Is it really that bad if some airlines fail? That whole industry really needs to be restarted IMO. Their assets would be purchased at a major discount by others who would likely create new airlines, or you might potentially see the healthiest ones consolidate the market (which wouldn't be the best outcome). Also, why isn't there consideration for nationalization of one of these failed airlines rather than giving them tax payer money even as a loan?
This essentially happened after 9/11. We saw broad consolidation into the Big Three. The argument was that the restructuring meant we'd finally have an air industry with structurally bigger margins. This was sorta true- during a bull market.
Ultimately, I think large scale personal air travel (or mass transit in general) isn't feasible in all economic climates. By definition, it's high upfront costs and low margins. The only airlines who seem to always make it work are regional and shuttles between high-income cities (Alaska, JetBlue.) As for why don't we just nationalize them, I'd say we de facto have already. Airlines know bankruptcy-level downside is covered by the government.
It's not all bad though; there's an argument to be made that this system is pareto efficient. During bull times, you want private operators pushing for network expansions and price efficiencies, even if that means levering up. But these are a de facto utility, so having the government pinch their nose and cover the downside in a bear market is an efficient use of dollars. You could try and put in regulation to force them to reserve X months (years isn't realistic) of operation costs, but you can't get around the basic unit economics of the problem: planes are expensive, even if they're grounded and don't make money if they can't fly.
I think there's a middle ground: allow them to compete as private businesses but require that they contribute some fraction of revenues into a common pool that pays out refunds and wages for a few months if a major travel-halting emergency happens.
That is, make it so they can't compete on "whether they anticipated a global catastrophe".
I think its still better to have some competition between a few private airlines (even if de facto subsidized by gov't) as opposed to one behemoth national airline that faces no competition and therefore has no incentive to innovate.
You haven't flown on any of the Asian national carriers, have you? They are all better than any American carrier. They are all better value than any American carriers other than the "discount" brands like Southwest. USA domestic air travel would improve dramatically if they were allowed to compete here.
I don't care if airlines innovate. I want rail to innovate. Airlines should be obsoleted. Build a train across the Bering straight and through Greenland.
I like that you mentioned they're a de facto utility. Utilities tend to also be natural monopolies. They usually tend to be government owned and operate at arms length. They also tend to be heavily heavily regulated.
I hadn't heard of this, so I just looked it up, and it's an interesting story! However, it seems a bit more complicated than just "big government muscled out the little guy and screwed everything up." The "mosquito fleet" you referred t was apparently down to only two companies by the early 1930s, and down to one by the end of that decade. At that point, the ferries were already a de facto monopoly.
Saying the ferries were "nationalized" makes it sound like the government forced a bunch of operators -- or, well, that single operator -- to quit and just took over their business, but again, it looks like it's a bit more complicated than that. That remaining operator, the Puget Sound Navigation Company, got into a big fight with their union when they were demanding higher wages -- and the one point the state can be blamed for in this original saga is that they refused to let the operator raise their fares, although they were largely responding to public demand, according to the Seattle Times in 1951 (when this happened): the public didn't actually like that private operator, and thought they had raised their fares too much over the past decade while providing increasingly worse service. PSNC decided not to restart service, and the state offered to buy them out -- again, not what most people would call "nationalization."
If the state did a bad job running the ferries for the subsequent decades up until about the 2010s, there's no immediately accessible litany of complaints I can find. An investigation in 2017 seems like it's led to a lot of accusations about how the ferry service's labor costs had been managed since 2012.
In any case, this is fascinating history -- but it doesn't seem like a resoundingly knockout argument for "private monopoly good, government-run service bad."
The public roads in Washington State run at massive losses, yet we don't blink an eye at it - why should we treat ferries any differently? For anyone living on an island, they are the only 'road' in or out.
They were privatized (formerly funded with toll bridge dollars), had service cut, and roundly failed to make a profit and are probably being transferred to another company. My point was that privatization is not some golden age all these services started out with like in WA.
If you believe the free market should operate everywhere in medicine because it will somehow lead to an equitable outcome you also believe that it will deliver good outcomes in infrastructure.
Since when is equitable outcome a goal? Brand new treatments like all technological innovations take money to develop and will always be expensive for first adopters.
Care that becomes faster, cheaper and better is a goal. With the exception of some pharmaceutical regulatory capture shenanigans and administrative bloat due to growing regulations, the healthcare system actually does a really good job at achieving at least two of those goals. Pretty much every treatment available 20 to 30 years ago is faster and better today. Some are cheaper, and some are more expensive.
I'm not an expert in this area, but I don't see nationalization as the best answer. If you have a government that can handle airlines better, then it could be considered. In India, Air India is the nationalized carrier. The amount of taxpayer money it has wasted while providing substandard services is truly appalling. I think it's better to let certain businesses just fail and deal with the effects of those failures than propping them up through unsustainable means. In any case, the people working in the industry would need some sort of support from society.
Over the last decade, airlines spent 96% of their free cash flow buying back stock[1]. This improves the stock value for investors (and executives). Rather than requesting bailouts and rule changes, imo they should be selling that stock to raise capital.
