emergency fund" of an individual company is going to be much smaller. Imagining an airline holding 1 billion in a buffer, rather than using it for stock buybacks, isn't that far-stretched.
Second, 90% loss of revenue isn't the problem, it's how long this revenue stays down that is the problem. The FAA closing the skies for a week should not be a problem, a month is going to be a huge problem, and a quarter might already be fatal.
Third, preparing for such scenarios is commonplace in the financial industry, for example. (I have a sibling comment regarding that). Banks are now expected to be resilient enough to survive another another 2008-like crisis on their own, without taxpayer-funded bailouts. And these expectations are not merely high-level, there are entire hordes of specialists, both in banks and with regulators, that do nothing else other than model various scenarios.
> who the hell could have predicted the world was going to shut down like this in 2015-2019
Market downturns tend to happen at semi-regular intervals. It's been 12 years since the last one.
> People make it sound like they were buying back their stock as they were cutting flights and laying off employees.
No but airlines were absolutely cutting the quality of their services. They bought back stocks at the expense of passenger comfort. Anecdotally, from 2015-2019 each flight I took was less pleasant than the last. When I travelled in the summer of 2019 our flight did not have vomit bags. Guess what? Two passengers vomited on the approach. All over the seats. Speaking of the seats, they were so uncomfortable that I actually injured my back as a result of sitting in them.
> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
It is absurd under the incentives that business operate under. It's also absurd that businesses can operate until the point of bankruptcy, stranding passengers like what happened when Thomas Cook went under last year. https://www.nytimes.com/2019/09/23/travel/thomas-cook-airlin...
> I really hate that this argument keeps popping up.
I think the reason this keeps coming up is because regular people are feeling extremely frustrated at the moment. Average people are told they should save for a rainy day. I did and now I have the privilege of spending down my rainy day fund while the airline industry expects a handout for not doing so.
> The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
Perhaps some of the impact can be mitigated by taking a portion of $50B and putting it in the pockets of the employees who will lose wages instead?
It doesn't help us much now, but I think there is a strong case for expecting them to build up a warchest. American, Delta, and United have all had bankruptcies before, so we know they're not invincible. 9/11 hit them hard in 2001, the Icelandic eruption hit them hard in 2010 .. Airlines are fragile, and I think it's time they started building their own safety nets.
That doesn't mean that this time we should let them sink, but perhaps there do need to be some strings attached. Airlines do just lurch from one crisis to the next, and we can't afford to lurch from one bailout to the next with them - else we may as well nationalise them.
I'm frankly amazed that you are really arguing that it is "absurd" for companies to be prepared for events of this magnitude. Many businesses absolutely prepare for them. This isn't a mile-wide asteroid, it's a pandemic. Also, $50B is not the amount an airline has to buffer to weather this, that's a ridiculous exaggeration.
Terrible things happen to people all the time that are difficult to predict. Yet the legal system holds them accountable for the contracts they are involved in.
This needs to be equally true with large corporations, otherwise contracts lose meaning.
How about they invest that money in production instead of stock buybacks ?
Here's what Matt Stoller has to say about buybacks and bailouts in general:
Fundamentally, mergers, buybacks, and excessive executive compensation are about stripping out resiliency in return for cash, and the lobbying is the political machine to protect the ability to do that. So what to do? The answer is pretty simple. Stop hidden risk pooling.
Financialization and private equity is about loading up corporations with hidden risk. We cannot afford that anymore. So here are the conditions to put on large corporations who need cash from the government:
-No bailouts for shareholders. Shareholders took the risk and upside, they should get the downside too. A bailout means the stock value goes to zero.
-No more buybacks ever, and no more dividends for five years. It’s time to stop asset-stripping, and restore the cushion inside corporations so they can invest in production.
-Strict executive compensation limits. No more get rich quick schemes and golden parachutes. We need long-term leaders focused on building institutional strength.
-No more lobbying, as well as limit public relations spending. The Housing and Economic Recovery Act of 2008 killed the ability of Fannie Mae and Freddie Mac to lobby, and that killed their political power. By contrast, Wall Street got bailouts with no strings attached, so they largely wrote the Dodd-Frank bill. (I was there, I saw it). Don’t repeat this.
