Why Airline Wages Rise, And Why Stock Buybacks Don’t Matter

U.S. airlines agreed not to buy back stock until September 30, 2022 as part of their government bailouts during the pandemic. It would have been unseemly to pick taxpayer pockets and immediately turn around and distribute those same funds to shareholders. (There were also limits to executive compensation for the same reason, Congress didn’t want to be embarrassed by the airlines once they had the money.)

Now that the buyback restriction is about to end, unions don’t want airlines to spend money that way, arguing that the funds should go into the operation instead (paying workers more, natch).

“We can’t allow executives to send one dime to Wall Street before they fix operational issues and conclude contract negotiations that will ensure pay and benefits keep and attract people to aviation jobs,” Sara Nelson, international president of the Association of Flight Attendants, which represents some 50,000 cabin crew members, said in a release announcing the anti-buyback campaign Thursday.

The campaign is also supported by the Association of Professional Flight Attendants, Air Line Pilots Associations, International Association of Machinists and Aerospace Workers, the International Brotherhood of Teamsters, the Transport Workers Union of America, and the Communications Workers of America.

Spending cash that airlines are generating on buybacks doesn’t really influence wages. Wages at airlines go up as a symptom of cost disease. As wages rise elsewhere in the economy due to productivity gains, airline wages have to go up to compete for staff, even though a flight attendant or pilot is no more productive than they were in previous years. Pilot wages, especially, go up when the government limits the pool of available pilots (Cf. 1500 hour rule, mandatory retirement age).

Unions largely affect the form that compensation pays (work rules versus cash) and to whom compensation is paid (redistributing income from junior employees to senior employees through seniority even though an airline is generally not getting more productivity from more senior employees). And airlines like Delta will pay employees more to convince them not to join unions, in order to save themselves the associated deadweight loss (Delta’s historically better financial and operational performance has been tied, in part, to being mostly non-union).

Here is the completely wrong way to think about contract negotiations at an airline,

“Every dollar that goes toward stock buybacks is a dollar that could have been used to reduce disruption by addressing understaffing, high turnover, excess overtime, and low starting wages,” said Richard Honeycutt, chair of CWA’s Passenger Service Airline Council.

Indeed, airlines aren’t about to start buying back stock because of:

  • debt loads, piled on during the pandemic
  • high fuel costs
  • possibility of recession reducing demand for travel

The airlines that are strongest financially could return to buying back shares if the economy stays strong, fuel prices moderate, and demand continues. But that just means those airlines are profitable, which is a necessary condition for achieving any of labor’s goals. If anything stock buyback and wage growth may correlate positively, rather than negatively.

Buybacks are one of the most misunderstood elements of finance among the public at large.

  • When airlines generate cash that belongs to shareholders they can invest it or return it. They are generally low growth businesses, and there are better opportunities for investment outside the airline. So dividends/buybacks move the cash to more productive places – that is good for society because it means money invested in productive, innovative ways.

  • Buybacks don’t even, generally, raise share price in a material lasting way. Share price includes the cash, when they distribute it the airline has both a lower value and fewer shares.

    Stock buybacks do not make shareholders wealthier. The cash already belongs to the shareholders. It is in the company’s account. The company distributes the cash and is therefore worth less, while (in this case ex-) shareholders invest it elsewhere.

  • Buybacks have historically been more tax-efficient than dividends though of course there will now be a 1% tax.

Whether a business is holding sufficient cash to operate (especially given mountains of debt!) is a reasonable question in the context of corporate governance. As a labor union issue it’s a red herring, except insofar as their concern is bankruptcy reorganization and abrogating contracts. But that is, of course, still the basic prudent management question.

That we’re even having the discussion about buybacks gets at why airline stocks have low multiples. They do not have high return opportunities to invest their cash.

And that’s the major reason (aside from how badly mergers often go, and how costly they can be to manage) that JetBlue shouldn’t take nearly $4 billion in cash and use it to buy an airline. They’d be better off taking the cash and investing it in almost anything else, even a broad-based stock ETF.

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. I would love to debate this with you, Gary, but I can’t find a single thing I disagree with.

    Labor often fails to understand that they work for the stockholders that have put management in place. Labor does not own the airline or have any meaningful say in the way a company is run.

    United employees owned the company at one time and it was an absolute financial disaster.

    btw, debt paydowns is what airlines are doing right now. WN just announced they were buying back $1 billion plus in debt; DL did it similarly not long ago. All of the big 4 – and others – have paid down debt as part of regularly scheduled debt payments.

    and there were only a couple airlines that paid dividends pre-covid including DAL and LUV and both will probably do it again. Dividends are part of what makes a stock attractive on a long-term basis and not just for trading.

  2. @ Gary — Buybacks will occur when it can best line the pockets of board members. Period.

  3. Buybacks are fine as long as they sell every one of those shares back to the market before they come begging to you and me (taxpayers) for a handout in bad times.

  4. Gary, I believe that your conclusion that airline wages are a result of Cost Disease is incorrect, especially in today’s labor market.

    Using 2022 BLS figures, most recently published August 9th, in annualized rates: Nonfarm [hourly] productivity fell @ 2.5% in Q2 and 7.4% in Q1, yet hourly wages for this cohort rose 5.7% in Q2 and and at a 6.7% compared to the second quarter of 2021.

    It seems to me that these numbers are moving in divergent directions. Instead, I believe wage growth is being caused by a tight labor market undergoing profound change to a degree never seen before.