I think people don't really understand buybacks. The nuances of dividend vs share buybacks can be debated, but at the end of the day, each are just ways to return capital to shareholders like pension funds, 401ks etc. They didn't 'spend it' then returned it to investors which is what companies should do unless they have a different way to invest it for better returns.
There's a third option: building up cash reserves for the inevitable down times. This is one of those "privatized profits, socialized risk" situations. It's not attractive to save money when you know you can get bailed out or go through bankruptcy without too much pain.
I would love to see a study that shows how much money publicly traded companies are keeping on hand as a percentage of revenues over the last 75 years.
My guess is: (1) The long period of relative peace post WW-II and (2) the collapse of the Soviet Union, and (3) the ever-expanding size and liquidity of global financial markets, have led to slowly dwindling cash reserves for all non-financial, publicly traded companies. (Especially if you exclude the most profitable tech companies)
I'd also love to see the trend in cash reserves post 2008 bailouts.
That data might help settle this debate.
Are companies taking advantage of bailout culture?
E.g. there is a social safety net for large companies that doesn't exist for small companies.
As that safety net has formed, has that led to no change in net cash reserves, an increase, or a decrease?
My guess would be that it has led to a decrease.
Because, it seems safe for the largest companies to understand that every 10 years or so, they will need a bailout for unexpected global turmoil. (A war, a man-made disaster, a pandemic, etc.)
I'd be willing to bet my next paycheck that cash/credit trends would generally follow the cycle of the broader economy with few surprises -- though I understand viscerally your (very human) impulse to say we'd find cash reserves falling steadily over the years. After all, the reason economic expansion (above and beyond productivity growth) happens is because companies and people are extended credit, and companies and people take credit because they don't have the cash on hand. And of course when this momentum cannot be maintained, recession. To your point, however, I'd also be willing to bet that the largest companies actively consider the current "bailout culture" in decisions concerning their broader strategy.
Perhaps what’s needed for “too big to fail” businesses is to require them to either have a certain amount of cash reserves on hand, or split up in such a way that the risk is mitigated. This would help prevent an aggressively spending company from out-competing savers through excess spending, buying them out, then going out of business itself when hard times come around.
Just wipe out the shareholders when the time for bailout comes. Owners can choose whether to take bankruptcy or a 90% haircut. (Or, say, X - 10%, where X is the number that state negotiators determines the company will get in a fire sale).
This should properly incentivize everyone for the next round. I don't understand why more people don't propose something along these lines.
>Just wipe out the shareholders when the time for bailout comes... I don't understand why more people don't propose something along these lines.
The answer seems pretty obvious. If you don't believe that any company should be "too big to fail", that's valid, but it's not exactly the situation we have today. Secondly, those shareholders you speak of aren't just a small group of billionaires. Many of these companies make up substantial portions of people's returement savings, not to mention the knock on effects of huge businesses going under.
> Many of these companies make up substantial portions of people's returement savings
If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
I'd rather not have everyone else's retirement-savings-to-be bail out those bad investments.
>If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
Index funds go down with the market... but perhaps more importantly, there _has_ been a massive shift to index/ETF trading. You know what that did? Pumped up the market as a whole. Now individual business assessment is less valuable because businesses with crap fundamentals go up and up and up due to index buying. Just another bubble.
Not for the banks after 2008. I think far more people should have been arrested, but the reason our banks have enough liquidity to ride this out is due to regulations out in place after the last bailout.
Sure, but you're talking about regulation of the companies, not the management within the companies themselves. I think the parent comment's point stands.
I believe they did that for banks after the 2008 crisis, maybe it should apply more widely. But still I'm not sure it'd make a huge difference given the scale of disruption caused by a global shutdown like we're seeing as a result of covid-19.
If you aren't massively over-leveraged, your survival prospects are much higher under any circumstances. If the airlines had serviced their debt instead of accumulating debt while rewarding shareholders, recovery would be a lot easier.
Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
Buying back shares is, in some ways, paying off your debt. Whenever you need money, you can just create more shares and sell them back. The problem is that you lose some diversification benefits: when you need to sell more shares is often (though not always) correlated to a drop in your own stock price. Ideally though, you're inflating the balloon so to speak so you can deflate it when need be. Or you think that your stock is undervalued right now.
> Buying back shares is, in some ways, paying off your debt.
So you buy back shares when they are at the 52 week high and sell more shares when they are at the 52 week low... that's brilliant.
Share buybacks make sense for companies with strong balance sheets and little/ no debt load. For example: Apple. They make zero sense for companies with weak balance sheets and tons of debts (e.g. Most of the airlines).
C level executives of these companies buyback stock to unlock stock performance bonuses early....they will borrow money to do it if interest rates are low and if they know they will get bailed out during bad times....
All this "we are doing it for shareholders" tripe is nonsense. Buying back stock at all time highs is the most idiotic thing a company can do because it says the business has no better use for said money, which imo is one of the dumbest conclusions a company can come to if growth is the goal (is your R&D department so useless that giving the money back to shareholders is the best allocation choice? Silly)....I'm including companies with a huge war chest like Apple, they are not an exception to this truth.
