The Only Honest Case For Another Round Of Airline Bailouts Comes From Ben Baldanza

Former Spirit Airlines CEO is a JetBlue board member and naturally thinks more of that sweet, sweet taxpayer cash ought to flow to airlines. He lays out what he calls misconceptions about government aid to airlines as he makes the case for the second government bailout of the industry this year.

Baldanza’s piece is a breath of fresh air though because it honestly talks about government subsidies as more than just an unemployment program. He takes seriously government support as an airline bailout, ensuring airlines are providing capacity to the economy, and doesn’t offer the fiction that it’s only about supporting the workers. Remember that,

  • ‘a clean extension of CARES Act payroll support’ means $25 billion to not lay off anyone involuntarily for six months but that amounts to At $333,333 per job actually saved (and only saves those jobs for six months)

  • because airlines get paid most of last year’s payroll, even though they’ve already shrunk their employment and they aren’t going to be laying off most people – most of the money goes to cover payroll airlines will still incur whether the grant is made or not.

  • by covering airline payroll that means the marginal cost of adding flights is very low, they have no additional personnel cost and already have the planes – that means they just need to cover incremental fuel. You get a lot more flying than the market would support without payroll subsidies.

Airlines have already received over $50 billion from the federal government. None will go out of business this year. It’s an open question what happens in the future – that depends on when passenger demand comes back. (With high costs and an enormous debt burden, markets are betting American Airlines is the first into Chapter 11.)

Taking payroll costs out of the equation for adding flights means a lot more empty seats and low fares that hurts all the airlines and slows their recovery. And since airlines universally say customer demand won’t come back for years, we know that many current employees will just be laid off in April – we’re delaying their transition to new roles in different industries by keeping people unproductive (paid not to work). That’s bad for the economy.

So what is Baldanza’s case, and how does it stack up? He posits 5 ‘myths’ about bailouts, as a way of arguing for even more subsidies. It’s the best I’ve seen anyone arguing honestly has been able to muster.

Balanda’s “Myth #1: Aid Now Just Delays The Inevitable”

Baldanza acknowledges “that demand recovery for the industry is years away, and even then some business traffic may be lost forever.” So why on earth would paying airline employees for the next six months help? The original argument that got CARES Act funding was that we’d be through the pandemic in the fall and needed to keep workers attached to the airlines so that airlines would be ready to soar on a moment’s notice. We already know how that turned out.

Still, Baldanza says we need continued subsidies so that “the sooner airlines can start flying the better it is for the whole economy.” Implicitly then he’s not just asking for a six month extension of the CARES Act, he’d want government money to flow until travel recovers (which IATA says won’t be until 2024). Of course he – and the airlines – can’t make that ask explicitly. It would be laughed out of Congress. So funds are asked for on a drip drip basis.

Now, he points out that airlines will be quicker to provide flights as demand returns if pilots are current and mechanics are well-practiced. But he never explains why we should pay all airline employees not to work when it’ll be years before all their skills are needed again.

Indeed airlines know that they need the most skilled workers, and they know how long it takes to re-certify workers, and that’s why proportionately fewer pilots will be laid off. Baldanza is saying that airline businesses won’t make investments now to earn money later – which they need to do to repay the massive debt they’re incurring – without government forcing them to do it, but that’s simply not borne out by the evidence.

Baldanza wants you to believe that payroll support is a free ride because “these employees would be eligible for unemployment insurance ” anyway. But paying a pilot $200,000 is different than paying that pilot $500 a week plus any additional federal money whether it’s $300, $400 or $600.

More importantly though paying employees to stay on for another six months, when airlines say they won’t need as many employees in the spring (and would lay them off then) is just an expensive unemployment program that delays putting worker talent to good use for the economy elsewhere. In other words Baldanza neither compares costs nor considers opportunity cost.

He doesn’t want you to think this is all that generous, because airline workers have had their hours cut despite CARES Act payroll support – but that just underscores how much of the money is really going to airline equity rather than labor.

Baldanza’s Myth #2: Aid Only Helps Investors Who Knew The Risks

I have no issue at all with stock buy backs, though the CARES Act limits those. Buy backs are a tax-efficient form of dividends, and they’re used principally by businesses who don’t have a better use for the cash. They underscore that airlines are low growth businesses without productive use for the capital.

