The U.S. Senate has agreed to a bailout package for large corporations, with a piece dedicated to commercial airlines. It still has to proceed through the House and be signed by the President.
The legislation lacks the environmental restrictions demanded by the House, and the $15 minimum wage Democratic leadership insisted on. It also only bans stock buybacks for firms receiving bailout funds for a year.
The U.S. government can issue over $50 billion in loans and grants (and take non-voting equity positions in airlines) under plans that have been sketched out so far. There’s also nearly $20 billion for airports and cargo airlines. It is not too late to stop this.
In a paper I co-wrote this week with Veronique de Rugy we make the case that a bailout is not the best way for the government to respond to the extreme challenges faced by the airline industry.
- The airline industry isn’t unique in these troubling times. Airlines are facing a challenging time. Employees are likely to be laid off, just as they are across many industries. We aren’t going to be able to bail every company out, and at risk employees should be treated equally across industries. Spending $50 billion on airline relief is being taken from other workers and industries.
- Shareholders and creditors should take a hit before taxpayers. The median individual income in the U.S. is approximately $33,000, but taxpayers are being asked to prop up share price and fund the salaries of airline management and senior pilots making in some cases ten times as much as they are. That’s highly inequitable.
- Credit markets remain open to the airlines, and they haven’t come close to exhausting available options for funds. Delta raised $2.6 billion, United $2 billion, and American $1 billion over the past two weeks. They all have additional unencumbered assets. Not one of them has gone to their frequent flyer program (partial spinoff, presale of miles to co-brand bank partner) to raise cash.
- Airline ‘failure’ doesn’t mean not having airlines. United, Delta, and American all have experience flying through bankruptcy successfully. United merged with Continental, which went through bankruptcy twice. American merged with US Airways which went through bankruptcy twice. Delta merged with Northwest which itself has bankruptcy experience.
- No economic contagion to failure. When the US bailed out the banks, the argument was that a seizing up financial system would send shockwaves through the rest of the economy. A bailout doesn’t change the terrain for flying at this time. A slowing airline industry affects suppliers and employees, in much the same way as any other industry. There’s little strategic reason why a bailout is required – let alone at this time, before airlines exhaust their options to raise capital.
- This isn’t a one-off event. This is an industry born into subsidy and corruption, initially earning its living off the U.S. Post Office and entering into corrupt deals (“Air Mail Scandal”). American’s first large aircraft order was funded by the Roosevelt administration (American’s CEO was best man in Roosevelt’s son’s wedding).
Doug Parker was CEO of America West when it was bailed out by the government after 9/11. He merged it with US Airways which itself was bailed out after 9/11. America West executive-turned US Airways President Scott Kirby now leads United. Two bailed out executives return to the government for even more funding. When does it end?
Alan Joyce, CEO of Qantas which is a revenue-sharing joint venture partner of American Airlines, opposes airline bailouts,
[W]hen good companies have managed their position very well, the Government should let them manage their way through this, and not look after the badly managed companies, that have been badly managed for 10 years that have resulted in them being very weak.
In full disclosure I have a family member who has been furloughed by Qantas. And airlines are a huge part of my life. This blog is in many ways a travel business so self-interest should argue for a big bailout in travel.
I care deeply about the many employees I’ve met and befriended along the way. But this isn’t the last time we’ll be asked to throwing more money at the airline industry, and bail out the same executives. Taxpayers shouldn’t be the rope-a-dope of first resort, which is how we’re being positioned today.
[…] that converts into equity.” I imagine this would be non-voting preferred shares. As bad an idea as a bailout is, and as unnecessary, a position where the government is poised to get its money back (and a […]