Many companies (run by idiots) have concluded that financial engineering is more useful than R&D, these badly managed companies should be left right in front of the "market firing squad" when the market turns against them inevitably... No bailouts.
Take current expenses and multiply by 6, and that's a good start. Standard personal finance advice is for individuals to have 3-6 months worth of expenses on hand for an emergency. Banks frequently require 3-6 months of reserves for commercial real estate loans. Why shouldn't that rule apply to large corporations?
>Why shouldn't that rule apply to large corporations?
Because it makes little sense to compare a corporation's finances to your own, especially in a low margin industry, and it would completely stifle growth.
It literally is that simple. My company had ~6 months worth of expenses stashed away in cash, cash equivalents, and other fairly liquid vehicles, and our net profit was ~4% on over a billion in revenue.
Edit: Why should I, as an individual, be held to a higher standard than a group of individuals who have come together in the name of profit (most of which goes to those at the top) and have limited liability in case of failure?
The stock they bought back is a liquid vehicle. Seeing as your company, whatever that may be, had sixth months put away, I imagine you actually mean "invested" and very little of it was cash. Your operating expenses are extremely high and earnings low.
As to why it's a different standard, it's different for the same reason baseball doesn't use the same rules as water polo. Both sports, but very different.
I'm not here trying to defend poor management, but it's hard to take your "maintain a massive emergency cash fund" idea seriously.
3-6 months worth of operating expenses is in no way a “massive emergency cash fund.” Around half of that 6 months worth was in cash or cash equivalents (I don’t remember the exact numbers offhand), not shares or other investments.
You’re actually proving my point when you say our expenses are high relative to net profits. If we can do it, and still be growing at an adequate pace (we grew earnings at, IIRC, 8% last year), what can’t other companies? Before, you claimed it would stifle growth We have way more software engineers on staff than financial engineers. I find it hard to believe we can do this and other companies can’t. You haven’t given me any reason why they can’t, either.
And, BTW, if repurchased stock is so liquid, why are these airlines crying now? It’s because either they didn’t adequately insure against a systemic risk to their business, or they canceled the shares.
Hard to pin down exact figure, but a quarter worth of their normal turnover could probably go a long way. Given that their fleet is grounded, airports rents are suspended and there are no fuel expenses.
Moreover, now is actually a good time to buy fuel and stockpile it (if they have the facilities), or use derivatives to take advantage of the situation if not. I am aware that airlines do hedge their fuel costs, but, that requires cash, which they apparently don't have right now.
About 50 billion which is what American was asking for. Considering they have posted between $3-15 billion [0] in quarterly profits over the past 10 years, it seems reasonable that they could have saved a rainy day fund _and_ bought back stocks.
That data looks wildly inaccurate and does not pass a sanity check at all. Take a look at anything from AAL's investor relations' page and it does not reconcile to anything like 3-15bn quarterly profit ever.
The current reality would require them to have those reserves as opposed to being bailed out, so by all meaningful definitions, it does, in fact, make sense.
No, I don't think it does. Just because an event of very small probability happens does not mean it is rational to waste half your cash preparing for it. What determines the right actions in regards to mitigating risk has little to do with the realized events; instead, it's better to look at the probability of said event. Not saying they shouldn't have saved some cash for a pandemic, but the fact that it's happened isn't an argument for them to have done so.
It's not precisely illegal. I'm assuming that was a rhetorical device. There are some flight restrictions in place, though. Reduction in flights is also causing a larger than normal number of "ghost flights," which are a pure cost incurred to move people and aircraft around. [0]
Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes. So generally hoarding money is not only not encouraged, there is a tax penalty for doing so.
That’s also why you see so often companies with “no profit”. If a company is operating efficiently, they wouldn’t be turning a profit (they’d have already reinvested profit).
> Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes.
Basic profit-seeking capitalism incentivizes companies to either invest in productive areas or to return capital to shareholders so shareholders can invest in more productive areas. Taxes only effect those incentives at the margins, and the past several decades of increasingly corporate-friendly tax reforms don't excuse or justify the decisions that have been made by CFOs.
> If a company is operating efficiently, they wouldn’t be turning a profit
But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently. The ones taking on debt to fund buybacks are beyond any sort of reasonable justification from a public policy perspective.
We can quibble over the scope of unpredictable downturns, but AFAIU the airlines returned much more capital than would be reasonable in expectations of a 10-year event. 1980s deregulation, 9/11, 2008 recession, and now 2020 pandemic... at some point you can't say that this stuff is "unpredictable" with a straight face. Something always happens, and even if you don't know precisely what or when, it's regular enough that you can substantially insure yourself. There's obvious moral hazard at play here, even though some public support may have been justifiable in this particular case.
Even worse, AFAIU once upon a time airline union retirement funds were major purchasers of airline bonds. There was a sort of quid pro at play that more closely aligned unions and airlines during downturns, as unions were more incentivized than usual to return the airline to profitability through cost-cutting measures. The downside was, at least hypothetically, greater moral hazard--more pressure for government bailouts because more low- and middle-class employees were effected. But these days airlines have increasingly spurned unions and these sorts of arrangements, so any bailout directly lines the pockets of wealthy investors. There should be much less urgency to bailout the industry, especially without an equity exchange.
