Don’t Ban Stock Buybacks Or Impose Consumer Protection Rules As Part Of An Airline Bailout

Airline bailouts are a bad idea. Stockholders should take a haircut before taxpayers. Airline bankruptcy does not present contagion risk to the economy. Airlines have flown through bankruptcy successfully – American, Delta, and United have all done it. And any help for workers should address the needs people face independent of industry.. Working for an airline isn’t ‘more special’ than some other job.

However there are very bad ideas circulating around new conditions to impose in exchange for a bailout. They amount to pet issues that people have anyway and would like to see, and merely use the current crisis as a vehicle to see them happen. Those include a ban on stock buybacks and imposition of new consumer protection rules. A hasty legislative package, pushed through in an emergency when the industry is weak, shouldn’t be used this way.

Don’t Ban Stock Buybacks

It’s perfectly reasonable to say in hindsight that airlines spent way too much capital buying back shares, in many cases at higher prices than where the market settled even before the current crisis.

Stock buybacks themselves aren’t the bad idea they’re often made out to be. In fact, buybacks can be good for the economy.

When an airline buys back stock they are saying they don’t have good investments with the cash.  It should be a sign to run away from the stock. Airline executives have touted that their companies had become ‘high quality industrials’ but the truth is that they didn’t have better opportunities to earn a return on the money than the broader stock market.

Buybacks make cash available to invest in more productive uses, and are more tax-efficient than dividends.  They take cash away from airlines who don’t see opportunities to spend it well, and allow the money to be invested elsewhere such as biotech, new drug creation, or future green technologies.

I’m against bailouts, but restrictions on buybacks would just mean that airlines hang onto even more resources to invest badly.

Don’t Impose New Consumer Protections Through The Bailout Process

There are a number of things I’d like to see the Department of Transportation do in aviation. Ramming those things through in a crisis is a bad idea, and generally the DOT doesn’t need new legislative authorities in any case.

There’s a regulatory process – complete with opportunities for comment and requirements to weigh costs and benefits – that would be a bad idea to short circuit.

Some have suggested limitations on airline fees. Those are annoying. But the average price of airfare has been on the decline including fees . The price of travel is likely to be low for awhile even as the current crisis abates. And limiting fees, requiring that services be re-bundled into airfares, won’t make travel cheaper.

Similarly there’s been a call to impose compensation requirements in the event of a travel delay like in the E.U.. There compensation rules are both very generous to passengers (requiring compensation for events largely outside of airlines’ control) and difficult to navigate (airlines make actually collecting nearly impossible, spawning a cottage industry of businesses who pursue claims for passengers in exchange for a cut of the proceeds).

If we want to go down the road of mirroring European compensation rules, that should be done carefully looking at the costs, the benefits, and the challenges faced there. We also shouldn’t legislate the DOT actually come to one conclusion or another as part of this process.

Now, I disagree with Treasury Secretary Mnuchin who has suggested ‘no conditions’ because the current crisis isn’t the airlines’ fault. The crisis isn’t the fault of taxpayers either. The reason not to rush new rules is because we shouldn’t rush new rules, we should consider them carefully.

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. @ Gary — I disagree on the consumer protections. They should be required to make flying somewhat less miserable in exchange for any bailouts. Is it really asking too much to ask for seats and lavatories that we fat Americans can comfortably fit in? Greedy executives will always find a way around stock buyback restrictions or any financial limitations, so yes those should unfortunately not be included.

  2. “Buybacks make cash available to invest in more productive uses, and are more tax-efficient than dividends. They take cash away from airlines who don’t see opportunities to spend it well, and allow the money to be invested elsewhere such as biotech, new drug creation, or future green technologies.”

    Only if the stockholder sells their shares to realize a gain (incurring taxes in many cases). While it would be nice to think of the money being used to develop green technologies (high risk, uncertain, illiquid), let’s be realistic – it would most likely be used for stock and real estate speculation and/or exotic financial engineering, which do little for the actual economy.

    Nice to see the shareholding elite at the public trough again. Only took 11 years.

  3. There is no appetite for a bailout because the way airlines treat passengers. Having said that we should bailout airlines the same route we bailed out AIG/Fannie/Freddie by taking a significant equity stake. Once we are through this, we can sell that stake at a significant profit without killing airline travel as we know it.