The last thing I think we want is airlines forced to hold onto cash, instead of having the funds available for investors to deploy in more productive and innovative sectors (like bioscience!).

Still, Baldanza’s claim that “[p]roviding aid to keep employees current has not resulted in airline equity values increasing” is silly. First, we’ve seen shares jump on word that additional government funds may be coming and second without the infusion of government cash airlines would be in worse shape and their equity would be worth less.

The fact that airlines are losing money does not mean investors aren’t better off with government aid than without it. Indeed thanks to CARES Act payroll support, when oil prices were at their lowest, American Airlines Senior Vice President Vasu Raja said their break-even load factor was down to 9%.

It’s certainly true that shares aren’t likely to take off “until the industry truly recovers” but it’s weak analysis to say that investors aren’t benefiting from government money.

Baldanza’s Myth #3: Aid Rewards Bad Cash Management Behavior

This is somewhat duplicative about his claims about investors, since he’s talking about share buy backs versus saving for a rainy day. I don’t think anyone makes the case that airlines haven’t invested in their businesses – just look at all the new planes at American Airlines. Even Delta, which Qatar Airways CEO Akbar Al Baker said flies crap airplanes, bought a whole bunch of Airbus widebodies.

And all of this investment is precisely the reason airlines have had so much wood to burn raising liquidity in private markets without turning to government. Airlines haven’t all even decided for certain to take subsidized loans from the last CARES Act because so much private money has remained available. Government should be a lender of last resort (if at all), certainly not a lender of first resort.

Baldanza’s point about how “airlines have effectively generated new liquidity in the private market” is an argument against subsidy, not an argument for it.

Baldanza’s Myth #4: Airlines Need Demand Recovery, And Government Aid Can’t Do That

The argument here – that “reducing the financial burden during this time allows airlines to spend and experiment on ideas to make customers and businesses more confident” – is an admission that payroll support isn’t just money for people who would lose their jobs.

And I’ll grant that in past airline crises, the first thing to go has often been cleaning (putting off deep cleans to as long as 18 months) but this time they’ve invested more in cleaning.

They’ve done this because it’s in their financial interest to make customers confident in buying their product. If we were looking to reward that though wouldn’t we be giving money to the airlines doing the most (Delta) and not to those refusing to block middle seats (American, United)? Perhaps Baldanza would like that because it would mean money to middle seat blocker JetBlue.

He acknowledges that “the real cure for airlines is for customers to feel confident to travel again” but that comes from getting through the pandemic not from United’s use of UVC tools to disinfect cockpits of from electrostatic spraying.

And he acknowledges that airlines have been experimenting with new ways to give customers confidence without another round of aid. Not a single airline has said they’re holding off on cleaning or disinfecting pending a second bailout. So where’s the proof that “relieving the wage pressure on airlines” is what’s needed to provide safe transportation?

Indeed the implication here that without more government subsidies airlines wouldn’t be able to invest in cleanliness is what’s most troubling.

Baldanza’s Myth #5: Bankruptcy Is Better Option For Airlines

If continued CARES Act payroll subsidies weren’t about bolstering airline bottom lines, Baldanza wouldn’t even be addressing the bankruptcy argument. This only comes into play because payroll subsidies aren’t just a straight pass-through to workers. Airlines are pocketing more than half, since government support covers far more than just the payroll of people who would have been laid off without it.

As a result airlines will have more liquidity and become more likely to stave off bankruptcy with CARES Act funding.

Baldanza thinks bankruptcy is bad for airlines now because there’s nothing to gain like there was when they reduced “costs of retirement expenses” (by foisting worker pensions onto the government’s Pension Benefit Guaranty Corporation), when US Airways rejected its Pittsburgh gate leases and closed its hub there.

However he says “[d]emand at low levels is not fixed by bankruptcy.” That’s wrong. Airlines have planes they do not need because they do not have customers to fill them. They have gates they do not need because they don’t have passengers to fly from them. Bankruptcy means that equity and (mostly unsecured) creditors take a haircut when the business suffers – and certainly that they do so before taxpayers.

