The Really Really Yucky Airlines Bailout

I’ve held back from saying much about the 2020 bailouts because they are even stinkier than the 2008 ones, yet the people putting them together and receiving them don’t care what you think. If the Trump Administration could stare down two years of Russiagate, with the press braying daily and all sorts of spook state people warning about the danger to our precious bodily fluids elections, they have nothing to worry about when they are handing boatloads of cash out to friendly or at least friendly out-of-desperation recipients.

The airlines are a particularly unsympathetic lot of corporate welfare queens. As most of you know, the largest US carriers spent 96% of their free cash flow on stock buybacks, well above the 50% average for the S&P 500. This Bloomberg factoid does not include whether the airlines borrowed to make these purchases, which was common in the post-crisis era.

It’s bad enough that airlines went whole hog into propping up stock prices so as to goose executive pay. It’s even worse because airlines are a high fixed cost, cyclical business. They more than just about any business ought to keep cash around for a rainy day and they didn’t.

Now admittedly, airlines are less ugly than banks, since they haven’t engaged in large scale incompetence (like regularly all together making stupid loans and acting like they shouldn’t be blamed because pretty much every other bank did so too), borrower fraud (like steering people of color to subprime loans, or switching mortgage documentation at closing), investor fraud (lying about loan quality) and other forms of chicanery (pervasive bad servicing). However, they are producing a lot of greenhouse gas emissions, and electric planes are a long way away. So a smaller airline business would not be a bad thing.

Nevertheless, if the Feds are going to rescue reckless businessmen, they ought to put their boots on the necks of the miscreants, particularly in making sure they build up big cash coffers so they don’t do a rerun any time soon.

Instead, what the airlines get is the way of bailout conditions is so minimal as to be a too-obvious exercise in optics. For instance, some of the money is in cheap loans, and some in grants that will be forgiven if the carriers fly right. The carriers are whining that it isn’t all grants. They actually have a point since as companies with high operational leverage, more debt is not a hot idea (even if the interest rate is low, the principal has to be paid off or refinanced). More grants and much more stringent conditions would have been a better mix. Instead we get:

A ban on laying off workers or cutting pay prior to September 30 (the Financial Times reports that airlines “will receive a payment equal to roughly three-quarters of its payroll for the second and third quarters of 2019”). Needless to say, this is pathetic

Prohibition of share buybacks before September 2021

Restrictions on executive pay until March 2022

The deals have been struck individually, but according to the Wall Street Journal:

On Friday Mr. Mnuchin told the largest carriers that 30% of the assistance would need to be repaid and that airlines would have to offer stock warrants on a portion of those funds.

The Financial Times description isn’t clearly worded, but as I take it, in Delta’s case, Treasury would get as much as 5% in warrants. That’s chump change.

Needless to say, the bare minimum of a sensible deal would include at least 40% board seats, much stronger and explicit requirement to build cash reserves, and veto rights on lots of issues. One would want an equity stake now, but that’s legally problematic, and the need for speed makes it a non-starter. And the point isn’t for the government to make a killing as much as to make sure the airlines act more like utilities and less like high-fliers until they get their balance sheets sorted out. That could take a while given that the damage to the economy means it’s going to be a long time, if ever, before people fly as much as they did pre-pandemic.

So in a less dysfunctional world, you’d want a lot of controls and access to internal financial and operational information, as opposed to caring much about financial upside to the government.

But in a less capital-serving bailout, another problem is who the minders would be. Remember AIG? The government appointed three trustees. There’s no evidence they did anything other than collect fees and confer a veneer of legitimacy.

Board members are trained to not rock boat so as to get even more board seats. As a result, “seasoned” board members are with a very few exceptions, constitutionally unsuited to play a real oversight role. The lack of independent-minded, vigilant yet business savvy types to parachute into a rescue supervision role is a big problem even if one generously assumes an Administration that got religion about not toadying to Corporate America.

A final issue is that some of these airlines will not make it even with a rescue. Pray tell, how does Jet Blue survive? It’s a budget airline catering to tourists. Even the middle class Americans that manage to keep their jobs and something resembling their pre-coronacrisis paychecks are going to be so traumatized that a lot of them will hunker down and save more, which among other things means traveling less.

So unless we get a coronavirus treatment shortly, we’re going to face a slow recovery even if we don’t see a rise in infections shortly after lockdowns are relaxed or next year. It is hard to see how the airlines won’t be back for more dough.

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  1. JM

    And today’s front page news here is that the South African government is not planning to bail out the South African Airways again after many years of mismanagement. At least we are doing something right.

  2. John A

    Easyjet paid £170 million dividend in March, including 60m to the founder and Monaco resident. Since which time they have been given a 600m bailout by the British government to keep them going. They are refusing any refunds for booked flights and holidays and laying off personnel. The easyjet Chief Operating Officer has proposed three months’ unpaid leave and what they called “a complete retraction of benefits and collective agreements” through to November 2021.