  5. There have been 2 bailouts for all airlines plus bankruptcy for the largest carriers since 9/11, not including other government handouts that they get regularly. The airlines can start buybacks once they stop privatizing profits and socializing the losses. Put in a floor of cash on hand for when they are allowed to enable buybacks, or an FDIC-style system where they are required to make insurance payments for when the next issue happens and they come hat-in-hand to the government.

  6. Medical costs are too high! We should lower the education level for doctors so more can be graduated!

    I do agree the labor costs should be more evenly spread, although if you look at a cost per passenger per flight hour, regional pilots are now the most highly paid pilots. Since productivity drives wages, this is divergent from norms. A pilot operating a 300 passenger 777 would earn more than a CRJ in the same way a CEO of a $5 billion (revenue) company would earn more than a CEO of a $5m (revenue) company.

  7. Ben,
    chapter 11 reorganization is NOT a government bailout. It is a court-supervised process of exchanging debt for equity among PRIVATE lenders. Government obligations are not subject to chapter 11 reorganization.

    However, your point about privatizing profits and socializing losses is true – it is just not at all restricted to airlines.
    And you do realize that the US Treasury made money on its loans to the airline industry post 9/11 and has warrants on every US airline so will likely make money – lots of it – for making loans to airlines. May I once again note, loans, not cash.

    And a big part of the reason why the entire US economy was bailed out was because of the draconian lockdown measures that didn’t really make a difference in covid outcomes. Given that the CDC is finally admitting that they did alot of things wrong w/ covid – and Congress and two Administrations followed their advice, you have to start tallying the damage to the entire US economy for their advice.

    going back in the dialogure here, CEOs and high level execs should have a significant part of their compensation aligned with the goals of stockholders. The problem is that the industry has had executives like Doug Parker that touted that his compensation was only stock-based even as he bought back more stock than any other US airline industry – even while AAL’s market cap fell from parity with DAL – $40 billion in the early 2010s – to just 40% of DAL’s for the past 5 years, regardless of what DAL’s market cap was.

    Stock buybacks can be effective tools for managements to use to boost shareholder value but there needs to be accountability esp. when companies need government help, regardless of the industry – and let’s be clear that other industries ROUTINELY get government aid.

    But let’s also not think that there is or should be a correlation between labor costs or stock buybacks.

  8. @ Tim Dunn – The PBGC is not a private lender, so contrary to your statements, Chapter 11 can very much be a government bailout. In fact,, American Airlines’ last bankruptcy was triggered by its pilot pension plan.

  9. The new inflation reduction act (LOL) will add new taxes to buybacks to punish capitalist. That might change some dynamics.

  10. Gene,
    the PBGC charges fees to pension providers in order to guarantee their pensions.
    The PBGC has not been bailed out because of airline bankruptcies.
    The pension protection act – which essentially strongly encouraged DL, NW and AA from terminating most of their pension plans – was enacted by Congress to keep the airline industry from doing to the PBGC what the steel industry did.
    Of all those 3 airlines, I believe the only pension plan that was terminated in bankruptcy was original DL’s pilot pension plan which contained a lump sum distribution provision which could not be removed. The PBGC got a $2 billion claim on DL’s estate which gave them equity in reorganized which undoubtedly was worth more than the claim. DL pilots are still sore about having their pension terminated but there was nothing else either side could have done. No matter how you look at it, the PBGC was not harmed by any of the last 3 airlines’ chapter 11 reorganizations. I can’t say whether that was true about UA (pre-CO merger) or US, both of which did terminate all of their pension plans.

  11. Buybacks only benefit company execs by supporting the share price while the execs unload their options. Meanwhile, shareholders lose because buybacks inevitably occur when the stock is overvalued. The moment growth dissipates or economic conditions deteriorate, the share price multiple collapses and all the buyback money has disappeared into the pockets of execs who unloaded at the top.

  12. @ Tim Dunn — Premiums paid to the PBGC very poorly correlate to risk of failure. The Pension Protection Act has been amended constantly since enactment and does next to nothing to encourage plan sponsors to maintain their pension plans.

  13. There is a very good article in the Motley Fool from 2020 under the article
    “Airlines” Didn’t Waste All Their Cash Flow on Share Buybacks: American Airlines Did”
    Anyone that wants to see hard data on how each of the big 4 bought back stock compared to cash flow metrics should read the article.

    you are correct but the fact is that airline pensions have not been bailed out by the federal taxpayer.

    Airlines received direct federal aid post 9/11 to put hardened cockpit doors on their aircraft and then during covid but the federal government also will receive interest on the loans it made to the industry and also has stock warrants in U.S. airlines – all of them.

    and to the other part of the discussion – which has received far less discussion – airline unions are looking to significantly increase their pay as a result of inflation. Given that airline employees themselves benefitted dramatically from federal aid – tens of thousands would have been laid off were it not for federal aid (the whole reason for government aid was to keep airlines from laying off employees). The real question is should airline employees expect to recoup what they “lost” during the pandemic; many are asking for retroactive pay even though most airline employees worked far less than normal for much of the pandemic.

    part 2 of the question is how much airlines will raise pay which will have a far larger and more sustained impact on airline finances than any buybacks.
    With the largest airline workforce in the US, AA will either increase pay less than other airlines (as a %) or will see its costs go up much more than other airlines, esp. DL and WN, which are much efficient in generating revenue per employee than AA or UA.

  14. Quick question for anybody: can a company force a shareholder to sell back their shares to the company or do they buy it on the open market?

  15. Geez Gary, I never dreamed you could make me sleepy with one of your articles but you just did LOL!

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