  4. @Roy EWR – no, it takes cash sitting in airline coffers with little high value use and puts it in the hands of those who buy the shares to invest in something else

  5. Oh Gary, you know better than this. Let’s be practical here. Most companies have increased their debt burden while increasing their buy backs. Happens when interest rates are low. Obviously these industries need to have more cash on hand and less debt in the future before they are permitted to buy back their stock. That can easily be regulated in an environment where they are apparently too big to fail.

  6. Agreed with @chesterwilson: Bailout in exchange for an equity stake. I would even be open to a non-voting equity stake based on the market cap Jan 31st (before stuff hit the fan) as long as minor concessions are made for preventing major involuntary staff layoffs, executive compensation, etc.

    Given that in 20 years, the big 3 airlines will have been bailed out twice plus all gone through bankruptcy, I think this is a time to put a ban in on buybacks until there is a minimum safety net so they don’t come running back to us the next time there is a disruption to their business. Also, DL is never allowed to complain about subsidies again 😀

  7. @Gary. Good post. I agree with your sentiment. Several comments:
    –People misunderstand what a stock buyback is.
    (a) Basically, it is the company using cash to reduce the number of shares in the marketplace (and increase the percent ownership of the remaining shares).
    (b) The flip side of that is issuing shares to the market place for cash.
    (c) I do believe that companies have the right to control the number of shares outstanding.

    –Bailouts. I agree with you in principle that bailing out companies is a bad way to go.
    (a) We are seeing the negative effect of helicopter cash right now. Everyone has their hands out.
    (b) Also, politicians are sneaking in their pet projects that they could never get passed otherwise.
    (c) I continue to believe a significant portion of the bailout if not all would be in the baseline budget of the US government and would represent a significant and permanent increase in government spending. Previous large bailout stimuluses have been added to the baseline.
    (d) Unfortunately, I believe that ship has flown. Everyone in government is on board with a gigantic bailout. It is supported by all groups in congress (Trump-Haters, Empty Suits, non-Trump-Haters , and Trump Supporters in Congress) and by the President. I think complaining about it is kind of like shouting at the wind.

    –Loans preferred. Giving loans is preferred in my opinion for the following reasons:
    (a) It solves the immediate cash problem which causes bankruptcy
    (b) It increases leverage (ie debt/debt+equity), which makes the stock holders holdings much more risky. Therefore, stockholders are not entirely bailed out.
    (c) Eventually, it should be paid back either via repayment of principle or through ongoing interest payments. Therefore, it would have the least direct impact on the tax payers.

    –Unfortunately, it looks like helicopter money. Smiley frown emoji.

  8. @Other Just Saying: I think most people understand what a buyback is. If the company wants to reduce the number of shares available, they can do a reverse split for a minimal cost.

  9. You’re right. Buying back stocks shouldn’t be part of an airline bailout. It should go back to being completely and totally illegal to do stock buybacks at all, for ANY company. They were illegal for a VERY good reason in the past: it encourages wasting a lot of money that could be put into actually bettering the company.

  10. @Ben. If I have 100 shares which own 10% of the company. If you do a reverse stock split, I now have 50 shares and own 10% (same percentage of the company).

    However, if the company issues a stock buyback for 10% of the shares. My 100 shares now own 100 my shares/1000 total shares -100 my shares = 11% of the company. That is 1% more of the company.

    While you were arrogantly lecturing me about how everyone knows what a buyback it, maybe you missed that.

  11. The equation I used above produced the correct number, but the denominator should have been total shares-buyback shares not my shares. Generally, the equation is:

    Ownership share after a buyback equals number of shares owned divided by (total shares before buyback minus shares bought back)

  12. Similarly. Ownership share after a stock issuance is number of shares owned divided by (total shares before the issuance + the number of shares issued).

    Stock issuance and stock buybacks are mirror images of each other as I said above.

    By comparison, splits and reverse splits are tautologies.

  13. I am sorry, one more. Stock buybacks use cash and therefore increases leverage. Stock issuance generate cash and decreases leverage.

    Increase leverage increases risk to the equity holders but increases return. And visa versa.

  14. @Gary: If we want to go down the road of mirroring European compensation rules, that should be done carefully looking at the costs, the benefits, and the challenges faced there.

