Two weeks ago the world’s airline trade association asked the European Union not to make airlines give customers refunds when they don’t fly the flights that customers purchased.
Now that the U.S. government is requiring airlines to follow the law and refund customers whose flights are cancelled that same organization – IATA, the International Air Transport Association – is complaining.
We’re deeply disappointed by @USDOT ruling on issuance of vouchers for flight cancellations due to gov’t travel restrictions. This decision risks 750,000 #airline jobs, each of which supports 13 additional jobs in the wider US economy.
— IATA (@IATA) April 4, 2020
Make no mistake, Alexandre de Juniac – head of IATA and former CEO of Air France KLM – is not acting on his own. He’s representing U.S. airlines, saying they shouldn’t be required to return cash to customers for services not rendered. And that is wrong.
- Airlines sold tickets for future travel. They took the money, and spent it. Throughout the world that total is likely as much as $35 billion. World airlines didn’t hold onto the cash until they had fulfilled their obligations.
- And now that the world has changed in an instant, and they cannot deliver the promised transportation they want to keep the money anyway.
- That’s theft. The airlines (and some sympathizers) say but they need it. That’s not an excuse. They’re already getting a government bailout. They also want the government to require customers to give them an interest free loan on top of it.
- You might object, but then the airlines will go bankrupt! That might even be true (though the government will loan them the money cheap now). Since when is it a bad thing to recognize truth? If airlines don’t have the money to make good on their commitments that is the definition of being bankrupt.
- Bankrupt airlines do not disappear. American, United, and Delta have all been through bankruptcy. They all kept flying – and flying safely. (So too did Northwest, Continental and US Airways, the latter two twice each.)
- Instead bankruptcy means that equity gets wiped out first. Stockholders take their haircut before customers. And creditors may get (partially) wiped out too. For an airline that’s a going concern, flying through bankruptcy, customers might not get refunds and might wind up instead with travel vouchers.
The airlines are asking to treat customers as though they are bankrupt without their owners having to kick in anything first. Why would they think they can get away with it?
It’s simple, really. Doug Parker was the CEO of America West and believes the defining moment of his career was getting government subsidies to keep flying after 9/11. Scott Kirby, who worked for him at the time, helped engineer their takeover of US Airways which itself got government subsidies. Parker runs American Airlines. Kirby runs United. They managed airlines through the financial crisis, where banks that bet wrong on mortgages got bailed out by the government too. Why wouldn’t they think they could go to the government again?
And the government just obliged them with a $54 billion package. When you just got a big yes, why wouldn’t you ask the government for even more?
American Airlines has been better then United and JetBlue at honoring refunds. But IATA represents American, too. (Parker is an officer of the organization.)
There’s nothing wrong with a profitable company returning cash to shareholders. That’s true whether it’s in the form of dividends or more tax-efficient stock buybacks. However U.S. airlines have served their shareholders well over the last decade. Shareholders shouldn’t have been bailed out by taxpayers, and shouldn’t receive a further bailout by customers.
Here’s data on airline financial performance and stock buybacks over the last decade (through December 31, 2019):
|Free Cashlow||Stock Buybacks|
|Delta Air Lines||$23,186||$11,430|
Airlines thought they could pull in cash, and distribute it to shareholders. They’ve even taken in cash that they hadn’t yet earned by providing flights to customers. That worked for them for years, and it continued to work until – all of a sudden – it didn’t. Business works on profit and loss, and is encouraged to take on risk and ignore customers when the government socializes those losses.
Airlines are on the verge of being partially nationalized it shouldn’t come as any surprise they’re already viewing customers like taxpayers.