> But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently.
By your definition any company that didn't see the coronavirus pandemic coming would be not operating efficiently, but the reality is even if your company was operating efficiently your company may be killed by it.
That's like saying a healthy person shouldn't need to be put on a ventilator because if they took care of their body well they wouldn't need it, but the reality is this virus is not something anyone could have prepared for.
It is not at all out of line to say "the airlines should not have spent $45B (or whatever the amount was) on stock buybacks, they should have saved a reasonable amount in anticipation of the next crisis" even if this particular crisis is much worse than anyone would have been able to anticipate a year ago.
Even if they had only kept, say, $20B of that money—reducing their buybacks by less than half—that would surely be $20B they would not now be asking us taxpayers to spot them, and it's possible they would even be able to make a different kind of plan using that $20B to stretch them over at least some significant part of the gap.
Moral hazard isn't the only issue with union retirement funds buying stock: you want to mitigate the risk of being laid off or forced to retire and having your fund lose value at the same time. An airline employee with a retirement fund that consists of the same airline's stock is a very bad idea from a risk standpoint: you ideally want your fund and your job to be uncorrelated in order to reduce the volatility of your income stream.
In exchange for that return on investments, investors bear risk. That risk has now come due, investors should be getting a haircut.
IMO the bailout should take the form of an equity investment from the government. Investors get diluted, but the company survives. Government gets a profit if things go well.
Privatizing profit and mutualizing risks is an insane moral hazard, we have to shake it off.
Hmm.. maybe this is a chance to kickstart a US Sovereign Wealth fund. If all the bailouts are in the form of buying an equity stake, we simply put all that equity in a portfolio, and rebalance it when things stabilize. Presto, that's a sovereign wealth fund right there.
What you're describing is exactly how tarp bailouts of 2008 worked - government bought preferred stock. It was then promptly bought back over the next couple of years.
Truly getting rid of the mutualizing of risks would be letting the companies just collapse. But for various reasons (wanting banks, plane flights), we've decided to not do that.
I think if you severely dilute (or even wipe out) the shareholders you've gotten rid of the moral hazard. This happened with some of the car companies, and I don't think they're too eager to go through it again.
American Airlines had negative free cash flow during the last decade yet did $12+ billion in share buy backs. They essentially borrowed money and handed it over to investors.
Yet instead of liquidating their assets once their incompetent management hit a sand bar, US tax payers have been required to bail them out with loans and grants.
You make it sound like this was excess money. In fact it was cash flow freed up by leveraging the entire company and loading it up with debt, a ponzi game they were playing with the feds where the feds made the low interest loans happen and the airlines bought back stocks to bring about the desired market bull run. And the executives got paid, seeing how stock (and stock performance) is a big part of their renumeration.
I think what the OP is arguing is that executives and investors have profited off of this arrangement. If they want to keep that airline afloat, they should have to put money back in.
Or here's a simpler mechanism-- the airline should sell stock to the public markets to raise capital. It's the natural response to running out of money because you spent it buying stock. The fact that this is a market downturn is something they'll have to deal with.
Buybacks increase the share price, which is a typical metric for executives. This leads to a situation where it is in the interest of the exec to increase buybacks in order to drive the price up, even if the company performance is not that good.
Personally, I'm neutral except for this one thing.
Maybe they should ask the investors for the money... Or give the ticket holders stock in the company.
I'm tired of corporations doing this, and people making excuses for them. It's all about the free market when they're raking in money and paying off investors, but the second they run into any problem that costs them money they want another bail out or for the government to change the rules in their favor.
But the fact they do not have the warchest (or insurance) against an event such as this means all those earnings were false. They weren't risk adjusted. Kind of like I can drive around without insurance, but once i crash (or get a ticket) my savings disappear.
The moral hazard is that companies with many employees think they are "too big to fail". They don't feel the need to keep cash reserves so instead leverage themselves up to the eyeballs because when a recession hits the government will just bail them out.
This is what everyone means by "privatize profits, socialize losses". Pay back all profits as dividends/buybacks and when losses mount from a recession then get bailed out by the government.
I think you seem to not understand how corporate governance should work. The goal of corporations is to maximize long term shareholder value. Not to bump up stock price so that stock options of their CEOs can be exercised.
I think the idea is that stock buybacks can be the same as dividends for an investor who want cashflow from their shares if the investor sells a probationally equivalent amount of shares that were bought back by the company during the stock buyback period.
The challenge is that most investors don't bother to do such tracking. And thus most investors are buying stock at prices much higher than they would have originally bought it at.
They can be the same for that investor, and better (for tax purposes) for an investor who doesn't want that cash flow and would prefer to reinvest.
The enormous majority of US publicly-traded stock is held by institutions who have the resources to monitor the buybacks and sell off stock, if that's what they wanted. Buybacks aren't a scheme where companies or hedge funds make money off careless retail investors.
It doesn't matter that they are buying at a higher price, theoretically stock buybacks should have no affect on the market value of the company. All it does is increase shareholder equity and buy the same amount decrease the number of floating shares. The problem is that retail money only looks at the price of the stock without any context for the company as a whole.