    If you want to look at it carefully, note that in Europe, 261 has been a huge success. The flying public like to know thy won’t be screwed by airlines, the airlines are held to better standards. And Americans flying American airline companies through Europe, cheer when they can get a victory when they can’t get one at home. And finally, is it wrong to consider the rights of citizens, in this country for a change. If we keep bailing out losing airlines, with overpaid, undervalued executives, we will never make headway.
    And personally, I don’t find you are a shill for the airlines. But let’s just say that you have a vested interest in this game.

  15. The biggest restriction placed on airlines that want a bailout is regulation of their change and cancellation policies. Countless people who were sick flew even when they knew they should not because they could not change or cancel their tickets. It is imperative that airlines be required to allow changes for medical reasons. And if they have nothing to invest in except stock buy back, they might consider building a rainy day fund and paying their employees more so they can as well.

  16. Sorry Gary.
    Other than Southwest no airline will ever do the right thing without a boot on their necks.

  17. “A hasty legislative package, pushed through in an emergency when the industry is weak, shouldn’t be used this way.”

    You sound like 2A devotees who block legislation after a bunch of people get murdered because we shouldn’t be too hasty about protecting the public

    Not a good look

  18. @Alan L +1

    @Gary – You’ve repeatedly said that you’re against a wholesale import of EU261 but you don’t really give specific reasons. Taking a wildly successful system into ours is a match made in heaven for customers and the Europeans have proven that it works without putting airlines out of business. Would it be perfect? No. Would it be a superb improvement over our current system? Without question. Vague arguments against this idea just sounds like you have some hidden reason to object to this. I don’t think that’s the case, but you’re normally perfectly willing to present specific arguments.

  19. I’m against giving free money to the companies who are firing employees regardless. The top management of the company will do nothing to protect or keep employees so why should tax payers give them free cash? I am not against offering them some level of assistance, but with zero restrictions is a bad idea. I am more concerned of the employees, the local suppliers, the coffee shop workers, the lounge catering staff than I am of the Doug Parkers of the world, or even Boeing as a company for that matter.

    We should look at a bottom up approach versus a top down approach. Remember the big banks and how well that went? They got billions and kept it to themselves. The concept of ‘you will do the right thing…right? wink wink’ will get no where. Perhaps not as drastic as some have suggested, but there should most definitely be restrictions and at least half of the money needs to go directly to employees, flight attendants, pilots, and airport staff.

  20. @ Gary Leff says: – March 18, 2020 at 9:27 am

    You opposition to the bailout is disengouis

    They don’t have to sit on the cash, they can return excess profits in the form of dividends. Kind of like every company did the Pre-1982 SEC ruling. Stock buybacks really are only used to manipulate the stock price and EPS. If companies wanna be able to control their stock issuance, then lets outlaw executive comp based upon stock price and EPS. Then there is no question of the proprietary of the buyback and any question of execs lining their pockets with company cash. There will be a bailout and the loans should be secured and have priority in bankruptcy over all other corp debt and stock issuance. Lets face it, the airlines give warnings in their 10K about pandemics effecting business and AA spent $15B on stock buybacks.

    Your opposition to the bailout is disingenuous, because you know that it’s going to happen. When they have their hat in hand you can force them to do the right things for their customers. It’s actually nice to see the airlines eat crow, they have been cocky and didn’t think people could ever live without them. Sucks to be them.

    “If you’ve got them by the balls, their hearts and minds will follow.” – TR.

  21. The most we should do is either loan them the money or take a piece of the company in exchange, like we did with GM.

  22. At the very least there should be some consumer protections such as around refunds and cancellation of flights. For instance United’s ever changing policy these past few weeks is ridiculous. I’m now looking at fighting with UA, my travel insurance policy, and or initiating a charge back so I can get my $2k back for a flight that won’t take place in a couple weeks (cut CZM flights today). Based on the policy in place when I bought, it should be a 5 minute process. With deregulation and airlines being allowed to basically do what we want, I don’t think it’s unreasonable to ask for the pendulum to shift to something more balanced in exchange for help.

