President Trump said on Tuesday that the federal government would help the airline and cruise industries. Details, though, are limited. However economic stimulus proposals being batted around Washington are bigger in nominal dollars than 2008’s Troubled Asset Relief Program and the 2009 stimulus law.
When Congress starts talking big dollars, industries line up. After 9/11 Congressman Jim Moran said “It’s an open grab bag, so let’s grab.” And that’s what the travel industry seems to be starting to gear up for.
The Travel Industry Is Hurting, And Feverishly Looking For Government Money
We know that travel bookings are expected to be down quite a lot and travel businesses will lose money. United Airlines President said on Tuesday that he doesn’t expect any major U.S. airlines to go bankrupt but might see that in Europe.
That isn’t stopping the industry from asking for money, however. And it isn’t limited to the airlines. Hotels are also looking for a bailout. The Executive Vice President of hotel lobbying group American Hotel and Lodging Association says,
“We’ve also met with the White House, they want to contain the virus first and foremost and simultaneously figure out how to provide help to impacted industries and employees.
“We have urged the Administration and Congress to look at things that don’t require a legislative fix… the last thing we want is a situation like in ’08 and ’09 where small hoteliers cant meet their debt payments, banks foreclose, and they own those distressed assets. We want to keep people in place even though occupancy is taking a dive.”
The Airline Industry Survived 9/11 And The Financial Crisis Without Government Money
Airlines didn’t receive a bailout during the financial crisis. They were persuaded to buy into federalizing airport security (creating the TSA) after 9/11 with the promise of money from a new Air Transportation Stabilization Board. The ATSB gave money to America West, US Airways, American Trans Air, Aloha Airlines, Frontier Airlines, Evergreen International Airlines, and World Airways.
Frontier later went through bankruptcy but still exists. America West later took over US Airways and then later took over American Airlines. The rest went out of business anyway.
Doug Parker testifying on the need for subsidies to the US airline industry in 2001
On 9/11 the airline industry was directly attacked. The theory at the time was that the 9/11 attacks meant the industry itself couldn’t survive without assistance. Ultimately government aid wasn’t necessary to save most of the airlines, and most of those that received assistance went out of business anyway. I believe U.S. air travel would be better today had America West executives not managed to take their bailout and parlay it into running the world’s largest airline.
Airline And Hotel Losses Don’t Present Systemic Risk To The Economy
I wasn’t a fan of bank bailouts but at least the argument there was about systemic risk to the economy as a whole. There’s no such issue here with bailouts for the travel industry.
Major hotel chains don’t own most of the hotels operating under their brand. Individual hotels could go bankrupt and the effect of that bankruptcy is limited. The property itself is still there, creditors take it over, and will sell it or recapitalize it. Some hotels might go out of business. Those are the ones that people do not want to stay at in the future.
The U.S. isn’t going to stop having an airline industry. U.S. airlines could even go bankrupt, though Scott Kirby says not to expect it. Delta, United, American Airlines and Frontier all went through bankruptcy and are flying today. Northwest, US Airways and Continental Airlines have all had at least one bankruptcy and are now merged with another surviving airline. (Continental’s second bankruptcy was precipitated by the crisis of the first Gulf War.)
Airlines can fly through bankruptcy. The largest U.S. airlines already have done do. And they can be recapitalized.
You may want to ensure that laid off workers receive help of some kind. You may want to ensure that a sick policy like the one American Airlines imposed doesn’t keep workers showing up sick, and that they’re able to stay home if they think they have a virus. Those things do not require a travel industry bailout.
Businesses Lose Money
In September 2017 American’s Doug Parker famously said American would never lose money again. But the nature of business overall is to make and lose money. Private investors take that risk.
Airlines have earned tremendous profits over the past 8 years. They have tremendous government advantages already including no foreign competition in the U.S. domestic market and a lock on gates at congested airports that keeps out new entrants. They’ve taken those profits and invested in their businesses. They’ve bought planes, and renovated terminals. And they’ve bought back stock. Hotel chains have earned record profits as well on the back of historically high occupancy and average room rates.
Private enterprise only works when investors bear the consequences of their decisions. Taking profit, and having the rest of the country subsidize losses, is a recipe for too much risk taking and an incentive for looting the firm (buybacks?) and leaving taxpayers holding the bag.