There is a very real issue if the company pays too high a price for its share buybacks. Taken in the extreme case of the corona virus there is a very real difference if the company (say the airlines) did a buyback of a set amount of shares in January 2020 versus if the company did a buyback of the exact amount of shares buyback today, post corona virus crash.
They could have paid off debts. I am pretty sure some even use debt to purchase stocks in their buy back programs. I don’t get why we are bailing them out. 60% of people down own a single share stock including 401Ks, IRAs etc. Adding some much liquidity into the economy through q-easing will increase inflation in the long run and harm the middle the class.
It don't think the difference between buyback and dividends actually matter to the important part of the parent's argument.
The main thing is that airlines transfered their capital to their shareholders. So now they have very little. If they want to keep operating, they will have to ask for some more capital, maybe from their shareholders, maybe from others.
Dividends don’t create as much of a false sense of success/growth though. Buyback programs are way more extensive than dividends as well. At this point buybacks and corporate bonds seem like a middleman between executives pockets and the federal reserve.
They can invest it into a cash reserve to combat the existential risk to the company from a global disaster which halts airline travel. Investors are too short-term focused and states are too corporate welfare dealing for that to be enticing though.
Buying treasury stock is what happens when you're undervalued in the market, but don't have many expansion opportunities. They don't want to raise capital because they don't think the demand exists for more airports, more supply: right now they're trying to compete on price, driving costs down. The airlines are not in a growth phase, raising capital seems incredibly silly.
They're also making the calculation that the people are leaving the market and selling under value. This makes sense. The market is low right now because of COVID-19, people need liquidity to handle underemployment and low-spending.
Profits are down and money isn't coming in, and treasury stock is an important counter-balancing force on a receding market. Airlines don't see any major opportunity to make money off of new infrastructure, so they're injecting that money back into the economy.
A pet peeve of mine, but you lump together investors and executives together as if having money in the financial markets is something reserved for the elites, and not inherent in every pension and 401(k) plan.
Lets not forget that they've been devaluing and increasing the price of the product/service. Yes the costs are cheaper but compared to what it used to be you're getting much less for your money.
I seem to remember getting an included meal for US domestic flights that are 5+ hours. Now you get snack with the option of a paid meal. One thing I like about Air Asia is that you can pre-order your paid meals.
>Rather than requesting bailouts and rule changes, imo they should be selling that stock to raise capital.
This strategy has already been kneecapped by plummeting share prices, and trying to sell massive amounts of shares right now would only lead to even further diminishing marginal returns.
Airlines are a crucial national infrastructure, and they know this, which is why they've been incentivized not to give a shit about recession resistance. Bailouts are fine, as long as they are coupled with corrective action. Those who accept them should be unable to buy back stock in the future, and required to build up the capital reserves necessary to weather another pandemic.
You know what is an alternative plan with built in protections for creditors that will redoubtably watch the restructuring more closely than congress?
Bankruptcy.
United Airline's value is not in its people, or its service, or its business model. The value is in its airplanes, its exclusive rights to fly to some airports and lobbying prowess (Ever wonder why flights to LaGuardia don't fly to the west Coast? United).
The creditors who take over United Airlines will not take the majority of these airplanes and send them to another country.
If there is any value to United as an entity at all, Chapter 11 bankruptcy is what they need to go through, not congress. In chapter 11 bankrupcy new creditors will come in and punish the existing investors/executives who got United in this situation.
If United truly has no value, chapter 7 is the way and United's assets will be repurposed the most efficient way possible for United's creditors and the economy as a whole.
I frankly cannot think of a less sympathetic organization.
A patently bad argument. No company was forecasting a pandemic in their 5-year plan. Doesn’t mean American or any other firm should receive special treatment.
American Airlines alone has a market cap today of $4.7B.
> Rather than requesting bailouts and rule changes, imo they should be selling that stock to raise capital.
Sell stock to raise capital after airline stocks have dropped 70%? Usually you want to raise capital when stocks rise ( like tesla did ).
Also, if airlines start increasing float during a market selloff, it would put even greater downward pressure on their stock price and it would make their financial data ( EPS, etc ) look that much worse.
Your idea is one of the worse things airlines could do, but given their awful track record, they might do it.
Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almost the same financial thing. Shareholders 'own' the $1 in the company's bank, or they 'own' it if it's paid back to shareholders.
Stock buybacks or dividend payouts should basically have a null effect on the value of the company. They are kind of 'neutral' exercises.
Edit: 'null value' obviously taking into consideration fewer shares, i.e. if the company buys shares from the market at market prices, it shouldn't directly affect the value of the other shares it's financially neutral.
Only if you assume perfect liquidity and either 1) a constant or monotonically increasing stock price or else 2) a huge cash reserve such that selling stock at basement prices or taking out highly leveraged loans is never necessary.
If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times.
If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1.
Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.
Maybe the companies in question should save money instead of expecting the American people to bail them out in these situations. Every single financial crisis in recent memory has the same core group of companies not saving money and needing the government's help. Yet when it comes time to help individuals in need the government suddenly wants means testing and byzantine rules around who gets the help and how quickly it can come. Trickle down economics don't work. They just coat the economy in varnish.