Baldanza says bankruptcy may not be needed to accomplish this, and that’s great! Whatever mechanism is used, investors and creditors should incur losses before the public at large.

Are Airline Subsidies The Best Way To Boost The Economy?

After arguing that contrary positions are ‘myths’ Baldanza offers his one brief case that subsidies for airlines are good, and that’s that airlines are necessary for the economy, that we won’t “fully recover without airlines, as people and goods need to move and without robust transportation, both big and small businesses suffer.”

Here though what he’s given you is a sleight of hand. He never makes the argument (because it would be silly) that airlines would disappear without subsidies. We’ll have fewer flights for a while because there are fewer passengers.

Sure, if businesses can’t go anywhere they will suffer but despite the first CARES Act set of bailouts there’s been no business travel. The reason for lack of business travel isn’t a lack of flights, or an inability to buy seats on planes. The reason for lack of business travel is the virus.

While Baldanza says “[i]f the government wants to help the economy with another aid package, there are few places that will provide as strong a return in terms of economic growth and protect as many jobs in one swoop” but that isn’t true.

To bring business travel back, and support the airlines, we need to get through the pandemic. Investments in bioscience would seem to have a much higher rate of return that shoveling more money into airlines.

Besides, paying for unused airline capacity just drags down fares and makes recovery harder. If there are fewer airlines operating fewer routes that’s a symptom of economic contraction, not its cause. When businesses are ready to travel airlines will be there. They already have the planes. There are already airports. And carriers are being careful to furlough disproportionately fewer pilots, since they take longer to train to get back in the air.

(HT: @JakeHake)

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 »

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  1. This is nuts. If one, as Baldanza and other airline execs, assume that demand will be depressed for a long time, there’s no reason to keep throwing money at the industry. It’s unfortunate that more people will lose their jobs, but as Gary says, the subsidies would merely delay the time when they lose their jobs and, to my mind, there’s no reason airline employees should be receiving more subsidy than employees of other industries who lose their jobs. To me, the appropriate remedy would be robust unemployment compensation for all workers and let the airlines, like other businesses find the proper level of capacity. Bankruptcy, contrary to Baldanza’s implication isn’t only about getting a break on retirement obligations; it also allows one to reduce ongoing costs by renegotiating debts and, in the airlines’ case, leases. And, guess what, all those planes sitting in the desert will be available to rebuild (at a cost) capacity when demand returns and, so will the ability to retrain/train pilots (also at a cost) once demand returns.
    I do disagree somewhat with Gary about buybacks. They certainly are a tax efficient way to return capital to investors and, generally, as an investor I’ve always welcomed it when companies I”ve invested in do buybacks. However, like any good thing, they can be overdone. And, when, for example, we see American pile buybacks upon a significant capital program, so that debt rises to levels that are unsustainable in a downturn, the risk to the enterprise and its shareholders is inappropriate.

  2. @Jerry – I was fine from a legal standpoint with buybacks even when American was adding debt, it seemed imprudent but not outside the realm. Buybacks become absurd in a world of continued airline subsidies, because then airline investing becomes heads investors win, tails taxpayers lose.

    My point was about buy backs generally, not about how American Airlines was effectively borrowing money to buy back stock. Now they’re highly leveraged going into the pandemic, so when they need to lever up further they’re in a less sustainable position than competitors. It’s why they’re the most likely bankrutpcy risk of the major U.S. airlines.

    All of which is fine if the government isn’t backstopping them….

  3. My first HT on VFTW! I look forward to listening to Airlines Confidential this week to hear Bens talking points.

  4. @Patrick – care to elaborate? If you’re referring to cost per job saved, bailout amount divided by number of warn act notices … which understates the cost, because actual furloughs will be less than number of notices sent.

  5. You could throw trillions into bioscience and it wouldn’t crank out a vaccine any faster. We could fund the simultanious full development and all testing phases of 200 vaccines for Covid-19, along with a full production of each to produce a dose for every person in the world, and it would cost less than $100 billion, and wouldn’t get done any faster. For all practical matters, this is probably what is happening anyway. There’s no doubt that governments are footing the R&D expense of these projects just to ensure they get developed without companies getting distracted by financial issues.

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