DEBUNKED: Southwest’s Meltdown Wasn’t Caused By Government Subsidies Being Used For Share Buybacks

There’s a rather odd take on the Southwest Airlines meltdown, that it was caused by capitalism or, in Senator Bernie Sanders’ formulation, caused by stock buybacks to benefit shareholders at the expense of passengers.

I mean, Bernie voted for an airline bailout and he surely knows that taking Payroll Support funds included a prohibition on share repurchases. Now that the restriction has lapsed, and airlines generate cash from their business, they’ll do buybacks again. However the reference here is to stock buybacks that occurred before the bailouts so he’s being pretty disingenuous.

But there’s an important point here.

  • Southwest Airlines needed to make more investments in its infrastructure
  • And should have done that with excess cash, indeed they didn’t really have ‘excess cash’ without having made those investments
  • Funds would have been better spend addressing their IT capital deficit

But none of this actually has anything to do with buybacks. Buybacks aren’t the reason Southwest didn’t accelerate IT spend. We know this because they had the strongest airline balance sheet going into the pandemic. While they could have financed needed investment with cash that was used for buybacks, they could also have made those investments even while doing buybacks. It was simply a management error not to do so, unrelated to buybacks

Let’s not misunderstand what buybacks even do. “Enrich wealthy shareholders” is far from the correct framing.

Businesses with cash that they can’t productively invest to earn high rates of return should not be holding that cash. They can pay dividends or buy back shares. Buybacks are more tax-efficient. The money then gets invested in companies that have a better opportunity to earn returns. And it is better to transfer assets from low return businesses, back to shareholders to invest in higher social return opportunities. Stock buybacks are completely misunderstood.

  • When airlines generate cash that belongs to shareholders they can invest it or return it. Airlines are generally low growth businesses, and there are usually 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, though, don’t even generally raise share price in a materially lasting way. Share price includes the cash held by the company. When they distribute the cash the airline has a lower value, because they have less cash. They also have fewer shares.

  • Stock buybacks literally cannot make shareholders wealthier. The cash held by the company 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).

So what possible benefit can there be to the company? Why do analysts get excited by buybacks? Buybacks might trick investors by making per-share numbers look better, but ‘tricking investors’ is the opposite of what Sanders is concerned with.

Buybacks might briefly increase demand for shares so there might be a temporary trading bump. There may (on rare occasion) be some self-service here on the part of executives timing their own awards and sales. But that’s about executives taking advantage of shareholders, again where shareholders are the victim.

And buybacks can signal confidence in the business’s prospects, since they do not need the cash. That’s former American Airlines CEO Doug Parker describing the company as effectively an annuity, generating an average of $3 billion in free cashflow each year, and promising they’d ‘never lose money again’. Again, fooling investors!

Whether a business is holding sufficient cash to operate is ultimately 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 an issue for a Senator, however, it’s ill-informed nonsense.

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 might make sense.

In other words, Congress might have to require airlines to hold cash because Congress itself is dysfunctional and can’t resist shoveling taxpayer cash into airline coffers. Of course breaking the commitment that airlines can pick taxpayer pockets would be the better approach.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. There is a related fallacy that i have heard repeatedly (including on Fox News, shame on you): the $7 billion that WN received as part of the Covid package rewarded shareholders. I assume it went to pay salaries of employees (the intent) – is there hard evidence of this? I suppose indirectly it did benefit shareholders because otherwise WN would have been bankrupt thanks to government action (shutdown). But at the time the government was throwing money at every possible beneficiary (I received a small PPP loan to pay my employees).
    Your exposition on share buy-backs is spot on.

  2. Bernie has shows time and time again he doesn’t have a clue about what he’s talking about especially when it comes the economy and reality. The only people who listen or care what he has to say are unemployed basement dwellers and college kids thats paid for by their mommy and daddy.

    Most people eventually grow out of their edgy marxist phase. Bernie hasn’t.

  3. Bernie is a moron. He’s an embarrassment, clearly his mental faculties are failing. He needs to be ran out of U.S. Senate, which used to be a place to be proud of (greatest deliberate body and all that). No more, unfortunately.

  4. So Bernie is against borrowing tax dollars to pay for welfare. That is refreshing for a liberal. Maybe he should start flying coach instead of first class for research.

  5. Southwest spent $5.6bn on share buybacks, money which obviously should have been used for improving technology – that’s not controversial surely?