Amen. And even though you didn’t address it, there is no economic rationale that I can think of for federal assistance to cruise lines.
Agree 100%. It could be a rough season, but bookings won’t be down forever. We don’t need billions of taxpayer dollars funneled into the airlines.
We get it, Gary. You’re a conservative Texas Republican.
Air Canada got a govt bailout in 2009. And they’ve been price gouging and cutting service ever since turning in record profits, and record compensation for management while not doing same for front line staff.
Its a sorry airline with non-existing customer service, a shady safety record, that should have been allowed to fail a long time ago.
Thank you for highlighting the fact that if anyone may need direct financial assistance it is the workers, not the corporations they work for. I fear this will once again be missed by Washington as it plans its economic reponse.
@MJ – is that really what you get from this post? I don’t think anyone can reasonably describe me as conservative. How is chafing at corporate welfare conservative?
I’m a hotel franchise owner and I agree. I think my company is going to take a major loss this year, but we’ve made a lot of money in the past several years too.
Sound more like you’re a European socialist if you’re advocating AirBerlin 2.0. Personally I think US style bankruptcies give companies too much leverage. They prevent corporate cultures from changing.
For a some much needed contextualization, United alone spent more than $7bn in the last 5 years on share buybacks. Delta has spent roughly the same. American has spent over $10bn in the same timeframe. Perhaps instead of share buybacks, the airlines’ leadership should have been stockpiling cash to prepare for any downturn. Any federal bailout would be be a direct consequence of this failure to plan ahead and would function as a direct asset transfer from taxpayers to AA/UA/DL shareholders. Hard oppose.
@ABC – I have articulated issues with US bankruptcy law here on the blog before, eg I believe pensions ought to be treated similarly to compensation owed to employees
No bailout.
How about all those fuel surcharges which we likely predicated on higher priced fuel which has come down a long way over the past many months?? I don’t see the “profit margin” on that line item being returned to customers.
I agree with the post. And here’s another thought. Before we consider bailing out companies and having a cow over the stock market, the administration needs to admit that coronavirus is a serious problem and come up with a comprehensive plan to address the effects on the health of the population.
@MJ – I’m a moderate from a major East Coast city – and I agree with Gary 100% on this. Most of my colleagues (from NC and TX) would call me a liberal. Regardless, I agree with Gary.
We don’t need welfare for travel companies. But loans to travel companies that they pay back with interest like TARP in 2008-2009 where every bank paid back with interest the loans in short order isn’t a bad idea. We don’t need a permanent government lending situation like with subsidized federal student loans that encourages raises in tuition costs. But to combat a pandemic induced travel disruption where travel can be at a standstill for months if it gets to that point, a temporary loan program makes sense. I think it is more of a confidence thing since interest rates are very low, a lot of these airlines and cruise lines have cash and the fed can aid them in the repo market if necessary to get cheap funding.
Trump already gave the airlines a bailout in Q4 2017:
Tax reform legislation is having a major effect on airline earnings. And thus far, Southwest, JetBlue, and Alaska Airlines seem to have experienced the most immediate benefit from the recent changes in US tax policy.
Southwest Airlines reported a $1.4 billion benefit due to tax reform legislation. JetBlue and Alaska Airlines reported fourth-quarter tax benefits of $502 million and $274 million, respectively. United Airlines also saw its tax expense in the fourth quarter of 2017 fall 95.9% in part because of a $192 million tax benefit.
indeed – equity holders don’t’ need to be bailed out
if there’s a liquidation prospect that threatens the ability to provide air service then consider it – but let’s not prematurely bail out airline shareholders
jackson’s temporary loan program makes sense – give them liquidity if needed that must be repaid ahead of other obligations
These businesses do not need any kind of a massive bailout at our expense. I’d like to know when we as the American people who may be directly affected due to lost wages get help. No right. But yet we as the working Americans are expected to bail every one else out. The leeches, the unaffected and the businesses who don’t even need it.
No bailout. We will need expanded hospital staff, space and equipment.
Governments should never give a dime to private industry. Ever. They can buy insurance if they like. Same for farmers, etc.
Do I get something to compensate me for the losses in my family’s 403(b)? Hell no.
Free markets for once in my godforsaken life.
No corporate bailouts. Use the money to help the displaced and sick.
I agree, no corporate bailouts. Companies that are bad at business go out of business.