-No more mergers and acquisitions for five years. If you get bailouts, you have to run your business as a business, not as an acquisition target. I can imagine an exception if the business fails as a stand-alone, but exceptions need to be very narrow.
Of all industries the airlines should have been acutely aware that they could be suddenly and without warning significantly effected by outside incidents and planned accordingly. This is an industry that has gone through this before following 9/11.
Seems like they should sell the government 50 billion dollars of stock at the lower of current prices and 90% of the stock price at the time they did the buy back. They'll have lost money on the buybacks. They'll stay in business though.
In good times, people complain about companies like Apple "hoarding cash". Now, people complain about companies redistributing profits to their shareholders--many of which are ordinary people holding shares in their 401(k)'s or otherwise. They really cannot win.
Apples cash hoard was all sitting overseas because it couldn’t be repatriated, no? That’s kind of a different scenario... they didn’t really choose to hold cash. They just didn’t want to pay the tax to bring it to the states.
But once the corporate tax rate was brought back in line with the rest of the developed world, Apple brought the money back to fund buybacks and dividends. When you have more cash than available attention, that's the right thing to do: return it to shareholders.
I'm not sure what you mean by this, but if companies are going to hold large amounts of cash, it would be fiscally irresponsible not to seek the best possible tax treatment for it within the law. If people think it's inappropriate for companies to hold cash overseas, those concerns should be addressed towards lawmakers.
When the companies are the main lobbyists of corporate tax law, they effectively become judge/jury/executioner. You can say "Boycott Apple" but that's not really viable either for an injustice that is not seen by most as severe enough to give up something so centrally important to them. That importance should not give Apple a free pass to do any minor things they care to though, regardless of morality. These are not easy problems and for companies to throw their hands up to "well the law says X", especially as they lobby for X to stay, then IMO falls back morally on the company.
Having worked in the financial industry for close to two decades, and with most of my friends in the same industry, it is remarkable to what lengths regulators went after the 2008 banking crisis.
Banks are vital middlemen between many parties and as such, were already heavily regulated back then, but after the massive tax-payer funded bailouts, regulation went into overdrive.
For example, Banks are expected to survive short- to mid-term dire periods. However, the 2008 crisis showed that most banks were not in that position. So the regulators went into overdrive and regulated most of the weak spots they had identified, and (IMO) most importantly, really stepped up stress tests. Banks have to demonstrate that they can survive interest rate shocks, market crashes, political crises, etc. for a certain amount of time.
And these things get audited extensively. A friend of mine works at a bank under direct ECB oversight, and the sheer amount of data, models, simulations, etc. they need to produce is just staggering.
Perhaps it is time to apply some of these methods to other industries that might only survive with a taxpayer bailout. For example, a global pandemic as we are experiencing right now, is not exactly something that was unimaginable before.
Airlines could be expected to maintain contingency plans for such scenarios, and required to maintain appropriate financial buffers, with stock buybacks, dividends etc. forbidden as long as those buffers are below the levels required by those scenarios.
> Perhaps it is time to apply some of these methods to other industries that might only survive with a taxpayer bailout
I feel as though the problem here is that we can't survive losing some of these companies. "Too big to fail" is the problem. There's so little diversity in these ecosystem that losing one company is an economic disaster.
Maybe the regulations around these sorts of things ought to just apply to any company that represents more than X% of a given industry, or any company worth more than Y% of the entire stock market. And these don't even have to be big X and Y values. If you're that big, you've grown beyond being just a simple company and you've become an integral part of society that must remain functional.
Go even further: tax those companies that meet these standards an extra small amount, and then reduce the taxes of their smaller competitors by the same total value. Incentivize competition to increase the diversity, so that there aren't many companies we can't afford to lose.
So what? The times were right and the opted for a stock buyback with excess cash.
I don't own airlines stocks, but when a company where I am a shareholders does a stock-buyback with excess cash I am v=so very happy.
I am OK with banning stock buyback during the period between bailout and full repayment of the loan, but what happened before of after the loan should not be part of the argument for the bailout.
