This week, industry after industry has approached Congress asking for tens of billions of dollars in bailouts to help them weather the COVID-19 pandemic. Perhaps the most egregious requests came from the airline industry and related fields. Airlines for America, a lobbying group representing American Airlines, United, Delta, and Southwest, asked for $50 billion in loans and grants, which would not require eventual repayment. [CNBC] In the economic relief package passed by the Senate, they get the full amount.
The planned bailout of the airline industry, which President Trump has indicated is a priority, is ludicrous because airlines have engaged in risky and shortsighted corporate behavior with regards to its use of its profits. The airline industry has been unusually profitable in the last decade. In 2015, U.S. airlines made almost $25 billion in pre-tax profits, and they reported their tenth consecutive profitable year in 2018. [Bureau of Transportation Statistics] Despite these profits, airlines have unnecessarily carried debt to facilitate capital expenditures like new aircraft. At the end of 2019, the same four airlines that requested the bailout held combined debts of over $75 billion. [Bloomberg] While the airline industry does require rather large capital expenses, the extent to which airlines have indebted themselves is not necessary considering their operating profit, and some airlines have more debt than others. American Airlines holds the lion’s share of U.S. airline debt, having borrowed $33.4 billion, while Southwest, which tends to buy its aircraft outright, holds just $4 billion in debt. The contrast is starker when one considers that the two airlines made exactly the same amount in pre-tax profit. [Bloomberg]
These two numbers beg the question: if they weren’t using their profits to avoid going into debt, what exactly were the airlines spending their profits on? The answer, indisputably, is that they spent it all on stock buybacks. Over the past ten years, the six largest American carriers have spent 96% of their profits buying their own stock in order to increase the price. [Marketwatch] This is good for investors, as it removes stocks from the market, increasing the earnings per share and the resale value of the remaining stocks.
However, stock buybacks are not in the long-term interest of the company. Their opportunity cost is that the company isn’t spending its profits reinvesting in their business. American Airlines, for example, could have spent their profits buying aircraft outright rather than leasing them or taking out loans, the long-term cost of their fleet would be lower. It would cost more initially, but that would have been okay because they were profitable back then. Had they done that, their current expenses would be lower and they would thus be better situated to survive the economic downturn.
Notably, investors are not the only ones who stand to benefit from stock buybacks. Executives’ compensation is largely tied to their companies’ performance in all industries, but before the coronavirus pandemic, airline C.E.O’s were so confident about their stocks’ performances that one even chose to be compensated entirely in stock options. [Wall Street Journal] Incidentally, that one C.E.O was Doug Parker of American Airlines, which has spent the most on stock buybacks of any airline in the past decade, despite having the worst-performing stock and being the only of the top six airlines to turn a cumulative loss over the ten-year period. [Marketwatch] The reason that executives love stock buy-backs despite the damage to their companies is that they stand directly to benefit from them. In other words, they’re incentivized to buy-back stock because they personally stand to gain from that decision. It is for that reason that stock buybacks were illegal until the Reagan Administration. When buying back stock means taking on a mountain of unnecessary debt, it is not in the long-term interest of the company, but C.E.O.s don’t last forever, so that doesn’t matter to them. They would much rather pump up the stock price in the near-term and make a quick buck (or quick tens of millions of bucks, actually) for themselves.
When they chose to buy back stock rather than avoid debt, airline C.E.O.s were taking a massive risk with regards to their companies’ futures. If they fell upon hard times (and they have), they would be stuck with avoidable debt. The airline industry was entirely aware of the risk they were taking when they repurchased so much of their own stock. Yet, it seems that they anticipated that somebody else would come to their rescue when their decisions inevitably backfired, and Congress is about to prove them correct. By agreeing to bail out the industry, Congress would be setting a precedent that the government is willing to come to its rescue when its risk-taking backfires, incentivizing such foolish behavior in the future. While the airline industry faces tough times, with net bookings (bookings minus cancellations) becoming negative in recent weeks and airlines grounding large portions of their fleets, the airlines themselves declined the opportunity to prepare themselves for this situation. Had they engaged in responsible corporate behavior in the good times, they would have been better prepared for the bad, with rainy-day funds and smaller debt burdens.
The airline industry will undoubtedly argue that if the government doesn’t bail them out, their workers will suffer. This is true, and pilots and flight attendants shouldn’t have to pay for their bosses’ poor decisions. Yet, if the government helps workers by helping their companies, it will inevitably embolden the executives. The airline C.E.O.s are much more interested in being bailed-out than their worker’s financial security. After all, if the welfare of their workers were of concern to them, wouldn’t they have treated them better when they had the money to invest in their workforce, rather than choosing to further enrich themselves? So why not help the employees of the airline industry the same way as other workers, through initiatives such as the tax refund included in the economic recovery legislation? The suggestion that employees of the airlines should be taken care of more than anyone else or that the only way to save them from ruin would be to bail-out their companies is simply a helpless plea for the industry to receive undeserved aid.
Congress’ bailout plan would not only incentivize risk-taking in the future but also force taxpayers to care for the airline industry’s self-inflicted wounds. The primary beneficiaries of the stock buybacks were executives and shareholders, so it is right that they should bear the bulk of the long-term costs. It is simply unfair to ask the average American to pay $200 (each person’s share of the cost of just the airline bailouts) out of their own pockets in these economically difficult times to cover the costs of the airline industry’s risks, when the general non-stockholding public was not able to benefit from the industry’s success in better times. While nobody could have foreseen the exact challenge that the world faces, the airline industry declined to ensure its long-term health, instead racking up debt in order to allow shareholders and executives to profit immediately, desperately hoping that someone else would be in charge when the chickens came home to roost. If Congress saves them from the mess they made, they will be emboldened. If the American taxpayer is forced to pay the price for the follies of the rich people who created this problem, this will happen again.
So let the airlines suffer; let them feel the pain of their self-inflicted wounds. Let the shareholders lose their money. Let every airline in America declare bankruptcy; they’ve done it many times before and emerged alive. This needs to be a crisis for the airlines, lest they repeat their mistakes.