Airlines are facing an existential crisis in their business, as bookings dry up and customers stay home. Other businesses, often smaller businesses, are facing a crisis too. People aren’t going out to local restaurants. Other businesses are closing down, and not all of their employees are being paid.
But airlines are politically well-connected. Delta’s CEO Ed Bastian told his airline’s employees today that they are going to the government for help, and they expect to be successful. While United Airlines is facing business challenges, its CEO Oscar Munoz spent two days in Washington “meeting with senior officials in the Trump Administration and senior members of the U.S. House and Senate” looking for help. American wants a piece of the action, too.
Bloomberg tells us what form subsidies are most likely to take.
The option is being discussed for the 7.5% tax on airline tickets, which provides a substantial part of the $16 billion a year collected for a trust fund used to help pay for the U.S. aviation system, according to three people familiar with the issue who asked not to be named.
Another possibility would be to allow airlines to temporarily keep a fee as high as $4.50 per passenger that goes to airports for construction and maintenance, the people said.
If airlines keep tax money instead of giving it to the government, the government will still find itself needing to fund services. And taking airport fees leaves airports in a lurch, who themselves are hurting with fewer passengers and fewer flights eating into their revenue.
There is absolutely no need for a bailout of U.S. airlines.
- At this point giving government money to airlines is just subsidizing an airline’s stockholders. No major U.S. carrier is on the brink of bankruptcy, and if they do go into chapter 11 that means investors take the haircut.
- There’s no serious systemic risk to the economy from an airline bankruptcy. Each of the major airlines has flown through bankruptcy successfully before (some have even twice).
- No single ariline is crucial to the nation’s economy as a whole, though if it were it would keep operating, and if that came into question government could consider options at that time.
These businesses are unquestionably better off with government cash than without it. Management is better off and their shareholders are better off. But we shouldn’t ask the median taxpayer – who themselves are going to be facing serious hardships as people stop eating out, having dry cleaning done, fixing cars when they’re driving less and who may themselves face layoffs from closed businesses – to give up money to the airlines.
Airlines have spent billions buying back stock. For years I’ve said that’s underscored how bad an investment airlines are, that they don’t have better uses for the money to generate outsized returns than just giving the money back. But private enterprise is profit and loss and when businesses don’t suffer losses they’re free to loot their companies risk-free. You wouldn’t buy the cramped seats and surly service we were selling, but we took your money anyway.
As the Washington Post reported a month after 9/11, Congressman Jim Moran said seeking transportation spending in another time of crisis “It’s an open grab bag, so let’s grab.”
Excellent analysis Gary. Two thumbs up.
Spot on analysis. This is a terrific opportunity to let an airline or two fail to motivate the others to innovate and at least act like they care a little bit about their customers.
The airlines are flush with cash. They don’t need a bailout !!
Neither the airlines nor the cruise companies need or deserve a bailout. They are private companies. Changing economic conditions is part of the risk they take in operating a business. What public good is served by bailing them out? Shareholders should bear the loss, not taxpayers.
“For years I’ve said that’s underscored how bad an investment airlines are, that they don’t have better uses for the money to generate outsized returns than just giving the money back.”
Gary, I think you’re assuming they made the best financial decision when they make so many other bad decisions.
I agree that the airlines should not be bailed out at this time. I have been waiting for a downturn in airline traffic to teach the airlines to value their customers more. Now there is a downturn, and voila, the federal government is going to bail them out with tax payer money. The airlines will learn nothing.
Gary said: “Airlines have spent billions buying back stock”. Generically, I am against the jihad against stock buybacks. I know it has great cachet in certain academic circles and many feel that stock buybacks are per se corrupt. However, it is just one tool, among many for a company to manage its capital structure. Basic stock theory states that the the value of a stock should be the sum of the net present value of all of its future cash flows. The problem is, most companies have a $0 value at the end of their life. So if the company is not giving back money throughout their life through buybacks or dividends, the company is worth $0. Hardly a way to raise capital if every stock is worth $0. Now, whether or not a company should buy back stocks or pay dividends, that is a more complex debate.