It's obvious that buy-backs are basically a hack for struggling companies to sacrifice long-time gains for short-term posturing. So what would a fair regulation around stock buy backs look like?
We could make it illegal, but that seems like it would favor people who want to do corporate takeovers. Also, I've seen legitimate uses of stock buybacks, such as buying it back to give it as a grant to new employees.
We could limit the amount bough or spent, or require that some percentage of stock's bought back be re-allocated to employees as grants or options.
I'm not an economic person though, just spit-balling.
> It's obvious that buy-backs are basically a hack for struggling companies to sacrifice long-time gains for short-term posturing.
No, I don't think that's obvious. Buy-backs are used that way, sometimes, but they're also used by companies that are doing well to return some money to the shareholders.
Why would they do that, when they could just issue dividends? I can see at least two reasons. First, dividends require one transaction per stock owner, whereas buying stock has much less overhead. Second, dividends create an expectation that you're going to continue to issue them, which is an expectation you may not wish to create.
Given that issue with your starting position, I don't think your conclusions are valid.
I don't necessarily buy this argument - if they would have distributed their earnings via dividend, they would be in the exact same boat (maybe a little bit worse because of the additional tax on dividends). Keeping share prices up is an objective of executive compensation because it benefits the average shareholder.
> The reason that I'm harping on share buybacks is that in theory, money for them is supposed to consist of cash that's surplus to the companies' needs. But in the real world, companies frequently borrow money to help fund buybacks. That works great to prop up their stock prices - until one day, there's a problem.
I've been told by corporate accountants that this is a huge misunderstanding of how corporate finance works. Companies borrow money all the time for everything, because sitting on cash is the equivalent of slowly losing it.
I'm not a financial expert, but there's a line in their 10-K's about how their loan agreements prevent them from paying dividends. I think that leaves buybacks as the only way of letting owners take profit from their earnings. Not sure why that's such a moral issue here?
* there's a structured process for when a company can't pay its bills but is possibly viable in the long run if it can restructure its obligations called Chapter 11. The airline industry has tons of examples of companies that continue operations through chapter 11 proceedings and end up as profitable on the other side. I don't see why that process is suddenly off limits today. It would require equity holders (and likely some liability holders) to take a haircut, but I'd argue investors knew the risks they were taking given the history of the airline industry.
* if the $45B was returned to shareholders in the form of dividends, would that be somehow less evil? I keep seeing articles citing share buyback numbers, but the whole point of publicly traded companies is to return capital to shareholders.
The airlines also have plenty of access to credit, collateralized by their airplanes. The loan portion of the bailout, from my understanding, is contingent upon them using up all those lines (which they haven't, both Delta & United were each able to borrow $2B in March in preparation for the shutdown). E.g. United borrowed $2B from JPMorgan Chase https://ir.united.com/static-files/fafc24ea-c999-4dc7-b6b3-d...
Banks have legally mandated reserve requirements. Is it time for companies in certain FRB (Frequently Requiring Bailouts) industries to also have some level of required cash reserves? What would be some arguments against, apart from ye olde “too much government regulation”?
Almost all major airlines in the world are receiving government bailouts: France, Germany, UK, Japan, Sweden, HongKong, UAE, Singapore. The airline industry is a notoriously cut-throat industry with lots of protectionism from nations, one can't just expect US airlines to sit on $50B cash and not put it to work.
I think there is a lot to weigh on many different levels about whether a bailout juxtaposed against buybacks is a good or bad thing. But I’m surprised by how little talk there is of individual investor opportunity. This seems like the bottom of airline stock prices. Here’s a list of their tickers: https://topforeignstocks.com/stock-lists/the-complete-list-o... … which stocks would you buy? JetBlue, American & United seem like bargains & no one can guarantee returns financially but lots of people will fly again.
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[ 2.9 ms ] story [ 210 ms ] threadI would need to look it up, but IIRC overall the feds made money on the bailout, especially to the banks, but took a slight haircut on the money they lent to automakers. Of course, that haircut doesn't factor in the benefit in keeping those industries alive and keeping those people employed (IMO very worth the price), but that's a bigger question.
Every large investment bank owes its continued existence to the government. Would you say the taxpayers have been sufficiently reimbursed for that? https://www.nakedcapitalism.com/2014/11/aig-bailout-trial-re...