  23. Gary: I disagree. At a minimum, the price for a bailout should be abrogation of Delta’s position that there is no duty of good faith and fair dealing, together with abrogation of the comprehensive preemption of all consumer suits. I would be in favor of retaining preemption of class actions, but people should have the ability to individually sue the airlines if they are affirmatively mistreated, or if the airline does not deliver on its duty to provide transportation. Every other business in America is subject to these requirements.

  24. A cyclical business like airlines must hoard cash. The longer the good times and cash pile the worse the next recession. They may not have good investments to make but a big cash pile is not a bad investment. Admittedly the LBO operators might make a run and pay themselves a huge dividend but then we need to not bail them out and let the creditors take over. I don’t get why we need to bail out anyone

  25. @Retired Lawyer – that’s the position though of the Supreme Court, based on the language of the Airline Deregulation Act. It’s appropriate for Congress to amend that at any time. Although I think substitute language is important to really debate and consider, not vote first and find out what it said later.

  26. Gary, I think this is one of the more thoughtful commentaries I have seen on these issues. A lot of people seem to have an axe to grind and the commentary about an airline bailout the last few days has been pretty ridiculous. It’s astonishing to read so many message board comments on every travel blog out there of people who seem to be reasonably bright but who also seem to have no comprehension of basic capital structure or tax issues. Stock repurchases are both tax advantaged relative to dividends, and offer a lot more flexibility to firms as a way to return capital to shareholders. Nobody who studies capital structure seriously disputes those facts. Share buybacks do not manipulate stock prices. The natural consequence in pretty much any market of reducing supply is for the equilibrium price to go up.

    I hope there is no bailout. The airlines allocated their capital how they saw best. In retrospect, they were foolish not to keep more cash as a cushion for a rainy day. Let shareholders, boards and executives learn the lesson they need to learn from it. Insulating the airlines from the consequences of not having a meaningful cash reserve is a good way to ensure they continue to make the same mistake in the future. Taxpayers don’t need to pay for this.

    Furthermore, there is no need for the government to tell corporate executives how to spend their cash. The government has no idea how to allocate the capital efficiently either. Let the airlines go through the bankruptcy process, and let the shareholders, employees and all other firm stakeholders be reminded what risk is. It’s unfortunate that the outcome is going to be people losing money and jobs, but that’s how risk works. No bailouts, and also no silly restrictions on how firms spend their capital.

    Finally, I’m 6’7″ and would love for the airlines to offer more legroom. I imagine the people sitting in front of me and next to me on most flights would prefer the same thing, though, I do try hard not to crowd their space (and to the snarky folks out there, yes, I regularly pay for economy plus seating because it’s more comfortable for me and for the people around me). I’d also like bags to be free again, for the airlines to have friendlier change policies, and a number of other changes that have been mentioned above. But this crisis is not the way to force that issue. Nobody is forcing me or anyone else to fly, so it’s sad to see people trying to use a legitimate health crisis to force through regulations that have pretty much nothing to do with the actual crisis we are facing.

  27. Why would airlines raise wages for already overpaid union flight attendants and pilots which makes airlines even more financially unsound and more likely to have problems in trying times. AOC is an idiot who understands nothing about reality.

    Unlike all other times the conduct of airlines had nothing to do with their predicament. They were actually focused on efficiency, cost cutting and raising revenue. The government taking an unprecedented step to ban air travel internationally, states and counties ordering shut downs of restaurants, bars, venues, hotels and factories did cause their predicament.

    If a stock is undervalued then buybacks are a fair move. If buybacks are banned airlines will recklessly expand through mergers and acquisitions and pay too much expanding into routes and become like sears, radio shack, toys r us, modells or a host of other businesses that over expand into eventual hardship and bankruptcy.

  28. I would like to see to it that kids must be seated with their parents as part of a bailout, in addition to (as I mentioned in another thread) required interlining in the event of IRROPS by all carriers on all fares.

  29. @Asdf – you going to displace someone who paid extra for a seat assignment because some parent was too cheap to do so?

  30. Stock buybacks are bad for any company to be doing. It is a waste of capital. It is the worst example of CORPORATE GREED!!! I don’t give a shit about tax consequences. Pay your stockholders special dividends!!! Pay your employees a decent wage!!! Stock buybacks are all about CEOs and their BODs juicing the stock prices to make their stock options worth more. Lining their pockets and not helping other stakeholders!!! The airlines know that their business is very cyclical and should have been saving money to weather a downturn. Because of their poor planning, us taxpayers have to bail them out? BS! For any bailout money, there needs to numerous conditions attached!

