After taking over at American Airlines, management spent $12.4 billion buying back stock over a six year period at an average price of $39.76 per share. Now they’re facing over $40 billion in debt and looking for a second government bailout this year.
At an internal Crew News session at the end of last week, a pilot asked the airline’s CEO Doug Parker if the airline is able to claw its way back, whether he’d change the way the airline is run – paying down debt instead of buying stock?
- At a macro level stock buybacks aren’t different from dividends, just more tax-efficient
- They’re actually good for society – they take money from unproductive businesses without an opportunity to invest for a strong return, and make the money available for investors to put to better use.
- But American Airlines become as much financing instrument as airline, borrowing billions of dollars while buying back billions in stock.
Parker answering the pilot by explaining his September 2017 claim that American Airlines would never lose money again, saying that he wasn’t foreseeing an event as severe as what they’re experiencing, but suggested that their financial decisions made sense against the backdrop he expected – one in which they’d even still make money in a crisis like the Great Recession (he doesn’t explain why, but it’s the credit card revenue not the flying).
He then suggests they made billions of dollars in profit, and invested heavily in the company from aircraft to facilities, and then they had money left and bought back stock. He says they borrowed for the aircraft “because it was really efficient borrowing.”
Despite profits, though, American Airlines had negative free cash flow. They were borrowing money and giving cash to stockholders. They were in effect buying back their stock with borrowed money. and Parker explains it as being because interest rates were low. He turned American Airlines into a financing company that flew planes.
Before the Covid crisis American was financially underperforming the industry. They earned lower revenues for their flying (having chased away their frequent customers) and had much greater capital expenses.
Now it’s precisely that borrowed money that’s the problem, rather than the buy backs per se. The debt burden is why American is the airline with the greatest risk of not paying back its unsecured creditors. The airline has $40 billion worth of debt, even before adding government-subsidized CARES Act loans they plan to pledge the AAdvantage program as collateral in order to get.
Copyright: rido / 123RF Stock Photo
Parker had planned to pay down debt with profits if Covid hadn’t hit, and that’s what they’ll be doing going forward. He still believes stock buy backs were the right thing to do at the time, even notwithstanding the the airline’s stock price had been languishing below the price they paid to buy back stock prior to the pandemic.
His poor market timing aside, I think it’s fair to say that there’s nothing inherently wrong with stock buybacks – it’s borrowing money for buybacks which put the airline in a hole, along with heavy capital expenditures on planes and a new billion dollar headquarters.
In related news, I still think that Doug Parker is a really bad CEO.
How does Parker keep his job? After 6 years I can’t believe Parker is still there. The guy should have been fired years ago!
Before getting rid of an employee, there needs to be a good replacement; maybe none is available?
Buying back stock is perfectly fine. Shareholders, bondholders, their bankers, directors, employees, and retirees just have to be prepared to go bankrupt in an instant if things go bad, as they do, predictably, every 9-13 years. 1973/4, 1987, 2000, 2008-9, 2020… Like clockwork.
The problem is not the buybacks. It’s that guys like me who are blameless have to get their ass taxed off for the backstop if things go south. Screw that.
There should never be a bailout of any US company ever, EVER, under any circumstances. Then there is no problem. The bosses would have to plan for all contingencies.
Let competent people buy up the assets and proceed.
The problem is not with buybacks themselves – if they can’t find a way to productively use operating profits more than a buyback, then fine.
The problem is when you borrow money to buy back stock – then you’re not making a decision that you can’t invest a dollar of operating profit more than buying back; you’re having your cake and eating it, too, by using dollars of profit you haven’t earned yet to serve a pretty low productivity purpose in the current time. (I view borrowing to pay for aircraft vs borrowing to buy back as the same, since money is fungible — AA would unquestionably be in a better financial place today if their planes were paid for.)
Then the problem is when you make poor decisions and expect the taxpayer to bail you out.
How many shares did Dougie pump and sell during the buyback era? Let him bail the company out.
Doug Parker thinks Doug Parker remaining as CEO is a good idea.
No one agrees with you Doug.
Companies often get themselves into problems. Fuel hedging is one area they would get too cute and end up thinking the price would rise but then when the price declines they lose money.