Micron, for example, has a policy of buying back a percentage of its cash flow. If you want to continue to own the same percentage of the company, just sell the amount of the stock buyback each year. That sale could be considered to be a dividend, cash back. Currently, there is no commission fee at Schwab and other stock broker companies. Micron does not have any dividend, because they feel that stock holders begin to rely on dividends, and therefore, they would have to pay a dividend, without regard to cash needs. Most other companies, Apple for example, do both dividends and stock buybacks.
Obviously each airline should first ask stockholders for money. And sure if they say no, the government can pump in money in exchange for owning parts of the companies.
If you do it any other way, you can’t be surprised if the country ends up socialist.
Agree with you Gary on ideological grounds, but would make a small correction. Bailouts (particularly in the case of AA) would not just be bailing out shareholders and creditors, but labor. AA is the most levered of the 3 legacies, but interest expense is still only $1B ($500MM of which is aircraft financings) of their $40B+ cost base vs. labor’s $12B. Labor is the story here; without restructuring the labor force, AA won’t survive the kind of shock UA is bracing for.
First and foremost, I agree that the airlines should not be bailed out. However, if it comes to that, I think the subsidies should be in the form of cash payments or another form of direct assistance.
I worry about the forms of subsidies being considered. The problem with letting the airlines retain tax revenue is that they will do everything they can to hold onto it (i.e. normalize their retention of it) after the crisis has passed. Then customers will effectively be left paying the current tax amounts and whatever new ones inevitably arise to replace them. Direct assistance is easier to simply shut off.
This isn’t a subsidy. A subsidy is money granted by the government so that the price may remain low or competitive. This is disaster assistance.
@JetsFan
“Neither the airlines nor the cruise companies need or deserve a bailout. They are private companies. Changing economic conditions is part of the risk they take in operating a business. What public good is served by bailing them out? Shareholders should bear the loss, not taxpayers”
The public good is that they shut down operations to prevent spread. If we let them flap in the wind, they would keep cruising as long as they could fill enough of the boat to pay employees….and a segment of people would still go because they would otherwise lose their prepaid amounts.
@Chas – that kind of restructuring would only happen in bankruptcy, at which point equity takes a haircut maybe even 100%. there are other more direct ways to subsidize american’s workers without first propping up management and equity holders.
If United has enough money to change their Premier program to only apply for spend then they can certainly weather the storm… I feel no remorse for the airlines yet. They had a little more than a decade of record profit making and should have planned a scenario, like this, out better rather than screw customers on all ends.
No to giving taxpayer money to airlines.
@Jose +1
Using the same logic as the airlines, when Washington Mutual sank, the government should have made me whole as a stockholder. If that happened, I must’ve missed it. The airline stockholders win when things are good, so they should be the losers when things are bad. If things are bad enough, Chapter 11 awaits (again). They’ll still be flying and the fat cats at the top will still be raking in money.
The airlines will surely hold out for the time being. What I’d like to hear is Bernie Sanders’ proposal for dealing with their situation and the plight of air travelers. Now, if only one of those posing questions at the next ‘debate’ would have the smarts to ask such a question. Fat chance, of course. But hope springs eternal…
@ Gary, I have to say this time I totally agree with you! Good detailed article.
The American economy continues. Socialism for the rich, free enterprise for the poor.
@Rob
It’s funny how when the ME3 get money it’s “subsidies” but when the US3 come begging it’s “disaster assistance”
Who gets to define what a disaster is? Delta? United? American?
@Ziggy
I spelled out the definition of a subsidy above. It is crystal clear. It’s only “funny” to armchair economists, not actual ones. The sovereign ownership of the ME3 explicitly advertised for a decade that its goal was to subsidize carriers to make their region a global business hub and then provided a high quality product at low quality product prices while running losses to gain market share for years. That is the definition of a subsidy and often used as the case study on the topic in MBA programs.
