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.
Congress is not qualified to discuss corporate buy backs. They can’t even control insider trading or the passing of information from within the congress to friends and family. So they should not be discussing corporate buy backs by the airlines.
If they really wanted that it would have specifically said so in bail out package
A quick look at the September 29 letter reveals that all the members of ‘The Squad’ and their left-leaning colleagues signed it. That’s enough to support the airlines in their buy-back.
@Frank “A quick look at the September 29 letter reveals that all the members of ‘The Squad’ and their left-leaning colleagues signed it. That’s enough to support the airlines in their buy-back.”
Thank you for your rigorous analysis.
70 congresspeople represents 15% – so not exactly a majority.
And well-run airlines will pay down debt as a priority; Delta is already doing the most followed by Southwest.
“So dividends/buybacks move the cash to more productive places – that is good for society because it means money invested in productive, innovative businesses.”
For this to be true, the stockholder would first have to liquidate their now-more-valuable shares, and then decide to invest directly in another business. Because so many investors simply allocate funds across various secondary markets (e.g., all publicly traded stocks), the buyback does not necessarily represent any investment in any new productive business.
Furthermore, even if the investors liquidate their airline stock and choose to not reinvest in some other stock, they may take the gain and consume in marginally productive ways, such as bidding up the price of already-existing art, real estate, wine, cars, aircraft, or other consumption. This makes little to no difference to society.
“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”
Members of Congress are ignorant about most things, except perhaps winning elections (and in a mont we’ll find out that some of them aren’t even good at that).
The left lack abt coherent policies so their rely on their grievance politica, i.e. blm, lgbt and class war nonsense. This is part of it, anyone with any education knows these people have no jurisdiction over how a company operates in this way but it plays to the “capitalism is bad crowd”.
Every single signatory a Democrat. Just pandering to their union member base.
A meaningless display of politics.
Just waiting for the mid-terms and the incompetent Left losing the majority.
The Left complains about Trump, but that administration didn’t drag our country down the way the Biden administration has. Total and complete failure at every level.
Let’s not forget that the Trump airline bailout was to transfer money to airline CEOs, not to save the American people from having terrible service! Resumption of stock buyouts, which is the #1 way CEOs pump the price of the stock they are given for free by the company and upon whose price their bonuses are set, was built into the Trump plan from day 1. How dare Congresspeople disrupt the grand plan, even if it’s because airlines completely failed the American people post-pandemic?
What happened to the Trump era’s corporate socialism and the ability of corporations to take advantage of Americans?
@Luis: “Let’s not forget that the Trump airline bailout was to transfer money to airline CEOs”
Authority for that assertion?
Gee, here I was thinking it was to keep the airlines flying since it is an essential industry.
Foolish me.
“How dare Congresspeople disrupt the grand plan?”
A letter from a few hacks pandering to their base is disrupting? I think not.
“even if it’s because airlines completely failed the American people post-pandemic?”
How so? They are still flying, aren’t they?
“What happened to the Trump era’s corporate socialism and the ability of corporations to take advantage of Americans?”
I thought we lived in a capitalist society.
Despite your efforts to turn us into a socialist economy (every one of which has failed), it won’t happen.
You are going to hate the results of the mid-terms. And you don’t even see it coming, do you?
I’m surprised they care since it’s harder to predict stock swings to benefit Nancy’s husband with stock buybacks. Seriously this is just virtue signaling for union votes before the mid-term elections. I’m surprised Durban hasn’t introduced some bill prohibiting airlines from doing anything the unions don’t like.
@Luis – airline bailouts were bipartisan, passed by a Democrat-controlled Congress and then the third bailout was under the Biden administration.
My observations:
– Even a strongly worded letter by the squad or others won’t mean much! Pro-people pro-passenger legislation OTOH might do the trick.
– Most Democrats & ALL Republicans are corporatists and beholden to their donor constituency, the corporations and the donor class. The squad and other progressive Dems are subordinate to Pelosi and her corporatists wing of the Democratic party.
