Important Principles For Government Aid To The Airline Industry

The airline industry has long had effective lobbyists, and its lobbying is in furtherance of its own interests not the public interest. Just as the campaign ‘against subsidies’ by Delta, United, and American was about transferring money from consumers to their shareholders, now the campaign ‘for subsidies’ is about transferring money from taxpayers to their shareholders.

The best case for government aid to the airlines isn’t that the industry will be facing massive losses. That’s a huge problem for airline management and shareholders, not for the government and taxpayers. At this point the only moral case for government assistance is that government policy that has largely shut down transatlantic air travel amounts to a ‘regulatory taking’ of a big portion of their business. Of course the value of that business is heavily depressed – money losing, even – because of a drop in consumer demand, not bans on travel by non-residents that have visited Europe in the past 14 days.

Besides many other industries will be hurt just as much and receive nothing. People won’t be going to restaurants, movie theaters, or concerts. They won’t be going to hair stylists and barber shops. They won’t be visiting car dealership showrooms. Each of those businesses will be hurting, and many will be laying off workers.

If you’re concerned about workers there’s nothing special about those workers being in the airline industry, and airline workers shouldn’t get more assistance than other workers displaced by the reaction to the novel coronavirus. Moreover the best assistance to workers isn’t likely to be protecting airline shareholders. Many airline employees will likely be furloughed regardless of assistance to their employers.

What we care about as a society is that an airline industry exists. The reason for government intervention is to prevent economic contagion (the spread of one failure to another). That was the argument for bailing out banks during the financial crisis, and it doesn’t exist in the same dimension with airlines. Nonetheless the industry is an important one once we’re ready to recover.

However the planes will still exist. The airports and gates will still exist. Skilled pilots and mechanics will still need work. The only reason to intervene will come later, if at all.

  • Once airlines are in bankruptcy the relevant question is if they keep flying.

  • And that’s dependent on available new capital during the bankruptcy process.

Shareholders should take their haircut first. By the way Warren Buffett’s Berkshire Hathaway owns about 10% each of United, Southwest, Delta, and American. Should taxpayers really be softening the blow to Berkshire’s bottom line?

Then the government should wait to see what develops in bankruptcy. Only if resources appear that they will become dormant should the government intervene with capital to put them back to use. If there’s no new money to fly aircraft, that would at least be an argument for government assistance. However even that should be weighed against whether there are yet passengers looking to fly. If not, the assistance is for naught – akin to Italy propping up Alitalia for years, with more money continuing to flow in a neverending cycle. Better to fund only the upkeep of parked planes until there are once again customers to fly on the planes.

Again the question of displaced workers is different, and should be addressed directly – not by giving the American people’s money to the same airline leaders that failed to use past profits to protect their businesses.

In 1903, after the Wright Brothers’ first flight, they went looking for government cash. Some things never change.

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 InsideFlyer.com, 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 »

More articles by Gary Leff »

Comments

  1. Exactly right. Thanks to long running subtle PR from corporate execs, the public is under the misperception that’s bankruptcy = the company goes away and stops operating. In most cases bankruptcy simply means the ownership of the company changes from shareholders to creditors, and the company has an opportunity to restructure costly items such as supplier or labor contracts.

    Ironically the bankruptcy code as we know it today was created largely to ensure that railroads (which were defaulting en masse in the 19th century) could reorganize without ceasing operations, as they were deemed vital to US commerce at the time.

  2. @Gary. Of course stockholders should take the the hit. They are at the bottom of the priority of lien and the most leveraged. Due to leverage, they make the most money if the company does well. They also lose everything if the company does poorly. I totally agree, no bailout.

    However, I wish you had avoided that Warren/Sanders “Millionaires and Billionaire” shtick. Almost everyone owns the S&P 500 through index funds, mutual funds, 401ks, and guaranteed pension plans (hello government workers, your pension fund owns it). Delta, United, and American are all part of the S&P500. Social justice in the stock market hurts everyone, not just the millionaires and billionaires.

  3. Also, I should comment that a lot of institutions (including pension plans, mutual funds, mutual funds inside of 401K) own Berkshire Hathaway. That is where Berkshire Hathaway gets a significant portion of its funds. A hit to Berkshire Hathaway might hit your pension plan health directly.

    Nevertheless, I do not believe the airlines should be bailed out.

