Why Do the Airlines Need a Bailout? | Hacker News Reader

Why Do the Airlines Need a Bailout?

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43 pointsneaden39 comments

Step 1: Make money for 10 years. Step 2: Spend 96% of that money on stock buybacks. Step 3: Encounter difficulty Step 4: Ask for $50 Billion in grants and loans so you don't go broke.

Imagine if you or I tried to pull something like this.

Right, you and I get to pay the interest on all those grants and bailouts for decades to come. I think it's called "privatized upside, socialized downside".

Note that the stock buybacks were favored because they were a more tax favorable way of returning money to investors than via dividends as I understand it; and if the corporation did build up a rainy day fund, shareholders may have justifiably been upset at the lack of dividend.

In short, it may be more complicated than it necessarily seems at first blush; then again, what I just typed is a cargo cult parrot of the current business zeitgeist.

I will admit that I too ascribe to maintaining a rainy day fund as part of responsible operational stewardship given I see the purpose of a corporation to be providing a societal solution first, and generating/disseminating profit second, therefore I favor strategies that result in an operation that can keep chugging along even if something unexpected hits vs an absolute min/max on profit.

Then again, I don't have many successful individual business ventures to my name, so... yeah. Take it with a grain of salt. I can definitely tell you a handful of ways not to do it though!

I think the problem comes in when you know you are going to get a bailout if something catastrophic happens. If the Airlines had to pay into a mandatory insurance for this sort of thing it would be different, or if they were just going to be allowed to fail. But the Airlines want the best of both worlds.

Mandatory insurance would've been corporate taxes, with the government stepping in during a crisis.

I was more thinking something like the National Flood Insurance program. Corporate taxes would be similar if the airlines and other bailoutable industries had to pay a higher rate to compensate, but right now they don't.

We agree, we're just arguing semantics I think. I'd support the idea of a specific program airlines paid into under a federal office that would then provide relief during catastrophic events.

https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...

Nice.

>Stock buybacks done as open-market repurchases emerged as a major use of corporate funds in the mid-1980s after the Securities and Exchange Commission adopted Rule 10b-18, which gives corporate executives a safe harbor against stock-price manipulation charges that otherwise might have applied.

The 1980's, every damn time. I swear the 80's may as well be called the decade of economic time bomb construction.

They are also preaching to the choir with stock buybacks being toxic. The incentives really never seemed to line up as anything approaching good for anybody but someone trying to time the market. It is interesting that the behavior would have previously been classified as market manipulation prior to the 80's rule change.

Stock buybucks and dividends are OK. But when company needs money it is up to shareholders, bondholders, credit markets to re-capitalize the company (if they think it makes business sense).

This is exactly why low to zero interest rates are always a terrible idea. It incentivizes reckless borrowing, doing dumb things with the money like buy backs, then when money dries up, we have a major problem. All entirely predictable. All these companies should go bankrupt. No more 0% rates.

> shareholders may have justifiably been upset at the lack of dividend.

Then they priced their purchase of stock wrong. Maybe they should "un-stock buyback" instead of asking the gov't for money?

Exactly. You want money from the government? Give 'em (or really, us) shares. American Airlines, if you will.

(The GM bailout was done this way and actually worked pretty well, right?)

The airlines bought back ~$12.5B of stock over the last decade[1]. That’ll put a dent in $50B, but wouldn’t nearly cover the current shortfall...

As someone who does keep cash on hand, I find it frustrating when those who don't are bailed out. That said, hasn't almost every bailout the government has give returned a big profit? So (grants aside) isn't this just the lender of last resort seizing a good business opportunity? And as tax payers, that's good for all of us right?

If we decline, then there will be big disruption (bad for us as consumers), supply will contract unnecessarily driving up prices (bad for both consumers and taxpayers) and some private lender will make a killing selectively bailing out or investing. Sound better?

When the US government bails out those airlines, they're using taxpayer moneys to do so. To be fair, if this bailout does result in a return, then you could view it as a government investing its tax revenues in profitable investments, sort of like a sovereign wealth fund. However, this viewpoint requires a level of trust in the government to act as a responsible steward of its tax coffers for the betterment of its people which frankly isn't there in today's political climate. With the level of mistrust towards the US government and megacorps, any bailout seems like the elites using taxpayer money to build a safety net for themselves that the average citizen doesn't have. It ultimately isn't a problem with the numbers in the books, but with pent up discontent in the minds of the public over these past decades about how society just doesn't seem to be in their best interests anymore. If you yourself aren't helped by the government when hard times hit, why should the elites get any help, regardless of whether benefits will trickle down to you?

I think you're right about the general attitude, I just get really frustrated by it. The bailouts were help for normal people (the alternative was double digit mortgage interest rates and everyone's house being under water). And the bailouts turned a cash profit too, so right now we're all paying less tax for more services than we otherwise would.