Who gets to define a disaster? The President…and he just did.
@Other Just Saying
I recently realized that any company in the U.S. that is dominated by unions tends to do poorly whether it is car manufacturers or airlines. They have low PE ratios and do make a lot of money but as soon as they are healthy and making money for shareholders, the unions hit them on the head and engage in extortion to guarantee the former is not the case. Then when something happens and they make less money the unions are not going to lower their excessive pay and benefits unless the companies go bankrupt and the cycle starts over again. It’s literally happened to the legacy airlines 3 times in the last 30 years.
I am too against a bailout. I hate welfare because nothing is paid back and it incentivizes the very behavior it seeks to help. Loans to airlines that are paid back is not a bailout. I strongly feel that all government assistance to everyone and anyone should be in the form of a loan and not welfare. Problem is most airlines lease planes and have planes financed by banks. They don’t have many assets to be used as collateral that aren’t already serving as collateral. They have a lot of cash that can keep them going but if that runs out before they can start flying it is a problem. If banks allow payments to be deferred and pushed back that would help. If the government gives loans without the need for collateral that will help as airlines were decently profitable before the crisis. All the complaints about how they treat their customers is what made them profitable.
Aside from lease and financing payments, the big economic problem with airlines is the airport staff and flight attendants. Pilots too especially for the regional airlines (the big boys earning 150-250K should have enough saved). Once they stop getting paid that directly hurts the economy. Giving them cash or assistance that they don’t pay back is a bailout and welfare too. Why should shareholders be forced into bankruptcy but the union employees which put a lot of pressure on profitability for airlines in the first place get a bailout. So union employees earn excessively and provide poor service and then get direct cash payments from the government they don’t have to payback.
@Jackson Waterson. Correct me if I am wrong, but what I think you are saying that the unions should not be made whole while the stockholders and other creditors are forced to take a haircut. I am inclined to agree with that because then the unions have no incentive to keep the airline profitable. Did I capture your thoughts adequately?
I will say, that I was unhappy with the GM bailout, because the unions were made whole, over secured creditors, putting priority of lien law on its head. If I was a creditor, I would price secured loans and leases to everyone higher after that to accommodate higher risk. Moreover, I might be unwilling to make a secured loan at all to lower quality credits. I have not looked at the airline financial statements in any depth. But I suspect that most of the planes are based on secured loans or leases as you said. Those assets should revert back the the creditor in a bankruptcy, although, what is the creditor going to do with them, except release them out to the airlines with different terms.
We shall see how this plays out. Get out the popcorn.
It seems that so many FF are bitter due to policy changes they want revenge on the airlines now. From a government point of view they may think differently here in this disaster. A little surprised Gary says let them sink or swim but I think that he has a set opinion rather than others merely bitter because they could not clear an upgrade or a mileage charge changed.
Airlines don’t need a bailout, travel agencies need the bailout!!
Are we serious even thinking of providing any bailout. The airlines have been ripping off the public with all of their fees they feel they can continually add for them to make billions of dollars year after year. They are only worried about the bottom.line and not satisfying their customers in any way. They make travel so uncomfortable and stressful by trying to squeeze its customers in to sardine cans just for their profits and not for or to satisfy who they should be, the customers. Its a nightmare trying to make changes with rediculous fees or the do not allow a change and you lose the ticket and keep the fee. They need a bailout for mismanaging their profits give me a break.. No one is bailing the public out for those who cannot pay their mortgage.payments, instead we lose what we have. Maybe the CEOs should put some of their salaries back in to the business. The business gave them their wealth so they should invest back in to the company that provided to them. No one predicted this and they are not the only ones in need. That money could be used for more important things than bailing out mismanaged airlines that ripoff the customers over and over.