  4. @Other Just Saying – everyone gets hurt, even when they don’t own companies through retirement plans, but the point of contrast is to the median taxpayer who is ultimately going to shoulder a portion of the cost.

  5. A government bailout and some better customer rights (get rid of the court decision that we can’t sue the airlines when they screw us) written into the bailout law … PLUS EU 261 written into the bailout law.

  6. A temporary waiving of payroll taxes seems to me the best move, as it allows companies to keep people on the payroll longer. What we don’t want is this temporary health problem to cause extended unemployment. But of course since Trump proposed it, leftists will be against it.

    Shareholders have already taken their haircut. Have you not been paying attention to the stock market?

  7. @WR2 – waiving of the “payroll taxes”, which are payment to medicare and social security, greatly favors higher paid workers who are less likely to be living paycheck to paycheck. It also works to destabilize funding for medicare and social security. It’s a bad idea all around, unless you’re goal is to cut social security. It does nothing for workers if they’re laid off since they won’t be getting a paycheck at all.

  8. @WR2. Trump is working for the good of the people. I might change my mind about a bailout, if it turns out go be really “temporary’.

  9. @Rico. 100% of medicare and social security disbursements come out of current taxes or borrowings.

  10. Trump working for the good of the people…lol that’s a good one. Will he sign his name to a stock chart with all the declines and hand to his supporters, just like he did 10 days ago when there was a brief upturn?

    Sure everyone has seen the list of the false/misleading/outright lying statements he’s made over the past 2-3 months – shall we re-post it?

  11. @UA-NYC (aka Manhattan Waterbug). Since they have closed down New York City restaurants, I am not like to run into the Manhattan Waterbug. However, he is one of those liberals that is cheering deaths and economic decline in the USA from the Covid-19, because he wants it to take out Trump. Totally sick. Sorry,. but I call it as I see it.

  12. Trump has taken out himself – suggest all you Trump Sycophants read the excellent article in the Atlantic by the lifelong Republican Peter Wehner (“The Trump Presidency is Over”).

    Nobody with half a brain is even thinking Trump is any sort of leader – it’s all about Fauci, state governors, big city mayors, scientists & doctors, etc. stepping up to fill the void.

    Trump has admitted he takes no responsibility, he says the vaccine is imminent, he says that this is going away, it’s a Liberal hoax. Your Fearless Leader should just enjoy his remaining 7.5 months in office on the golf course, where he has already spent 20% of his Presidential time.

  13. And BTW, @OJS, it’s fairly despicable to suggest I am “cheering deaths and economic decline”. Seriously – go F yourself and crawl back into your Alt Right hole.

  14. @UA-NYC (Aka Manhattan Waterbug) Peter Wehner is a never Trumper. His article, (I read it a yesterday} is a hit piece. But your reading skills are not very good; Otherwise, you would have noticed the bias of the writer. He in fact even announced it in the first paragraph. Maybe you skipped the first paragraph.

  15. @Gary re: new regulation being a negative, I somewhat disagree. Some highly-visible consumer protection measures (e.g. delay protection, compensation for significant product swaps, etc.) could potentially restore consumer confidence and get the public traveling again after this passes, which would be good for all parties.

  16. Gary – can’t you just delete the back and forth political BS. Doesn’t belong on this thread or anywhere else. Thanks

  17. Great points. The same ones made by Mitt Romney in 2008:

    https://www.nytimes.com/2008/11/19/opinion/19romney.html

    But Obama correctly calculated that the American public doesn’t know the difference between bankruptcy (which hits shareholders and debt buyers but leaves the business going) and liquidation (which winds it all up) and so Obama had the utterly deceitful and condescending opportunity to deploy this egregious lie:

    “When Governor Romney said we should let Detroit go bankrupt, I said, we’re going to bet on American workers and the American auto industry,”

    Gary, it would be awesome to see you in a position of influence with respect to aviation. But if that’s ever in the cards you’d better have a plan for dealing with the lying liars

  18. A candidate once made the same point with respect to the auto industry and a lying liar skewered him as follows:

    “When he said we should let Detroit go bankrupt, I said, we’re going to bet on American workers and the American auto industry,”

  19. Here’s a general formula for corporate assistance from taxpayers
    – all repurchased shares from accumulated stock-buybacks will be handed over in exchange for govt aid, effectively sold to the taxpayers who foot the bill. All executive directors will be fired and the chairman will be replaced.

Leave a Reply

Your email address will not be published. Required fields are marked *