The fact people don't know these simple facts makes me wonder how much longer democracy can be made to work. People just believe whatever sounds most exciting and then vote against things that are in their (and the national) interest. What's a guy to do!?

Since this is becoming a recurring theme, of "too big to fail". I think, from now on, any company that is "too big to fail", should have to pay a "too big to fail" insurance tax to the government (perhaps a certain percentage of their revenue). they can't just keep getting free bail outs, without paying the insurance premium. If I opt to not get drivers insurance and then crash into someone, i can't just ask for insurance coverage after the fact.

Isn't that exactly what the bailout is? We lend them 100bn, they pay back 120bn, that's 20bn in to-big-to-fail insurance premiums...

well, the premium they're paying is less than the market rate, otherwise the market would have given it to them. Hence, if they're going to get a subsidized loan, they should have to pay into that, along with everyone else that is elligble for it

There is no market rate for this because it can only be provided by government and because these events are basically unique.

The key here should be for the insurer (government) to recover a little more than their expenses in the medium term. That's a correctly priced insurance policy. That's exactly what tarp did. It's actually very impressive that the managers of the program were able to price the policy so correctly if you think about it...

Check out: Systemically important financial institutions

Let them sell off that stock they bought back and/or fail. New airlines would emerge... when/if the demand ever picks back up to what it was end of '19.

If the government invests that much money they should receive shares in turn. Then distribute those shares to taxpayers. Same for any subsidy or bailout. Otherwise you are just giving money to existing shareholders who benefitted from stock buybacks that led to the problem.

What percentage of shareholders are retirement funds - owned by retired people that saved rather than spent?

Does it really matter? What is the difference between propping up someone's retirement fund and giving them the money directly?

I think we should bail then out but with just one unitranche facility that they can draw upon to pay wages and debt, but we accrue interest in the form of equity. The more they borrow, the more equity we end up owning effectively wiping out existing equity holders and most likely bond holders. We can then sell shares once it is operating smoothly again. It might make management think harder before they award bonuses or spend lavishly.

"This country has socialism for the rich, and rugged individualism for the poor."

-Dr. Martin Luther King, Jr, 1968

Do we need to rescue the airlines? I'm gonna guess that's pretty essential to the economic recovery at large. But it's hard to ignore the fact that in this country, when poor people make mistakes [or, in this case are the victims of circumstance], they typically eat those mistakes. Medical bankruptcies, unable to cover a $500 emergency, etc.

So, ok, let's rescue all the industries that juiced their share prices over saving for a rainy day – but, for the love of god, can we please also bail out 'main street' this time around?

" But it's hard to ignore the fact that in this country, when poor people make mistakes [or, in this case are the victims of circumstance], they typically eat those mistakes. Medical bankruptcies, unable to cover a $500 emergency, etc"

This may be the case. But would you rather have thousands of people without jobs in the airline industry and the many other jobs that will be lost as a result of the bankrupt airlines?

Bailing out these industries out is in essence allowing many people to keep their job.

one option is to bail them out but with strings attached. Demand concessions that are good for labor and for the consumer public in exchange for the bailout. Don't just let them put all savings into pockets of executives and shareholders (while promoting "ration and save/pull yourself by bootstraps" ideology to the poor, of course) then run crying to the taxpayers because they're too big to fail.

Or to just nationalize them, many other countries have government owned airlines.

best time to do something like this too

Bail out the customers.

Sure. So you give the customers a one time bailout and in exchange, thousands are out of jobs.

Great plan!

You're basically arguing that these jobs are government jobs, as without government bailouts, these jobs would not exist.

Let them fail. Others will come in because people will need air travel. Competition will come back, and more jobs will be created.

Times will be tough. People will struggle. But these things will happen either way. We can't keep sugar-coating society. If we keep bailing companies out, eventually the US government and its people will be unable to pay.

An insider's view (note: not mine): https://aviationweek.com/air-transport/airlines-lessors/opin...

First, they'll have to cut down on flights over time to help with climate. I haven't heard one idea out of the airlines over that problem. This would be a good time to demand that they explain how they're going to contribute to a solution ... and not have until 2050.

Second, they have been THE major contributor to the spread of this pandemic. No apparent recognition of that. This would be a good time for them to start planning how THEY - not government agencies - are going to be protect us the next time.

So we should just wait until we hear their plans. Boeing had to wait for a year - why not them?

Having worked at an airline in the past 3 years, here's my opinion:

1. Margins are extremely thin, so for many airlines break even for a flight is 80-90% of tickets sold.

2. Regulations such as requiring airlines to fly their routes or risk losing the slot, ends up in empty flight (pure loss) just so they don't lose the slot.

3. Airlines are high cashflow businesses which are then highly leveraged with loans and long contracts. Disruption to cashflow screws up everything.

Honestly 2.5 years with the airline and I have no idea how we stayed operating.

Why do we need airlines?

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