If every business had to consider every possible risk scenario (WW3?) then nothing would function. We need a kind of 'insurance' that nobody else will provide. The government is well-positioned to do that if they do it responsibly.
These companies are generally not getting free money - they are getting loans, or in some cases the gov. is getting equity. The government could have actually made a profit were they to have held their auto-bailouts a little longer.
The reality is, Auto Companies cannot prepare for an 'apocalypse' in an adjacent, much bigger market - banking.
Credit is the right thing to do to keep that system going, again the government did loose a few billion, but it was small in the grand scheme, moreover, they should have broken even.
There are quite a few social programs provided by gov for individuals, moreover, those are 'freebies'. The gov is not taking a chunk of 'ownership of you' and they're generally not extending loans.
Banks also paid back their loans, the sneaky thing there was when the Fed allowed banks to dump mortgages on them at face value - which was a 'bailout' of banks and home-owners.
Of all the things that drive unfairness and inequality - these are not them. These are generally good bits of intervention.
Low-interest rates that drive massive home inflation is a primary driver of inequality. Lack of some kind of socialized medicine. Lack of reasonable healthcare regulations. Garbage public schools in some areas. Prison Industrial Complex. These are much more obvious areas for reform.
Of course - I'm not denying that 'stock buybacks' have a strategic impetus, of course they do.
Every financial decision does.
I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all.
The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal.
Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
stock buybacks are rarely perfectly neutral for all shareholders. it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. dividends allow you to diversify right away, but have greater tax implications.
the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits.
and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying).
the benefits are not uniform to every shareholder, especially through time.
it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock.
How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting.
Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
Instead of buybacks being a "forced reinvestment", it would be more accurate to say dividends are a forced divestment. If the company spends $1/share on buybacks and you hold 100 shares, you can either keep the shares or sell $100 worth and get cash instead. If the company gave you a $1/share dividend, you couldn't use that to buy $100 worth of stock, because taxes.
not every shareholder participates in the decision-making behind a buyback, and in some cases they can't all participate in the buyback itself (especially with majority privately-held entities).
We are talking about publicly traded companies here. You can always participate in the buyback: just sell your shares, they're publicly traded, so there should be no difficulty. It doesn't matter much who's on the other side of your trade, as the arbitrageurs will ensure that the buyback is priced into the spot price.
many companies have multiple types of stock, and only publicly trade a portion of their shares (i.e., not treasury stock) and often only certain classes of their stock. sometimes they trade less than half of the total shares, which is how you can have majority privately-held companies trading shares publicly.
Please tell us you're not a corporate accountant. Cash is an asset, and is the definition of "liquid". Shares are not. Excessive dividends prior to a downturn would be just as dumb as excessive stock buybacks.
A buyback has the added effect of reducing the number of shares, increasing their Earnings per Share (EPS). Since EPS is a widely-used metric for valuing a company, it's not quite the same as a dividend.
In a 'perfect' buyback which was spread across all investors equally -> it's neutral. (Percentage ownership remains the same, cash was transferred to investors)
That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average.
Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation.
The question of how much cash on hand certain businesses should have to have ... is a separate issue.
If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
If it was essentially the same as putting the money in the bank then they should be able to use that stock to keep themselves going instead of getting a bailout. But that will not work because their stocks are down so much.
There are certain industries like airline (but also healthcare, telecom, etc) that just make a living out of screwing over consumers in any way possible.
It is so exhausting to deal with - I don't have the energy to dispute every single time a company pulls one of these stunts to fight for myself to get the baseline level of not being treated like trash. This is exactly what consumer protection agencies and regulations and other laws are meant to protect against, but these institutions are failing us daily.
These are all essential services that the government should be providing from taxpayer money. Instead many countries have chosen to privatise large parts of their infrastructure and essential services - the market does not regulate itself here, it is one that needs to be controlled or simply run by the government.
I've had nothing but excellent service in every one of my interactions with the California DMV. If every company I interacted with lived up to their standard I'd be thrilled.
The post office isn't really similar to the DMV or NASA. While it's not a private entity, it's supposed to be run like a corporation, in some ways similar to Amtrak. USPS is okay I guess, but Amtrak sure does suck.
We paid for that product. If they can't deliver the service, we are owed our money back. This would be fraud. Congress sells out the american people to corporations on these things. If revolution happens in the USA, it will be because congress and corporations pull this kind of corruption.
There's all sorts of Force Majeure rules in life and contracts. e.g. I still have to pay for my kid's preschool she can't use. (Edit: Prepaid, not getting a refund)
I'm not sympathetic to the airlines at all and think they should refund, but I don't think it is universally true that "can't deliver service = owed money back" in this pandemic.
Well, no, Force Majeure would give you an option to back out of your agreement with the preschool, including tuition.
My understanding is Force Majeure rescinds the contract for Act of God (natural disaster) or Government (human-caused disaster). No contract means deposits and pre-payments would also revert.