> (assuming it doesn't cause bigger problems down the line)
We're dealing with those bigger problems now, today. The moral hazard created by the 2008/2009 bailouts is a big part of why executives could leverage their companies to buy back stock throughout the 2010s with confidence they would pay no personal price if it ended in tears.
The estimates I've read are that the federal government lost between 9 and 10 billion on the automaker bailouts.
For example:
>...In the end, taxpayers lost $10.2 billion.
https://www.thebalance.com/auto-industry-bailout-gm-ford-chr...
>...the U.S. recovered all but about $9 billion of the auto bailout money.
https://www.marketplace.org/2018/11/13/what-did-america-buy-...
>...(quite apart from all the jobs that were saved).
Yea without the bailout, there would likely have been more job losses as consolidation occurred in the industry.
https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
> TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.
Money has been coming back in two ways: $390B of principal has been repaid, and the Treasury has collected revenue from its investments of $364B.
In total, the government has realized a $121B profit as of March 19, 2020.
https://projects.propublica.org/bailout/
edit: this was an actual question not a rhetorical one. curious why the downvotes?
By allowing stock buybacks, we are directly incentivizing this perverse behaviour.
1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage.
2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk.
3. Buy back your own stock, which gives back to shareholders.
I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency.
I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.
- Increase worker pay and benefits
* Government regulation impacts
* Union strikes
* Aircraft groundings due to faulty (or less-long-lived than anticipated) parts
* Ticket search companies undercutting their profits
* Oil (and thus fuel, one of their main costs) price surges
* Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world.
* Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust.
* Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc)
* Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower.
2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.
If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.
5. Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund
6. Focus on improving world impact through starting philanthropic activities
The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.
> Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund
What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?
I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much...
No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either.
> What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole?
First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.
But I'm a lot less convinced by your other two points.
I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.
And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
The (flawed, but not entirely) idea of buybacks and dividends is that they also achieve the function of getting cash out of the hands of big corporation managers. When that cash ends up just sitting in another bank account of a rich person (or in a yacht) that is a shame, but it is its own problem for which there should be different solutions, but when that cash ends up flowing into other investments, that is much better than it sitting in the bank account of an already-huge corporation or being funneled into doomed business lines outside that company's area of expertise.
I would agree that an emergency fund likely would have still run out in this scenario, but I don't think that invalidates the idea of investing back in the business does it? It's just more that the caveat is debatable / easier said than done.
> And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.
Honestly fair point, I agree generally with who is allocating. I guess the question is how do you execute getting it in the hands of individuals or government for philanthropic purposes though? I wouldn't actually mind seeing a system for that where you can pay into a government controlled philanthropy fund that voters help allocate on ballots during voting but that type of system doesn't exist now, and getting it to individuals is typically limited to your employees which then just turns this into option 4 but with the likelihood that they money goes into other businesses instead of the original intended purpose.
This whole thing could just be a poll on the website or a matching campaign that customers engage with where they choose from a wide variety of sources. That's a major philanthropic activity by the business but then not allocated by the business itself, assuming the options are sufficiently ranging.
And yes, I think it just boils down to option 4: more money to individuals through employee bonuses. I trust the individuals more to support good causes than a corporation with its own agenda.
But note that I also think dividends are a good thing too, for the same reason I think bonuses are a good thing. I think it is generally better for most corporations to pass their cash onto other stakeholders. I wish it was more balanced toward employees rather than shareholders, but I think both are usually better than the corporation holding onto it themselves.
How about spending that money to provide better service?
It's not a revisionist history that virtually everyone complains about the declining level of service and increased fees.
Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class.
We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so.
Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.
Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.
5. Invest it in research
6. Buy other companies to extend your core biz.
6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.)
6c. Buy competitor and dismantle it to consolidate and reduce competition.
You mean props up the share price so board members can hoard more wealth?
There are plenty of companies that have large cash reserves.
Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.
There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.
Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.
I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money.
One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them.
I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.
When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it.
Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company.
Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion.
You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same.
The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.
The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.