– Many airlines used much of the bailout funds as incentives to entice older and more expensive pilots to retire, and, thus, enhancing their bottom line. Stock prices went up and accordingly executive pay (what Luis is alluding to). This buy-back was one of the reasons that caused most delays/cancelations throughout the summer. Bad for the traveling public – but who cares, right!
– Other than enhancing executive pay, this stock buy-back won’t do much to alleviate what always inflicted the airline industry (delays, cancellations, shitty service, etc.).
The rational thing for airlines to do is use all available cash to buy back as much stock as possible while their share prices are near pandemic low levels. Then, just ask Congress for another bail out! They better do it quick though. When the Dems lose Congress in the midterms, the union pandering will moderate and it may be harder to gets billion$ in free money from taxpayers,
@Kalboz: What airline stocks went up during the pandemic?
kalboz,
your observations are incorrect.
Bailout money paid for SOME but not even all of payroll expenses to keep hundreds of thousands of airline employees on the job, even if they sat at home but still receiving checks.
The ENTIRE reason for payroll support was to keep high paid airline employees getting paychecks from their employers.
THAT WAS ACHIEVED.
You need only look at the mass layoffs post 9/11 to realize that the government achieved what they intended wrt airline employment.
People like you make the comments you do because you neither know history or can read airline financial statements.
Airlines borrowed money to offer early retirement. They have deep debts as a result of running their businesses even with about 70% of payroll costs covered by the feds.
@Tim Dunn – you are being incredibly misleading.
1. The first bailout (CARES Act) did make a difference in employment. I’d still argue it wasn’t worth it, but it’s true that many people would have been furloughed (union) and laid off (non-union) without a huge injection of government cash. Airlines would have rationally downsized. Instead we paid airlines to keep everyone employed at home, and airlines flying skeleton schedules.
2. By the time of the second bailout we knew the upper bound of the number of employees at risk of furlough, because airlines actually did furlough employees, and airlines were beginning to recover somewhat and talk about bringing people back. The number of jobs at risk by the time of the second bailout was under 50,000. Paying *those* employees would have cost ~ 15% of the bailout cost.
3. Virtually no jobs were at risk by the time of the third bailout.
The bailouts buttressed equity and debt, using employees as a fig leaf. Union leaders sold the fiction that this was about jobs because they didn’t want airlines renegotiating labor deals in Chapter 11.
The early retirement deals were contrary to how the bailouts were sold – keeping all employees connected to the airline and ready to fly when travelers returned. Paying employees, especially pilots, to stay home rather than stay current was similarly contrary to those deals and directly contributed to operational meltdowns (including at your beloved Delta).
Airlines both borrowed money and took government cash but claiming that it’s the borrowed money and not government cash funded the buyouts is pure sophistry.
By and large all the recent share buybacks are/were financed by borrowing, at historically low rates. Don’t believe any dodgy propaganda about how “It’s money that already belongs to shareholders”. It isn’t, it’s newly borrowed money, or money that could have been used to repay debts… perhaps even to repay taxpayers like you and me who provided bailouts.
@Luis
By every metric things were better under trump. Every single metric
Maybe Congress should act like custodians of public funds and, oh, I dunno, maybe quit bailing out the airlines? Let one actually fail and the rest will figure out how to run a profitable customer focused airline real fast. Instead, I’m absolutely sure the next time an airline begs for handouts of taxpayer money, Congress will fall all over itself to cut a blank check with no strings attached.
@Babblespeak, Agree with let one fail. Delta CEO Bastion has crossed the line when he and other airline CEO”S WENT WOKE, caring more about ESG than doing right by the company shareholders. These Board Of Directors need to remove stock price performance from C-Suite compensation and bonuses that are raised by these buybacks of shareholders stock. Read the book titled AIRLINE WITHOUT A PILOT, DISGUSTING what they have gotten away with. Look close at what DAL has done since declaring Chapter 11 in the mid 90’s, Then the NWA merger (BUYOUT) followed by the COVID-19 bailout that stated NO layoffs. Delta got around that by reducing employee hours and then demanding restrictions on worker’s social media posts to the point of Termination for violation. IT’S A SHIT SHOW. Major changes are needed at the CEO and BOD level. I’m hoping that changes come soon as my pension benefits, frozen at the bankruptcy, then changed to defined contribution (401K) with company match, plus Social Security make up my income now. It’s Delta in name only as the NWA BEANCOUNTERS are now calling the shots.
