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.
96% of airline profits over the last decade went to buying up their own stocks to juice the price – not raising wages or other investments.
If there is so much as a DIME of corporate bailout money in the next relief package, it should include a reinstated ban on stock buybacks.
— Alexandria Ocasio-Cortez (@AOC) March 17, 2020
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.