    And Southwest got a handout of $7bn after they just bought $5.6bn worth of (their own) shares ? If I were a US taxpayer I’d be furious and asking why, if they’re suddenly desperate for cash, why can’t they sell those shares instead?

    As to the ethical question if it’s right for a company to buy its own stock, what happens if they buy all of it ? Does the company disappear up its own a-hole?

  6. The $5.6 bn and $7.0 bn are not connected. As Gary points out, stock buybacks are a way of returning excess cash to shareholders. The $5.6 bn was returned in the 3 years prior to Covid.
    The market value of LUV (WN symbol) in 2019 prior to Covid was close to $30 bn. They could have gone for a leveraged buy-out and gone private I guess, though why is a good question.
    A more important question that isn’t being asked is why a) management b) the board and c) the auditors didn’t investigate their systems or dig into the prior melt-downs.

  7. Congress delegated to the Administration the handling of the details of the bailout; that’s what an administration, quite literally, does: it administers. You don’t want Congress to do that, and the founding Fathers knew it when they delineated powers in the Constitution.

    But the crony swampy Trump administration instead of managing the bailout, they just gave out cash with no string attached.

    And they grifted taxpayers with the airline hell of 2022.

  8. Not much of a “debunking” at all, as the reasons for Southwest’s meltdown are well understood. In fact, the meltdown had nothing to do with stocks, bailouts or even money per se.

    Bernie Sanders is not an economist, so it is silly to pay attention to him on the WN meltdown. Instead, turn to Paul Krugman — a liberal like Sanders but winner of the 2008 Nobel Memorial Prize in Economic Sciences — who penned an excellent opinion piece on the meltdown a couple of days ego:

    Learning From the Southwest Airlines Fiasco
    Surprisingly, it wasn’t mainly about greed.
    By Paul Krugman

    While still on the site, I recommend that you check out another explanatory piece:

    What Caused the Chaos at Southwest.
    While carriers like Delta, American Airlines and United bounced back after severe winter weather wreaked havoc on holiday travel, the low-cost carrier canceled thousands of flights. Here’s why.

    The short of it is that the meltdown was caused by a spectacular failure of the point-to-point (WN) model as compared to hub-and-spoke (AA, DL, UA) model, and by WN’s problematic and outdated IT system.

  9. Neither Congress, the media, nor the public have apparently learned from the prior fiascos at GE, Enron, and currently, Amtrak: Southwest, like Amtrak today, fails due to the lack of stewardship by an experienced Board capable of demanding accountability from management.

    Without the requisite relevant experience evidenced by the Board, management has no guardrails to be concerned about. In the case of Southwest, it’s painfully evident that management elected to push off the vitally required improvements in system upgrades, either to manipulate Wall Street, build a larger nest egg for bonuses, or, for whatever short-term thought.

    To appreciate the importance in transportation of an involved Board that is tuned in and can provide relevant stewardship, just look at how pathetic Amtrak has become, drifting about with no meaningful perspective how to operate a national passenger rail system. Lacking hands-on, in-depth railroad operational experience, Amtrak’s corporate management, composed of airline-types, persistently makes the wrong decisions, with no relevant Board to check-and-balance such novices. This explains why:

    1) Amtrak laid-off, furloughed, or bought out seasoned employees in operations and maintenance.
    2) Without experienced maintenance temporarily idled equipment could not be maintained or repaired and ready to resume service post pandemic. To this day, Amtrak has taken delivery from Siemens brand new cars that are sidelined until Amtrak can build-up its maintenance force.
    3) Consequently, Amtrak to this day cannot operate a complete train without bumping passengers with reservations; as well, has to cancel actually scheduled trains.
    4) Despite such a significant loss of revenue, Amtrak’s corporate management did not suffer from a loss or reduction in bonus.

    Note to Congress: Southwest, Amtrak, et al cannot be allowed to make such incorrect decisions that impact the public. Who would run their company like this?

  10. @M.E. Singer — Management/accountability was not the problem in this case. We should remember that until its meltdown, Southwest was pointed to as the model of a successful low-cost carrier.

    Ironically, the biggest contributor to the meltdown was precisely what had enabled WM to be successful until it choked: its point-to-point model, which shortened trips, thus lowering costs for both the airline are travelers, by flying directly from point A to point B, rather than going through a hub (point C) like the other airlines (the so-called hub-and-spokes model). The failure of the point-to-point model became crippling because it exacerbated for the carrier’s problematic IT system, leading to a domino effect…

  11. That’s not the way I’m reading Bernie’s comment. I don’t think he’s saying that the bailout & buybacks CAUSED the meltdown. I think he’s pointing out WN’s hypocrisy, contrasting, on the one hand, the way WN asks to be treated by the government and does treat their shareholders, with on the other hand the way they treat their passengers. He’s saying there’s a double standard.