Gary,
I have repeatedly said that only the first bailout was necessary to prevent wholesale collapse of the entire airline industry. As soon as credit markets were unlocked because of the first bailout, Delta and Southwest began to pull down tens of billions of dollars in credit. Other airlnes, notably American and United, had much less access to credit and it was very likely that at least American and likely United would have filed for bankruptcy. They both also have far more unionized employees than any other airline so it is no surprise that unions went to bat to try to protect their own.
I did not attempt in response to this article between the 3 rounds of bailouts and what was used for employee salaries vs. other uses. None of the airlines was operationally proftiable by the time the 3rd bailout ended so they were subsidizing employee salaries.
The bailouts were never intended to adjust to the size of losses – which is a logical error you continue to make about them. It might have been true that it made more sense to adjust the size of each subsequent bailout to the percent of revenues that airlines were getting and their employee expenses but that is not what Congress chose to do.
Airlines did EXACTLY what Congress wrote into the law and did not do what was not permitted.
It is true that much of the money given to the airlines was not necessary but your beef is with Congress – not with the airlines.
Stock buybacks are the biggest waste of capital. They do not give money back to stockholders as the vast majority of stockholders have no intentions of selling their stock. But it really benefits senior managements’ paychecks. Any airline buying back stock has stupid financial managers who have no understanding that the world economy is now a war economy. Whether we like it or not, no matter who is President, this economy is now based upon war that America does not want to be involved in. Financial markets know this, but idiot airline CEOs seem to not care.
@Tim Dunn – “Other airlnes, notably American and United, had much less access to credit and it was very likely that at least American and likely United would have filed for bankruptcy”
And that would have been appropriate – shareholders and creditors should have taken a haircut before taxpayers!
“None of the airlines was operationally proftiable by the time the 3rd bailout ended so they were subsidizing employee salaries.”
Your analytical error here is to look at salaries against profits in a given quarter, rather than expectations of returning business and future profits. Current employment and investment decisions are based on discounted expected future income streams, and airlines were looking to staff back up by the time the second bailout passed.
“Airlines did EXACTLY what Congress wrote into the law and did not do what was not permitted.”
That airlines followed the letter of the law (that they had a hand in writing) as opposed to honoring the argument for the law is beside the point, though it is also not obviously correct.
1. American Airlines denied payments to employees that had been pushed out when PSP2 passed if those employees had taken another job
2. I haven’t validated the numbers but it appears at first glance that American may have been below the employment numbers required to qualify for subsidized treasury loans when those were taken out. I should go back and check actual employment figures on the specific date.
So, your beef is really with American – so you label the entire industry as a failuire. And I would still bet that American can argue that it did comply with the requirements of the aid they received – Congress just did a poor, I mean very poor job of specifying what they really wanted including intended outcomes.
Again, Gary, federal aid was not based on what airlines expected in the future but the losses they actually were experiencing. Remember, just two weeks to flatten the curve turned into 2 years of flattened demand. Airlines and other profit-motivated companies do make short-term decisions based on medium and long-term expectations but no one had any idea what to expect for covid. By the time round two was announced, the industry looked very bleak once again because polititicans decided that trying to control the disease (which ended up not being successful anyway) was more important than harming children and the economy and throwing trillions of dollars at “solutions” which the free market could have done better.
I think we’re pretty much on the same page that aid to the airline industry was largely a waste of money and it prevented the free market from doing what it should have done which was to weed out legitimately unproductive capacity while also creating distortions that will never be fixed. Because of high costs – some of which were created by federal aid, the ultra low cost and low cost segment is a severe disadvantage to legacy carriers that will undo years of progress in deregulation.
There will be lots of post-mortems on covid but one of the more sobering will be on the airline industry not just in the US but worldwide. Some airlines will adapt and win – largely Delta and Southwest but they were already winning before covid – while consumers will be the biggest losers as capacity falls and prices are higher, reversing years of decline.