    Sorry Gary, your politics are showing. Because bailing out companies is just corporate welfare.

  31. We need to force companies who want bailouts to agree to hold cash reserves in the future to protect themselves in case of recession, reverses, and crisis. No excuse for needing bailouts after several years of record profits. In the case of United, 80% spent on stock buy backs.

  32. Jackson Wayerson, you are the idiot, as you stoop to name calling the Latina member of congress, you can’t even hide your bigotry with the name calling…AOC makes perfect sense even if you Trump supporters disagree with all that she says….AOC represents a progressive voice in Congress and speaks out for the 99%. You should watch you manners as you try to protect the airline industry profit at the expense of the American public….I bet you don’t even care what she says, you just are against all that progressive people stand for.

  33. Jackson Wayerson, my bottom dollar that you vote Republican….always protecting the Trump administration

  34. Put an expiration date on new consumer protections – say 24 months. If they airlines are hurting because coronavirus is disrupting travel, so are we. Take the 24 months to deliberate about whether protections should become permanent or allowed to expire when things are back to normal.

  35. Honestly, this is ridiculous. Are you seriously suggesting that airlines should spend money on stock buybacks while they still owe money to the Government and the taxpayers? No, sorry. Any positive cash flow must go to paying off the debt — just like in bankruptcy, when the creditors take over the operations entirely. The shareholders should be grateful that a bailout saves them from that.

  36. @Other Just Saying: I’m not trying to lecture you. The only reasoning you gave to why stock buybacks should be okay is “I do believe that companies have the right to control the number of shares outstanding.” A reverse split accomplishes that. You never mentioned that companies should have the right to increase the percentages shareholders own. If shareholders want that, they can buy out the existing stock themselves.

  37. Its not disingenuous to say the airlines shouldn’t be bailed out, even when they most likely are going to be. It’s taking a principled stand- no different from saying that guns should be controlled when they are not.

    I think we are all agreed that if there is a bail out, it should take the form of a loan, increasing the risk to shareholders, and giving leverage down the line.

    Capping executive compensation for people who take the loans is fair as well- they did a terrible job managing their cash flow through the boom years, they should pay for it now.

    But hold off an any additional regulation for now- there’s too much going on, too many pigs at the trough. Best would be to not do a bail out at all, and lets the cards fall as they may.

  38. Why would anyone be against consumer protections. The history of business shows that without said protections, the consumer gets shafted.
    Is the concern that it would cost the companies some cash to ensure consumer protections? If yes, they could just ensure slightly smaller comp packages for their CEOs and less stock buybacks.

  39. This was a terrible post. I don’t agree with Gary on either of his two main points. And, to my disappointment, he used the opportunity to throw yet another stone at Alexandria Ocasio-Cortez. For some reason Gary is fascinated by this woman.

  40. Gary,

    You’re pathetic. Horrible article. The airlines have taken advantage of the customer with exorbitant change/cancel/luggage/seat fees and horrid rules, which need to be addressed by the government since the industry can’t be trusted (with the exception of perhaps LUV).

    Your “argument” that lower fares today justify such fees is missing the point entirely. If the airlines need the extra revenue, they should simply raise prices to what is a “real” price rather than keeping fares wrongly-low (IF you assume your point that they can’t make money without change/cancel/seat revenues). However, that assumption is obviously wrong, since they have extra free cash flow with which to buy back stock. So no, they don’t need these fees and yes, they CAN make money even without the horrid fees.

    Buybacks and dividends paid out are the existence proof.

    It’s clear that the management of the US airlines has no real clue about running a winning business, and you could argue they have no clue about how to run even a business inside the business in which they operate. Foreign carriers are so much better in almost every respect.

    Now, when the airlines want help from the very people that they have been screwing for the last umpteen years, it should come with a QUID PRO QUO that makes the travel experience better and more humane — assuming any of us actually want to start flying with these guys again.

    Get a grip, Gary.

  41. Stick with your sometimes informative, sometimes not stories on travel. You have no credibility in financial analysis or economics.

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