    1. Tinky

      That is, from this loyal consumer’s standpoint, extremely disappointing. I say that because I have used EasyJet for the past five years, and have been very satisfied, especially in contrast to RyanAir.

  3. Shiloh1

    $1.55 / gallon gasoline in Indiana. About 400 miles range / tank. I trust my 100,000+ mile, 14 year old car more than anything from Boeing. Not ever flying.

    1. Synoia

      I’m told that anything under 300 miles is faster by Car, and that was pre 9/11.

      To airport
      1 Hour Driving and Parking
      2 Hours ahead of flight boarding
      30 Mins to actual take off
      1 hour Flight time for 300 Miles
      1 Hour Touch down to leave airport
      1 Hour to get to destination
      9.5 Hours Total

      Driving at 50 Mph average for 9.5 Hours, Distance 475 Miles

      No expense for a hire car.

  4. Jack

    And to add insult to injury, the airlines are refusing to refund customers per their carriage contracts, instead opting to issue vouchers. Southwest just got a lawsuit filed against them, soon to be a class action,for this practice. The other airlines are being sued as well.

  5. The Rev Kev

    So sometime soon if airlines have their way, I will perhaps be expected to go into a long metal tube and breath the same air as a coupla hundred other people, sit in a seat for several hours with no knowledge if any sick people had sat there for the previous coupla days, be jammed in with other strangers all around me, mix with hundreds of other people in the airports at either end of the trip at airports with no knowledge as to the state of their health, all to help make sure that millionaire executives do not lose their lucrative jobs, and while there is still a worldwide pandemic sputtering along – are they nuts?

  6. Oh

    None of the airlines should be bailed out. If they didn’t know how to manage the company that’s their own fault. (isn’t that what these neocons say to the poor homeless people?) They kept gouging the customer, requiring change fees, baggage fees, fuel surcharges, more $ for seat preference, no ticket transfers, etc. and they still didn’t make money? ANd they keep buying other airlines to become bigger and less efficient to boot. If we let them go under, maybe we’ll find a more efficient airline that will rise up from the ashes.

    Let’s not throw taxpayer money into these worthless ventures.

    1. rd

      They made money. They just used 96% to buyback stock during the bull market so those buybacks are greatly udnerwater.

      Its too bad Mnuchin didn’t tap Warren Buffet and Mark Cuban to team up to negotiate on Treasury’s behalf. But I think that would have defeated the point of the bailouts of the executives.

      I am somewhat sympathetic to the argument I have seen that we are all sharholders through 401ks and pension funds, but that really only applies to the top 25% (including me). The other 75% are constantly told that there is no money available to them from companies etc., so these are opportunities to create some financial equality and Treasury and Congress should be more aggresive in these bailouts.

      I would much prefer sweetheart deals to go to local privately held restaurants so they will have a space and staff to re-open with in a year or so. Instead, we will likely end up with functioning airlines and bankrupt closed restaurants and bars.

    2. Ron

      Congress doesn’t give a damn what Yves thinks, you think, or I think.
      Boss Tweed defined an honest politician as ” a politician who, once he is bought, stays bought.”
      Congress is full of “honest” politicians.

      1. Synoia

        And the solution is for the Politicians to be funded only by their home constituency’s residents, with a contribution cap, so making the Politicians bought by their hone ares.

        Pity about that pesky “Money is Speech” ruling by the Supremos.

        Maybe governed by open and transparent accounts for the Candidates.

        Never going to happen. Too many broken rice bowls.

  7. upstater

    Reuters has an article posted “Jet fuel demand to remain low for years as airlines buckle up for tough ride” this morning.

    If you look at the Q2-2020 jet fuel forecast, is shows down a little over 50%. How do they get that number? 95% of US domestic flights are not operating; cargo is also down hugely. It is doubtful that in the next 75 days that demand will increase making up for the present crater.

    And going out several months or into next year, I cannot see how demand rebounds even 50%. People will be both tapped out financially and emotionally — and fearful. There won’t be a vaccine at least for another year, if not longer, or ever. And if we travel internationally, a health certificate of some sort will be needed, adding huge hassles (paging Bill Gates: we need RFID implants now!).

    US airlines will end up in bankruptcy and there will be further consolidation.

    Then, of course, the DoD is doing its part to burn jet fuel: US flexes its military strength with ‘elephant walk’ of B-52 bombers and drones in Guam . Time to rattle them sabers!