  12. @DCS

    Paul Krugman. Right. Hahahahaha.

    Here’s a piece of his brilliant insight from a couple decades ago:

    “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

    And that the stock market would never EVER be higher than on the day of Trump’s election.

    And a bunch of other things. Hahahahaha.

  13. Maybe Southwest should have used the $7 billion to purchase software from another capitalist company that would then in turn use that cash from Southwest to buy back their own shares. Or they could pay their shareholders dividends who would then go out and use that money to buy more things from capitalist companies. It’s all one giant circle jerk – and then the government prints more money anyways and it’s repeated again.

  14. A libertarian, Koch brothers fan critical of the airlines being bailed out comes out to defend fungible money being used for a taxpayer-boosted airline boosting executive pay and share”holder” benefits? Why can’t I say I am surprised.

    Due to company management and financial market traders’ interest, companies become so overly focused on shorter term deliverables that long-term underinvestment by the company is the consequence since there is a material disincentive to not have short-term margins and cash flow erode to levels below that of the “competition”. This dynamic is why I expect the country — and the world — to have more and more major aviation industry meltdowns adversely hitting consumers. The only way to even try to set this right is for the US to have a sort of equivalent of Europe’s EC 261/2004 law, but this time with dollar amounts that are more costly in the short term to airlines with long-term underinvestment problems boiling over and harming consumers.

  15. @GUWonder – I am just not a fan of weak logic. I happen to agree that many companies become too short-term focused in public markets. And I am against airline subsidies – from Covid-era bailouts to continued funds that flow to these companies. But that doesn’t mean that tax money which was came AFTER buybacks is what was used in those buybacks.

  16. @DCS – while the fall 2021 Southwest operational failure was in some measure due to their point-to-point network, this one was not.

  17. @Gary — Then you are clueless about the point-to-point model.

    Because as usual you refuse to consult “evidence” that other provide and keep repeating bogus claims, delusionally confident that you know better, I will simply quote at length from the Times piece I mentioned above (note that even Southwest did not dispute that its model failed):

    The “point-to-point” model failed
    Southwest uses a “point-to-point” route model that often lets passengers fly directly from smaller cities and regions without having to stop at a central hub like Denver or New York. Point-to-point flights cut travel times by eliminating the intermediate stop — typically a big advantage for travelers who are not flying from major metro areas.

    Other large carriers like United and American rely on a “hub-and-spoke” model in which planes typically fly from smaller cities to a hub airport where passengers change planes.

    For example, a passenger flying on a United plane from Oklahoma City to Phoenix may have to stop in Denver for several hours. Southwest flies routes directly from Oklahoma City to Phoenix in less than three hours.

    With a hub system, there’s a ready pool of crew members and pilots who can report to work at a major airport, said Mike Arnot, an industry analyst. That makes it easier to regroup after a storm, he said. Planes also are kept closer to their home airports, rather than being spread across the country.

    It’s harder to have a reserve of standby crew members and pilots when airlines serve many smaller markets. There is not usually excess crew in places like Syracuse, N.Y., Mr. Arnot said.

    As a result, Southwest’s cancellations created a giant snowball effect that rippled across its carefully choreographed network, leaving planes and crews scattered across the country, he and other analysts said.

    “The only way to reset is to get the planes and crew back to where they should be,” Mr. Arnot said. “And the only way to do that is to cancel a huge amount of flights.”

    In a video message on Tuesday, Southwest’s chief executive, Bob Jordan, likened the airline’s route model to a “giant puzzle” that relies on airplanes and crews remaining in motion.

    Because Southwest is the largest airline in 23 of the top 25 travel markets in the United States, when the severe weather led to many canceled flights, it resulted in airplanes and crew members being out of position in dozens of cities, he said.

    The airline, he said, was “focused on safely getting all the pieces back into position to end this rolling struggle.”

    Tech problems also hurt

  18. Just like Boeing, Southwest choose to invest in short term returns via stock buybacks instead of long term investments by upgrading their IT systems. They compounded the problem by encouraging their senior back office people to leave during Covid. Now they have obsolete IT systems run by new employees, why are we surprised by their meltdown.

  19. Also, it is unclear why the WN point-to-point model would fail in Fall 2021 when the weather was generally not an issue. What drove that failure as compared to prior Falls or Fall 2022 when there was no failure?