Unless you prepaid. I got forced into taking an apartment rental I wanted to back out of when I got laid off because I made the mistake of paying promptly. I might have had a chance to fight it otherwise.
the common law concept of restitution requires that the parties be returned to their original, pre-contracting positions. In reality, this means that the parties must return any prepaid monies or deposits
I think 'fraud' has a specific technical definition - it requires 'intentional deception' or 'misrepresentation' or something similar depending where in the world you are.
If they decide to cancel your flight for business reasons and genuinely weren't planning to when they sold you your ticket you can argue that you should get your money back under consumer rights about paying for services provided and maybe contracts I don't know, but it doesn't really make any sense to claim it's 'fraud' - there isn't the deception or misrepresentation required.
The fraud is at a far deeper level. The founding father's social contract is based on laws-apply-equally-to-all-people (citizens vs BigCo). On a fundamental level, congress protects corporations financially in situations between BigCo-vs-citizen. Congress betrays people financially in cases of BigCo-vs-citizens. Congress sells out repeatedly to money interests. Congress on a fundamental violates laws-apply-equally-to-all-people. The fraud is at a deep level is when citizens loose hard cash by congress selling them out. I have plane tickets of flights that were cancelled. I'm going to lose $4,000 in real cash based on the flights my family ordered. $4,000 in real cash, because congress sells out citizens. When I lose $4k, that is fraud when the airline cancelled the flight.
But none of that is 'fraud' - they're being quite straightforward in telling you that they're cancelling and not refunding because they can't afford to refund. It'd only be 'fraud' if they were deceptive. 'Fraud' doesn't just mean 'something against my interests.'
They can and will deliver the service, on another flight, which is why they're giving you a flight voucher.
Why is this controversial? Seems fair enough to me.
I get the feeling people enjoy beating up on airlines because so many people pay the smallest amount possible, and then are shocked when they're not treated like first class passengers. People pay for McDonalds but expect fine dining.
The travel vouchers are essentially 0% interest loans that expire worthless if not used in 9 months. That is by far worse than cash. I don't even know why this is controversial. I paid for a service, they cancelled it and now I should get my money back and if they want that money, than they can get it in the future when the offer some other flight I want. I didn't pay them for a gift card that expires worthless in 9 months. Even gifts cards cannot pull that expiring shit anymore because it is so anti-consumer.
Because even though I probably agreed to a trade in the terms of purchase, a rescheduled flight isn’t a great solution; sometimes a rescheduled flight can mean the difference between a vacation and nothing. If I spend $5000 on a vacation (hotel and air) and I can’t fly there, I’m out $5000 for no fault of my own.
not fair. it's not a normal service. it's a transportation service. If I can't travel on date X, traveling on date Y may be useless.
One could argue it would be useful for another trip to a different location. Sure. But because airflights prices are so shady (prices changing every day, prices that are different if you have a VPN connected, etc etc), the voucher could make you choose for the worst price.
This is an ignorant comment; there are entirely legitimate reasons why those stores are still open. Alcohol withdrawal can actually kill you, or at least put you in the hospital, and having to hospitalize a bunch of alcoholics is the last thing the system needs right now. People also use cannabis as a safer alternative to pain relief than actual opiates.
Nicotine withdrawal won't kill you like alcohol can, but it sure fucking sucks. Taking away every source of joy from the populace during this could cause more harm than good. Also if you could buy cigarettes, but not vape supplies then a bunch of people would hop back on those.
It's a painful situation. There will be pain, suffering and A LOT OF economic loss. Somebody will have to pay for that loss. Guess who? The people! There's literally noone else to do it... how to distribute the burden? "fairly" (each person has a different idea what that means) ... at least people who afford air travel probably have a bit of money they can lose without suffering too much.
Since you seem to imply that one can make a good business plan for an airline accounting for such high risk, please present one, or point to one that has succeeded.
A plan that included saving rather than leverage would be well suited to many sorts of disruptions. You couldn't hire McKinsey to write it for you, however.
Underlying all this whinging there seems to be a remarkable expectation that the world is supposed to be fair, and when it's not the taxpayer and the Fed should make it so. If the objects of all this fairness were human, I could see the point. However, you're talking about corporations, so there is no point.
That's not the right question. The right question is, do we want to have airline companies running planes or not? And if "yes", is it an actual long-term profitable business, or is it "years of tiny profits followed by bankruptcy" a.k.a. something no sensible investor would invest in.
We should make them refund above how much they charged as a fee to them.
It's kind of funny when the shoe is on the other foot. They're upset when they're required to follow the law. They want to sell nothing but refundable tickets which they can oversell, but the minute they can't meet their obligation they're crying to the government.
Simple rule. No assistance unless they offer refunds. No assistance unless they stop any stock buy back programs, end all executive bonuses, and they must pay back and assistance before resuming either.
Sorry airlines, but the company I work for which is quite large has funds to sustain interruptions because you just don't do business otherwise. scrap bonuses, merit increases, all unnecessary expenses, and they borrow, and if you cannot then you were not preparing yourself for much of anything except good times.
This is beyond out of touch. Most people truly have never seen a bonus, or if they have it was a $20 McDonald's gift card. Until working in tech I never received a bonus, even as a 'necessary' HVAC service technician making decent money.
Either way it's hard to reconcile C level bonuses with a free turkey every Thanksgiving.