  8. chuck roast

    My wife used to fly to her conferences and committees four or five times a year. She would invariably come back with a cold. Maybe it was the hotels and their inevitable air conditioning, but more probably it was the airports and aeroplanes with their cheek-by-jowl, cattle car seating arrangements and recirculating interior air. Doubtless when the aeroplanes begin flying again many millions will be happy to walk the gangplank to see grammy and gramps or go to Disney World and all that that implies. There will certainly be competition for Darwin Awards in this brave new world, but I don’t think that it will be very stiff competition. I’m seeing quite a few people out and about with masks and functioning brain cells.

    The CV is apparently a cousin of the common cold and will find the individual aeroplane a very conducive atmosphere for carrying on its business. This will not be lost on the mask wearers. All the Federal Reserve ventilators and SPIVs will not save Zombie Airlines, and I for one will welcome the blue skies.

  9. Susan the other

    So, considering the airlines to be the most wasteful and least systemically important industry we have, it is logical that it is the first domino. Even with temporary life support the airlines will fail quickly and not be able to revive their industry. I’d say it’s over. The oil industry is also not coming back to “profitability” any time soon. The automobile industry is dead in the water. And everybody’s working and learning from home. The radio this morning said 50% of people prefer working from home. And I noticed yesterday something that warmed my old heart even more: mini delivery trucks – little orange Penske trucks – (never seen ones that small) zooming around all over town, all day long.

  10. Leroy

    Years ago, back in never, never, land, I heard an oracle from the east mention “high speed rail” to another oracle. They touted the time in which it takes a person to go to the airport, go through the theatrical experience we call “security” ? and board the plane. S.F. to L.A. in 45 minutes or at least very quickly. Why it’s faster than a speeding virus some said. And the cost, some said ? Less than the other speeding bullet and, it’s already on the ground ! Now, we seek any and all ideas that would sanitize THIS speeding bullet for the return trip. Fog it with special gas that purges the entire speeding bullet and does it in a hurry ? Bingo, all aboard for the next trip. The oracle from the west or, as we like to call him, Elon Musk, is not finished, and should be tested immediately for other ideas.

  11. Arizona Slim

    I’m old enough to remember when well-heeled wealthy travelers were called the Jet Set. Why? Because they could afford to fly.

    As for the peons, they didn’t travel. Or, if they did, they drove to some nearby destination.

    And, working from home? Well, I’m a second generation worker-from-home-er. So there ya go.

  12. OldPilot

    In the 1980s and 90s airlines were targets of Wall Street green mailers (Icahn, Lorenzo, etc.) who used excess cash to buy the companies, strip the cash and load up on debt. The raiders were hailed as heroes by the shareholder value crowd and CEOs who husbanded cash or assets were forced out.

    What is there to stop this type of behavior today? That is not rhetorical, but a real question to the readers here. I have been in this business for more than 30 years and have seen the shift to a great aversion of cash on hand. I am guessing that the legacy of the raider days and fear of the leveraged buy-out shops is what is driving this.

    1. Michael

      Perhaps if they are systemically important they can be forced to do what the banks were required to do: develop long term plans subject to annual stress tests and tough leverage and capital ratios.

    1. Portlander

      Thanks for that link on China’s high speed rail system, and the reminder that there are clean alternatives to travel by air that the U.S. has refused to pursue.

      For the amount we are spending on Bailouts to airlines–which have no future in a de-carbonized world– how many miles of high speed electric rail could be built?

      When will the U.S. start on this Green New Deal infrastructure project? I’d love to hear Biden say something on this.

  13. Darius

    Sara Nelson and the flight attendants have been hailing this. I presume they got what they needed out of it. As a union member, that means a lot to me. I can’t claim I hold detailed information though.

  14. rowlf

    Where did the incentive for stock buybacks come from? Was it a business fashion thing, something all the cool kids were doing? Were Wall Street types pushing for this too?

    I was really disappointed to find the company I work for did this too, as we were doing very well and investing in a lot of reliability programs while trying to be careful to be prepared for the next SARS event or economic downturn. After decades of paycuts, layoffs and mergers it seemed my company was going back to its conservative Civil Aeronautics Board era practices. I had been a critic of Boeing shifting to a financial engineering focus and was shocked to find out my company seemed to be doing something that I could not see as having any operational value with the stock buybacks.

    1. BlakeFelix

      I’m not an expert, but I think people thought that since stockholders want a high price for their stock, they should align their interest with management by giving stock options to Ceo types. But the CEOs with the stock options were misaligned timewise, they wanted a big spike in stock price but were willing to take long term risks to get it. I think that there were capital gains tax incentives or something like that too. And the quickest easiest way to get a stock price jump in an easy money environment is to borrow a bunch of money and buy your own stock. Apparently, anyway. But that leaves companies indebted and fragile. Theoretically, let them fail, have their creditors involved in the bankruptcy process, and that’s capitalism, theoretically the businesses can be operating the whole time and no one misses a beat but in practice it is ugly and they are big. So they are getting bailouts and here we are.

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