  20. @Gary — Fine, but that JAX ATC caused the failure simply supports the reason given for the recent winter failure, which was like JAX ATC multiplied many times…

  21. @DCS – Uh, no. JAX ATC (and ATC generally) had nothing whatsoever to do with this issue, it wasn’t “failure in one location spread” it was failure in several locations, and an inability to rebuild schedules because the airline didn’t know where crew were, couldn’t communicate with them, and everything was being done manually.

  22. Gary- I’m not saying the premise of the post is wrong, but conflating book value with market capitalization certainly disqualifies you from having any voice of authority on such topics.

  23. @Gary — All I said was that it (i.e., the effect of the point-to-point failure) is like JAX ATC multiplied several times, not that any ATC had anything to do with it.

    Please read what’s out there. I provided a snippet of it from the Times piece and it makes great sense. The burden of disproof is on you.


  24. This is a pointless conversation. Certainly, no conclusion on the matter can be reached. Anyone offering a position will not change the minds of others with entrenched, opposing positions. If you don’t understand this and can’t help yourself but to comment, Gary will appreciate your clicks.

    Now, if we want to know why SWA had the meltdown . . . it’s not that we haven’t been hearing this . . .

    A 35-year veteran pilot at SWA has vocalized what other insiders familiar with the meltdown have been saying. SWA’s IT infrastructure is of 1990s vintage. When it came time for upgrading, operations-oriented CEO Herb Kelleher had retired and bean-counter CEO Gary Kelly chose not to . . . during his entire tenure.

    ” . . . as time went on the operation began to deteriorate. . . . A half dozen small scale meltdowns occurred during the mid to late 2010’s. With each mini meltdown Leadership continued to ignore the pleas and warnings of the employees in the trenches. We were still operating with 1990’s technology. We didn’t have the tools we needed on the line to operate the sophisticated and large airline we had become. We could see that the wheels were about ready to fall off the bus. But no one in leadership would heed our pleas.”

    Earlier this year, Bob Jordan became CEO and announced his priority would be technology upgrades. “But two decades of neglect takes several years to overcome. And, unfortunately to our horror, our house of cards came tumbling down this week as a routine winter storm broke our 1990’s operating system.”

  25. Happy New Year, Señor Leff (and to the rest of the VFTW comment readers).

    Money is fungible — a given that makes the argument with arguably “weak logic” about the use of taxpayer money for share buybacks not as weak as some would want it to be taken if only because of a personal bias against regulation limiting the “freedom” of corporations (or should we call them corporate persons or persons to anthropomorphize them?).

    And by the way, it’s not just publicly-traded companies that have this problem with being more interested in pushing to maximize short-term financial valuation of the company at the expense of long-term operations. This problem also happens — arguably even more extremely — with privately-held companies with owners looking for near-term liquidity events. And in a different way, it even hits privately-held companies with owners not looking for a liquidity event, but whereby the company’s ability and terms to tap financing are subject to greater economic disadvantage if not “performing” more akin to publicly-traded companies.

  26. Scudder,

    Thankfully, some do learn. I’m sure that going forward there will be a bit more awareness of the tremendous difference between book value and market capitalization.

    40 years ago I didn’t know the difference. And then I got into reading a financial bible written by Graham and Dodd and learned a few more things. While I have my doubts about a lot of things, I have no doubt about the VFTW blogger’s ability to learn and incorporate additional information in making for more interesting arguments. And that’s whether I agree with the arguments and conclusions or not.

  27. “…… Congress might have to require airlines to hold cash….”?

    No, that won’t address the problem; and you in your heart, you know full well that Congress won’t get there with such a dysfunctional “requirement” for airlines.

    Airlines are not banks, and so any such straw-man argument push for minimal cash reserve requirements in a non-financial intermediary industry is just an argument to have the accountants run the show even more and keep the dysfunctional company focus biased in favor of short-term deliverables and against investments in robust long-term operations.

    The systematic preferential treatment of share buybacks over cash dividends (as a use for company cash flow from earnings) has consequences, and the taxation system is a part of the reason for how companies behave (and misbehave).

  28. omg first of all, I have to scroll ALL the way to the bottom to leave a comment? what a TERRIBLE website… (first and last time i’ll be here btw lol. ty “block from news” option!)

    second, you DO know that shilling for billionaires doesn’t mean they will let you suck them off, right?

