Kyle Stewart at Live and Let’s Fly argues that as distasteful as the $58 billion U.S. airline bailout was, it was needed.
As far as I can tell only (part of) one sentence actually addressed why the bailout was ‘needed’:
if the country is to resume after Coronavirus has passed, we will need every worker and company back in place as they were.
Except this doesn’t support the need for bailouts. It is true that airlines that aren’t operating do take time to start back up:
- planes coming out of storage
- pilots getting current with required takeoffs and landings, simulator time
However there’s no actual case that ‘without bailouts airlines wouldn’t continue to exist.’
We do not need the full capacity of airlines back online immediately, there won’t be demand right away for full capacity. There just needs to be some capacity.
A bankruptcy-first approach would have meant equity and creditors take a haircut before taxpayers. It’s not at all clear a bailout would have been needed even then.
- Liquidity markets remain open to the airlines, over the past few weeks Delta, American and United have each raised an incremental 10 figure amount of cash (smaller Alaska raised $500mm).
- None has yet tapped their frequent flyer programs for cash.
- Why wouldn’t debtor-in-possession financing have been available, though if it wasn’t the question of government funding could be raised at that point?
- Southwest for its part doesn’t even know if they’ll take the money.
Many airline workers would be furloughed under this scenario. To use United’s ballpark, 60%. But the bailout then is costing about $13,000 per month per worker – with management and senior captains making $300k+/yr fully bailed out by taxpayers, where the median US income is $30k – and that only defers layoffs through September. United says it doesn’t prevent them.
Furloughed workers need assistance in the same way restaurant workers do, personal trainers do, movie theater employees do, there’s no reason for a separate $58 billion bailout for airline workers that’s first a bailout of shareholders and debt holders.
Of course it’s not even the first time we’ve bailed out the airlines. The Air Mail Scandal involved improper postal service contracts determining which airlines survived and which failed. The money for the first big American Airlines aircraft order came from the Reconstruction Finance Corporation (CEO C.R. Smith introduced FDR’s son Elliott to his second wife and was best man at their wedding).
Current American CEO Doug Parker secured ATSB funding after 9/11 for America West and then took over ATSB bailed-out US Airways. His deputy Scott Kirby, who drove that US Airways acquisition now runs United, which lost its last CEO in a government favors scandal.
The U.S. airlines have long survived on government cash and government protection from competition (whether through foreign ownership, or long term gate leases at government airports). We continue to feed that, and then complain when effectively nationalized airlines don’t deliver the product consumers want. We have only ourselves to blame.
By the way will people finally acknowledge that Delta, for instance, isn’t actually opposed to government funds in aviation, they’re just opposed to things that do not benefit Delta?
I like this argument. Maybe turn it into an editorial for FT or the Journal or something.
I hear you, and I’m 100% with you. The bailout of the airlines is unnecessary, even if we (the tax payers) would have taken equity stake. Financial markets are still open, Bankruptcy is still an option, but we jumped immediately on a bailout…
As a veteran of the auto company bankruptcies, the idea that debtor-in-possession financing is readily available is silly. I remember that Chrysler would have needed over $20 billion in DIP financing, and GM was close to needing $50 billion. There was no source other than the government for these sums.
I am very skeptical of Gary’s claim that sufficient DIP financing would be available to the airlines. People who are not in the industry sadly underestimate the sums required. I don’t know how much the three major airlines would need if they filed another chapter 11, but I know it is more than most people envision, and I know it is not easy to get.
Had the auto industry not received government assistance, it would have resulted in chapter 7 (liquidation) for Chrysler, and a very tenuous time for GM. The permanent job losses would have been massive, as 1 of 6 people in the U.S. at that time was dependent on the auto industry. I don’t think this is a risk I would want to take if I were President or Speaker of the House.
Nice article, Gary.
And I love the way that you poke fun at the amateur “analysts” that are on Boarding Area. haha
“By the way will people finally acknowledge that Delta, for instance, isn’t actually opposed to government funds in aviation, they’re just opposed to things that do not benefit Delta?”
This is spot on, so the answer of course is that no, people will not acknowledge this. Easier to continue to bash the M.E. carriers than to acknowledge the same activities with the U.S. carriers.
I can see you voting with your feet and NOT fly.
Gary 2020
It will hit the fan when the airlines report positive cash flow in 4Q20 at the same time they’re laying people off and degrading the service. I imagine they’ll be using this year to clean the ledger and write down/write off everything they can to clear the books for next year and avoid the PR backlash significant book profits would create.
Gary,
How is this a bailout for Senior Captains? Their Senior. They will stay top of the scale even with furloughs. If you wanted to argue it was a bailout for a junior guys that would make sense. But not top of scale senior Captains.
@121Pilot – contracts rewritten in bankruptcy
–I am very skeptical of a government the just approve a $2.1 trillion of helicopter cash with the Fed kicking in another $4 trillion according to Mnuchin. The airline part of this ($50 billion (50% loans)) is really very small part of the total.
–So to be very clear, I am against the airline bailout.
–However, unlike your depiction of screwing the stock holders and bond holders being more or less free, I should point out the 9/11 happened 20 years ago, and the financial costs to the airlines of bankruptcy are high:
(1) Bond rating are low compared to similar companies in other industries. That means cost of funding is through the roof.
(2) Shareholders refused to buy more stock (which would increase share price), even when the airlines did buybacks. Fear of another bankruptcy.
(3) I am guessing that a significant portion of their bank financing is secured or has significant covenants, because who would trust an airline.
(4) After coming out of bankruptcy yet again, what suckers, I mean shareholders would buy an airline stock ever. I wouldn’t. And what sucker bank would give them a low cost loan.
–A lot of finance is common sense. Fool me once, shame on you, and I would be dumb to ever give you my money again.
–Finally, if the airlines have to pay up for financing, it would eventually be passed on in terms of ticket price.
I FULLY agree! In fact I mentioned the same thing (and a whole lot more) in my March 21st blog post here: https://richbilancia.wordpress.com/2020/03/21/winners-and-losers/
@ ABC — I was a 300k – 400k mile per year flyer until three weeks ago. Now, I don’t expect to leave my house until there is a vaccine (two years maybe?). Flying ain’t worth dying.
I’m not sure I know where to start with this.
I understand the sentiment in regards to the corporate bail outs. But to single out senior captains and executives as a valid reason not to save an truly vital economic industry is quite short sighted. The airlines employees Hundreds of thousands of workers. Almost all of which don’t make senior captian money. Indirectly, the airlines support millions of jobs. Which in turn, have a marked impact on the economy of this country. Many of those will and do need the help. If the airlines ceased operations tomorrow, about 1% of the workers would be ok. The senior captain, the executives, but 99% and thousands upon thousands of others would not.
An another note, sure. We can spool down the airlines for a few months. And I agree, a slow spool would most likely be prudent as well, but it’s not that simple. Did you factor in the costs of retraining multiple employee groups? The time and effort involved in getting pilots current again? The supply chains back up to speed? What if demand rises much faster than the capability to do all of that?
There are lots of things to be considered here. This article is definitely more of an emotional opinion piece by an flier that seems to hold a grudge.
@CranklyLawyer- I am very skeptical of your claim that DIP would not be available to airlines. It was available to them in prior bankruptcies and they own a cash cow in their loyalty businesses.
But you also misread Gary’s point- unlike you, he does not assert that DIP is available or not available. His question was rather why not test the markets first? The car manufacturers went through a process much more similar to what he is suggesting- bankruptcy in conjunction with funding, as I believe you that DIP was not available. The bailout just lets airlines continue to perpetuate bad business practices and rewards shareholders unnecessarily.