The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
The shareholders would protest, and should be allowed a right of first refusal. Put in money at the same price per share to avoid dilution if you want to. Their alternative is bankruptcy, so they don't have much other options.
The idea that the airlines could issue $50B in shares is a fantasy.
Of course, that's not politically popular, which is why the government is becoming involved.
If that were true, the price wouldn't have tanked so much?
Historically this kind of deal has been profitable for governments in the cases that I know of (in banking), while at the same time keeping more jobs and thus reducing economic impact of unemployment.
https://www.businessinsider.com/saudi-arabias-sovereign-weal...
I corrected my terminology faux pax above.
Here's a link to CCL on EDGAR:
https://www.sec.gov/cgi-bin/browse-edgar?company=carnival+cr...
The filing date for the 13G was yesterday. Link to said 13G:
https://www.sec.gov/Archives/edgar/data/815097/0001011438200...
They don't really need a bailout to stay in business. The grant money for employees is contingent upon them keeping open flight routes that they'd otherwise close. Sec. of Transportation wants low traffic (small) cities to have access to medical supplies and whatnot (at least that's what she says, of course she's pro-business as well).
It's like your parents buying stock for you and promising it to you in your inheritance versus buying a stock yourself. Sure, you can say that you own the stock if your parents promise it to you(In the sense that you will benefit from it eventually), but you don't own the stock simply because mom and dad do. They can change their mind, or decide to give all the money to your awkward brother.
If their businesses are solid, sound businesses, major lenders will not have an issue with offering good terms on whatever it is that they need to bridge the gap.
Other than a firm understanding of what that gap is, am I missing something obvious which makes bank loans not the go to solution here?
You have lots of options to get better service - economy plus, priority boarding, buying food onboard that you no longer get by default. And of course upgrading to business class.
All these things cost more and you could either pay for it by default on every ticket like in the old days, or you can purchase them separately. Consumer demand has overwhelmingly indicated a preference for the latter. Sure the airlines could lower their margins and drive down prices on these things for customers slightly. We'd be in the exact same situation now though without any cash reserves so I don't see how that would have helped.
Also the prices don’t go down when oil prices do.
If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why should we have to fix their mistake?
Yes. When you have a business in an industry that is in the political or regulatory eye, you should prepare. This is historical prudence.
> this is a teachable moment > No its not.
I would treat it as such and that's the problem, isn't it? The model didn't become illegal, it became impractical for an extended duration of inactivity. This isn't an unexpected natural disaster, it's a rather regular event. Something something The Ant and The Grasshopper. Maybe another incarnation will show better judgement by holding more reserves and point backward.
The inability to consider history is a trend of the USA, politically and commercially now.
"MBAs think companies make money. Companies make shoes."
When you abstract the details away again and again and again, eventually you forget that the details exist and matter.
No. People make it sound like they were buying back their stock as they were not using that money to increase worker salaries and benefits. Nobody would complain about necessary bailouts if the organization shared profits with its laborers instead of lining executive pockets.
The best thing we can do is let them and their bad debts die. We have private bailouts they're called acquisitions.
Maybe a smart airline should. Because people have been issuing warnings about a possible pandemic for many years.
A business that operates as if it's always going to be sunshine and rainbows is not a properly run business.
Aren't there a number of companies that have been hoarding cash for some time? [1]
1. https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet...
This is the same as scolding a child hitting their sibling and then giving them a fucking cookie. Then when they keep hitting people, at least have the sense not to be confused why they don't learn.
The people American Airlines employ to predict future risks to the business.
Their SEC filing:
> Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:
> • outbreaks of diseases that affect travel behavior
> In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior.
https://americanairlines.gcs-web.com/node/37211/html#s1E0EED...
You really don't have to look too far in the history of the airline industry to see examples of black swan events.
Independent of the COVID-19 pandemic, I can think of at least two other scenarios that would destabilize the revenues of airlines:
(1) A catastrophic airplane crash that disrupts air travel and/or changes consumer sentiment towards airline safety. Consider that US aviation is in an extended safety streak and most Americans cannot quickly recall a time other than 9/11 when an airplane crash resulted in death.
(2) A change in the price of oil that drastically alters ticket prices. This is not likely given the current climate and the mitigation that airlines now undertake vis-à-vis oil futures, but a plausible scenario nonetheless.