Stock buybacks often are a mistake by companies. Steve Wynn, while he had other issues, often would buy back stock at low prices and sell stock (issue stock) at higher prices. He took some heat because some people said he was taking advantage of investors. That was stupid, he wasn’t forcing anyone to sell low and buy high. He was only taking advantage of opportunities given to him.
It is like people with sports. They often want to trade players when they are slumping but the moment they are doing well they want to keep them and sign them to long term contracts. Basically doing the same buy high, sell low thing.
He made a serious of horrendous mistakes that sadly he won’t be held liable for and will count his millions he has been given by the board. Ideally the board should oversee this kind of bad behavior but that rarely happens.
AA will not get rid of Dougie, because he is doing exactly what they want! Employee morale has been in the dungeon for years (as it was when he ran US Airways). Why? Because they are treated so poorly, underpaid, poor operating systems that they pay the price of, etc. They are probably glad, in some ways, that the pandemic hit when it did, since they are negotiating new union contracts right now. Hopefully the unions will negotiate contracts that has catch-up clauses for when a vaccine comes around, and if business picks up to pre-pandemic levels. Doug is cheap with employees, and that is EXACTLY what is expected of him!!!
They financed the last planes they purchased at 3.5%, so basically free. Who wouldn’t do that? Then you’re sitting around with cash that if you don’t do something somewhat useful with the analyst will rip you a new a-hole. And you have to deal with unions that are basically vampires if they see cash sitting on the books; this is not Apple. Lacking any other vision or IRR investments and not believing that you can buy any more market share with marketing and frequent flyer giveaways, you buy back stock.
Yeah, maybe you might have “invested” in your people a little more. But with all those aging Betties refusing to retire what can you do?
REALLY? Those “betties” are only a few flight attendants. Pilots are required to resign at 65 years old. You have chosen to respond to a minority of employee situations. Perhaps some of that EXTRA CASH could have been spent on keeping the employees happier, and more interested in doing a better job with customer service!?!?!?!? In addition, perhaps they could have invested in paying down their debt???????? My husband, an AA pilot, is NOT a “vampire!!!” I don’t know where you got the idea that a person who works a 10-14 hour day, after having spent YEARS as a flight instructor, earning less than minimum wage, and THEN spending 26 days a month at his base (not his choice, but the closest to home, IF they are lucky), which cost them motel bills, (that the airline does NOT pay for, despite paying them 18K/year) is a “vampire”!!!!!!!!!!! When my husband flies overseas (which is all that he has done (by choice) for a dozen years or so, he misses his daughter’s special moments, misses birthdays, anniversaries, weddings, funerals, etc…….. YOU HAVE NO UNDERSTANDING OF WHAT IT IS LIKE TO LIVE WITH THE PERSONAL CHOICE OF WORKING FOR AN AIRLINE IN A FLYING CAPACITY!!!!! Yes, it is a choice, but it is a choice for which people, who are willing to take these positions should be compensated. I spent 5 years as a flight attendant, which I loved doing, but I was paid such a low wage, (But I totally took advantage of the flight benefits -which do NOT exist any more, and was only able to do so because I had a nest egg that allowed me to do so) that the compensation was increased, ever so slightly, when Pan Am, and TWA found out that their flight attendants were eligible for food stamps!!!!! STOP talking out of your ass, until you understand the details and reality of the situation!!!!!!!!
Borrowing money through your company to buyback stock and enrich yourself should be a crime. In addition, Parkers statement last year that AA would always make a profit is a sign of exceptional hubris and irrational exuberance. When CEOs start mouthing off stuff like thhat you can be sure a down turn is not far away.
Of course this time the downturn is due to Covid, but a correction in the economy was a long time coming. The financial jugglery of the last 12 years is coming home to roost.
Also, why the hell are all these bastions of the free market the first to run to the government for bail outs. From banks to airlines, they privatise profits and socialise losses. All while being cheered on by the Reds
The reality of the situation @christina potty mouth is wages increased substantially across the board after the merger was finalized. AA and to greater extent US were paid grossly under industry standards. He changed that and even said, It would not have been possible without the merger. What I do know is a Flight Attendant with 13 years or more flying the average scheduled hours each month makes more than $60k/yr with 18+ days off per month. How many jobs offer that? It’s also important to note that 50% or more of the flight attendant work group commutes to their base from a different home city which could be almost anywhere. How many jobs offer that.