Six weeks ago union leaders called for airlines not to resume stock buybacks, even though airlines are not on the verge of resuming stock buybacks (they have too much debt to pay down, and we’re in a rising interest rate environment making it more important to do so).
Now 70 members of the House of Representatives, led by House Transportation Committee Chair Pete DeFazio (D-OR), effectively announcing that they are ignorant about public company finance, taking on the buyback issue.
Government subsidies for the airline industry came with certain restrictions on executive compensation and stock buybacks. However starting October 2022 airlines are no longer prohibited from stock buybacks. Members of Congress still don’t want to see buybacks (emphasis mine),
[W]e urge your member carriers to refrain from initiating stock buybacks when the prohibition ends on September 30, 2022, at least until air carriers are able to publish and fulfill schedules that meet demand; staff flights and key personnel positions appropriately; and return service to every community—big or small.
The airlines that are strongest financially could return to buying back shares when faced with a strong economy, moderate fuel prices, and high levels of demand. But that just means those airlines are profitable and do not have opportunities to further invest in profitably.
- If adding staff will generate a high rate of return, airlines will add staff
- If adding routes will generate a high rate of return, airlines will add routes
- If airlines do not have high rate of return opportunities for investment, sitting on cash is socially destructive
Airlines don’t always hire staff and operate routes because it is profitable to do so. They also make bets that an investment might curry favor with legislators and bureaucrats, and that doing so might yield cronyist returns later on.
It is better transfer assets from low return businesses, back to shareholders to invest in higher social return opportunities.
Stock buybacks are completely misunderstood, by the public and by anyone signing this letter.
- When airlines generate cash that belongs to shareholders they can invest it or return it. They are generally low growth businesses, and there are better opportunities for investment outside the airline. So dividends/buybacks move the cash to more productive places – that is good for society because it means money invested in productive, innovative businesses.
- Buybacks don’t even, generally, raise share price in a material lasting way. Share price includes the cash, when they distribute it the airline has both a lower value because they have less cash and fewer shares.
- Stock buybacks do not make shareholders wealthier. The cash already belongs to the shareholders. It is in the company’s account. The company distributes the cash. The company is worth less, moving the cash from its balance sheet over to shareholders (who invest it elsewhere).
- Buybacks have historically been more tax-efficient than dividends though of course there will now be a 1% tax. No one seems to complain about dividends even though they’re basically the same thing for the company (but many investors prefer them for tax-efficiency).
Whether a business is holding sufficient cash to operate (especially given mountains of debt!) is a reasonable question. Whether they’re investing their cash well and growing where they have opportunities, is important for boards to consider when evaluating management. As a congressional issue it’s either ill-informed pandemic or simply a red herring.
An honest anti-buyback take would be to acknowledge that the federal government has created an implicit commitment to continue to bail out airlines when needed (Delta’s CEO has spoken explicitly to this saying “we’ve proven that governments will be there for us if ever needed again”) and therefore requiring airlines to hold greater cash reserves to forestall this. Breaking the commitment that airlines can pick taxpayer pockets would be the better approach.