Given that me, a random guy that knows fuck-all about airlines, can come up with 2 scenarios where revenues are disrupted without any foresight, it begs the question whether the airlines are acutely aware of their "too big too fail" status.
It seems their preference to enrich executives and shareholders all while hedging against any catastrophic events with a government bailout should be on par with 2008-era financial misconduct.
Prediction: Airlines will receive a bailout and face little repercussions for their poor planning.
That just isn't right, for a number of reasons.
First, the 50 billion applies to the entire industry, so the "emergency fund" of an individual company is going to be much smaller. Imagining an airline holding 1 billion in a buffer, rather than using it for stock buybacks, isn't that far-stretched.
Second, 90% loss of revenue isn't the problem, it's how long this revenue stays down that is the problem. The FAA closing the skies for a week should not be a problem, a month is going to be a huge problem, and a quarter might already be fatal.
Third, preparing for such scenarios is commonplace in the financial industry, for example. (I have a sibling comment regarding that). Banks are now expected to be resilient enough to survive another another 2008-like crisis on their own, without taxpayer-funded bailouts. And these expectations are not merely high-level, there are entire hordes of specialists, both in banks and with regulators, that do nothing else other than model various scenarios.
Market downturns tend to happen at semi-regular intervals. It's been 12 years since the last one.
> People make it sound like they were buying back their stock as they were cutting flights and laying off employees.
No but airlines were absolutely cutting the quality of their services. They bought back stocks at the expense of passenger comfort. Anecdotally, from 2015-2019 each flight I took was less pleasant than the last. When I travelled in the summer of 2019 our flight did not have vomit bags. Guess what? Two passengers vomited on the approach. All over the seats. Speaking of the seats, they were so uncomfortable that I actually injured my back as a result of sitting in them.
> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
It is absurd under the incentives that business operate under. It's also absurd that businesses can operate until the point of bankruptcy, stranding passengers like what happened when Thomas Cook went under last year. https://www.nytimes.com/2019/09/23/travel/thomas-cook-airlin...
> I really hate that this argument keeps popping up.
I think the reason this keeps coming up is because regular people are feeling extremely frustrated at the moment. Average people are told they should save for a rainy day. I did and now I have the privilege of spending down my rainy day fund while the airline industry expects a handout for not doing so.
> The reality of the situation is that these airlines employ a lot of people and enable even more commerce and economic activity through their operation. You can disagree with a bailout all you want, but if they go under, the economy most likely suffers by a lot more than $50B.
Perhaps some of the impact can be mitigated by taking a portion of $50B and putting it in the pockets of the employees who will lose wages instead?
That doesn't mean that this time we should let them sink, but perhaps there do need to be some strings attached. Airlines do just lurch from one crisis to the next, and we can't afford to lurch from one bailout to the next with them - else we may as well nationalise them.
This needs to be equally true with large corporations, otherwise contracts lose meaning.
Here's what Matt Stoller has to say about buybacks and bailouts in general:
Fundamentally, mergers, buybacks, and excessive executive compensation are about stripping out resiliency in return for cash, and the lobbying is the political machine to protect the ability to do that. So what to do? The answer is pretty simple. Stop hidden risk pooling.
Financialization and private equity is about loading up corporations with hidden risk. We cannot afford that anymore. So here are the conditions to put on large corporations who need cash from the government:
-No bailouts for shareholders. Shareholders took the risk and upside, they should get the downside too. A bailout means the stock value goes to zero.
-No more buybacks ever, and no more dividends for five years. It’s time to stop asset-stripping, and restore the cushion inside corporations so they can invest in production.
-Strict executive compensation limits. No more get rich quick schemes and golden parachutes. We need long-term leaders focused on building institutional strength.
-No more lobbying, as well as limit public relations spending. The Housing and Economic Recovery Act of 2008 killed the ability of Fannie Mae and Freddie Mac to lobby, and that killed their political power. By contrast, Wall Street got bailouts with no strings attached, so they largely wrote the Dodd-Frank bill. (I was there, I saw it). Don’t repeat this.