    At first, I was like “did a billionaire write this?”, but then I remembered there are literally hundreds of MILLIONS of poor idiots like yourself that think one day THEY will be rich and all this will pay off.

    Keep telling your mom you’ll move out of the basement and into you mansion one day, as soon as you finish owning the libs!!

  29. Frankly I am so tired of reading about “Southwest not using a hub-and-spoke model” caused their epic meltdown. Not true.

    WN has such antiquated IT systems in place they did not know where there crews were – and couldn’t properly staff flights due to no crew.
    Did the Southwest linear model prevent them from providing hotel vouchers for cancelled pax? Did this model prevent them from protecting pax on OAL flights? (NO – it’s because they do not have interline agreements nor the technology to do this).

    Save me the song about the way they structure their network. Spirit does not use a hub and spoke model either – and despite several meltdowns, nothing of this epic failure has occured.

  30. Did the Southwest linear model prevent them from providing hotel vouchers for cancelled pax? Did this model prevent them from protecting pax on OAL flights? (NO – it’s because they do not have interline agreements nor the technology to do this).

    Your questions — all non sequitur — clearly indicate that you do not understand the models’ key parameters. Rather than being “tired of reading about “Southwest not using a hub-and-spoke model” caused their epic meltdown” maybe you should keep reading, preferably with an open mind, to see if you’ll “get it.”

  31. @ Gary Leff

    ” I am just not a fan of weak logic.”

    Thanks for the laugh of the morning, Gary!

    Your inferences about the Sander’s Tweet is a typical example of your lack of logical rigor and ethical writing (the Tweet makes no actual statement on the order of events or their causal linkage) – another case of ascribing a position onto your target to rant against…

  32. “Corporate greed is Southwest getting a $7 billion bailout during the pandemic & spending $5.6 billion on stock buybacks to enrich wealthy shareholders, while stranded passengers are threatened with jail time for the crime of trying to rebook canceled flights during the holidays.”

    That’s not an argument, it’s a description of what he thinks greed results in.

    The airline management and shareholders got a massive bailout.

    The airline spent a massive amount of money to buy back its shares off the secondary market to boost the stock price.

    The airline had an operational meltdown whereby its passengers were threatened with jail time for “the crime” of wanting to get rebooked by the airline while remaining airside.

    That’s what Bernie Sanders said, and aren’t each of those three bundled claims categorized collectively as facts?

  33. That was no debunking; only an apologist shilling away. He is still right. SW still has no excuse and has clearly clearly prioritized dividends and stock buybacks ahead of a much deferred and needed investments.

  34. Let’s put all matters to bed right now. Bernie Sanders is one of the longest-serving members of Congress in our nation’s history and, as a senior senator, chairs POWERFUL committees. His opinion about the failure to invest while spending money on share buybacks HAS BEEN CORRORATED BY WN pilots! Socialists, all? Lie to yourself, if you must, but not your readers. Your post amounts to ideological pablum, neither news nor informed opinion. I will take all of your future posts with a grain of salt the size of Wyoming. Clearly, you cannot be trusted to do the heavy lifting or trust our nation’s most popular statesmen. After all, if Sanders were so horrible and ignorant, why would he be voted the most popular senator, including by his GOP colleagues, year after year? Riddle me that! You owe him an apology, too. Your reductive reading in this post is an insult to the 85%+ of his constituents has reelected him.

  35. Hate to disappoint you, @Corbett – Bernie is the least knowledgeable member of the US Senate. I have no idea who would vote him most popular senator, or why? He has no clue. He’s a commie who spent his honeymoon in the Soviet Union (!), and never worked a day in a private business. And you think he’s qualified to judge any for profit business? You think he knows anything about business, or how a business works?
    He believes in socialism and blames capitalism for all the problems and society ills. The same capitalism which allowed him, while working all his life for government, acquire 3 residences (one worth over $1M), and comfortable retirement, compliments of US taxpayers.

  36. Wow what an incredibly biased article. When I saw this website on Google search I thought it was a “View from the (right) wing” website. Turns out I’m not far from it…

    “And it is better to transfer assets from low return businesses, back to shareholders to invest in higher social return opportunities.” I had to stop reading after that.
    Do you have direct evidence supporting this money goes into “higher social return opportunities” as opposed to just lining some investor’s pockets? What about the Boeing share buyback fiasco?

    Rich people say “trickle-down effect” works but that is just a smokescreen…

  37. @XC when you declare you literally stopped reading, but dismiss the piece anyway, that says more about your own comprehension than the article.

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