-No more mergers and acquisitions for five years. If you get bailouts, you have to run your business as a business, not as an acquisition target. I can imagine an exception if the business fails as a stand-alone, but exceptions need to be very narrow.
I'm not sure what you mean by this, but if companies are going to hold large amounts of cash, it would be fiscally irresponsible not to seek the best possible tax treatment for it within the law. If people think it's inappropriate for companies to hold cash overseas, those concerns should be addressed towards lawmakers.
Banks are vital middlemen between many parties and as such, were already heavily regulated back then, but after the massive tax-payer funded bailouts, regulation went into overdrive.
For example, Banks are expected to survive short- to mid-term dire periods. However, the 2008 crisis showed that most banks were not in that position. So the regulators went into overdrive and regulated most of the weak spots they had identified, and (IMO) most importantly, really stepped up stress tests. Banks have to demonstrate that they can survive interest rate shocks, market crashes, political crises, etc. for a certain amount of time.
And these things get audited extensively. A friend of mine works at a bank under direct ECB oversight, and the sheer amount of data, models, simulations, etc. they need to produce is just staggering.
Perhaps it is time to apply some of these methods to other industries that might only survive with a taxpayer bailout. For example, a global pandemic as we are experiencing right now, is not exactly something that was unimaginable before.
Airlines could be expected to maintain contingency plans for such scenarios, and required to maintain appropriate financial buffers, with stock buybacks, dividends etc. forbidden as long as those buffers are below the levels required by those scenarios.
I feel as though the problem here is that we can't survive losing some of these companies. "Too big to fail" is the problem. There's so little diversity in these ecosystem that losing one company is an economic disaster.
Maybe the regulations around these sorts of things ought to just apply to any company that represents more than X% of a given industry, or any company worth more than Y% of the entire stock market. And these don't even have to be big X and Y values. If you're that big, you've grown beyond being just a simple company and you've become an integral part of society that must remain functional.
Go even further: tax those companies that meet these standards an extra small amount, and then reduce the taxes of their smaller competitors by the same total value. Incentivize competition to increase the diversity, so that there aren't many companies we can't afford to lose.
I don't own airlines stocks, but when a company where I am a shareholders does a stock-buyback with excess cash I am v=so very happy.
I am OK with banning stock buyback during the period between bailout and full repayment of the loan, but what happened before of after the loan should not be part of the argument for the bailout.
There are no bad politicians, only bad voter.
We could make it illegal, but that seems like it would favor people who want to do corporate takeovers. Also, I've seen legitimate uses of stock buybacks, such as buying it back to give it as a grant to new employees.
We could limit the amount bough or spent, or require that some percentage of stock's bought back be re-allocated to employees as grants or options.
I'm not an economic person though, just spit-balling.
No, I don't think that's obvious. Buy-backs are used that way, sometimes, but they're also used by companies that are doing well to return some money to the shareholders.
Why would they do that, when they could just issue dividends? I can see at least two reasons. First, dividends require one transaction per stock owner, whereas buying stock has much less overhead. Second, dividends create an expectation that you're going to continue to issue them, which is an expectation you may not wish to create.
Given that issue with your starting position, I don't think your conclusions are valid.
> The reason that I'm harping on share buybacks is that in theory, money for them is supposed to consist of cash that's surplus to the companies' needs. But in the real world, companies frequently borrow money to help fund buybacks. That works great to prop up their stock prices - until one day, there's a problem.
I've been told by corporate accountants that this is a huge misunderstanding of how corporate finance works. Companies borrow money all the time for everything, because sitting on cash is the equivalent of slowly losing it.
* there's a structured process for when a company can't pay its bills but is possibly viable in the long run if it can restructure its obligations called Chapter 11. The airline industry has tons of examples of companies that continue operations through chapter 11 proceedings and end up as profitable on the other side. I don't see why that process is suddenly off limits today. It would require equity holders (and likely some liability holders) to take a haircut, but I'd argue investors knew the risks they were taking given the history of the airline industry.
* if the $45B was returned to shareholders in the form of dividends, would that be somehow less evil? I keep seeing articles citing share buyback numbers, but the whole point of publicly traded companies is to return capital to shareholders.