Truly we need to scrap all their bonuses a d parachutes. The entire C level compensation model seems made for Moral Hazard.
Is this an actual airline-specific regulation? I would expect the ordinary law of contracts to already provide that, when one party unilaterally cancels a contract, they don't get to keep the consideration from the other party.
Usually it would depend on what the contract says.
For instance my gym went out of business, but hidden in the contract it was written they could transfer my membership to any other gym within 10 miles of the gym. And I was forced to pay a cancellation fee of several month to get out of it.
Contracts that "hide" things in them tend to get invalidated by the court if you refuse to pay. Courts take a dim view of attempts to trick consumers.
If you didn't read the contract before you signed it, though, next time you should.
When I bought a house, they gave me a stack of paper about half an inch high to read, including a document for me to sign that said "I have read and understand the documents." So I sat there with the agent and read every word of it. She was clearly quite irritated with me "wasting her time" by reading it, but too bad for her.
A couple issues I was particularly interested in was what happens if I default on the mortgage, and what happens if I prepay the loan.
BTW, I recommend reading the fitness club contracts first. They are negotiable, but if you don't read them you won't know what to negotiate, and will be paying the "sucker price".
Contracts that "hide" things in them tend to get invalidated by the court if you refuse to pay.
Which court is that? The one that finally hears your case three years after the gym has reported the debt to the credit bureaus and ruined your credit?
Small claims court doesn't take three years, doesn't allow counsel, comes to decisions quickly, and best of all: Small claims judgements are accepted as dispute resolution by all credit reporting agencies.
I've used small claims 4 times now. Each time, I spent less time with the court than I did with customer service prior to the court.
Lesson learned. I ask customer service once, in plain english, on a recorded line. If they don't resolve it at that opportunity, I just go to small claims.
I don't agree with bailouts or rule changes for airlines. Why should they get rule changes, while I am a simple citizen can't get jobseekers allowance (too much savings) or break on paying rent during this time?
Not really related, but it turns out that calling your American Airlines pilot neighbor a "sky bus driver" is a good way to get kicked out of his Christmas party, even if you were mildly drunk and maybe half kidding.
That's a great way to put themselves out of business. If they don't want to play a fair game, you can well be assured that people will stop using their products as much as they could be.
Airlines and Broadband companies are constantly getting terrible reviews because they offer such terrible quality customer service. But what the fuck are you gonna do, rig up your own ISP or charter a boat across the Atlantic? No, you're going to get reamed in the ass and keep living in the 21st century.
These industries "fail" because they're designed to fail! Nobody wants to admit it, but you need a public option on this shit or else people will just keep being forced to publicly subsidize a select group of private enterprises over and over when shit goes tits up.
> But what the fuck are you gonna do, rig up your own ISP or charter a boat across the Atlantic? No, you're going to get reamed in the ass and keep living in the 21st century.
Or we can globally live within our means. It is apparently barely sustainable for people to be able to fly anywhere on a whim and a salary. If the globe being able to do this means that airlines must operate at constant arm's reach of bankruptcy and bailout, then we're living beyond our global means and society is ill-structured.
That's a great way to put themselves out of business. If they don't want to play a fair game, you can well be assured that people will stop using their products as much as they could be.
If there was real airline competition, sure. But there aren't a half dozen airlines flying between most cities. There are two, if you're lucky. Or one for the majority of city pairs in the United States.
The government interfering existentially to shut down their business isn't quite 'fair game'.
Put another way, the government could ban travel, in which case, the airlines could theoretically offer the flight, but the consumer would have to then cancel their ticket and pay a charge, or not get anything back. Point being the government interference could run both ways.
So it's going to be a big problem clearing all of this up.
I have five flights booked through Lufthansa (2 turned out to be United) for a US flight which is kinda expensive. It's a non-refundable, so fair is fair. The thing that did upset me the most is that their website mentions that I can rebook now. I do call their, rather, horrible consumer service. They suggest that I should go to their office so that I can change the booking. That's, obviously, not possible because of the confinement order.
Now I rechecked their website and it seems that I might be able to get a voucher for my ticket value that will be valid until 31 August. They must be joking as I don't think flights will be open (in any meaningful capacity) until 2021 or late 2020.
My sister had Turkish tickets (non-refundable) and she was able to get miles for them.
I would wait. I had 3 flights for this week and 2 got cancelled and 1 got changed. I got refunds on all of them but I had to wait until about a week before the flight for them to tell me about the cancellations and the flight time change refund info came about a week before too. They are unsurprisingly pushing the vouchers until the last minute.
If you are unable to provide a service people paid for, then you give them their money back. It's pretty simple.
You can give people an option to leave as credit (e.g., we'll give you $400 of credit instead of a $300 refund) but it should be just that - an option.
I'm STILL waiting for United (or Expedia) to send me a refund after 2 weeks. I had a cancelled international flight and neither is sending me my refund.
I don't think many of us have just thousands of dollars to just not get back.
I think this is okay, provided they issue a cash-value voucher that does not expire (or expires at least 2 years out). There shouldn't be any nonsense about things being locked to the same region or destination because people may no longer be interested in going to the same place in the future, plus for international trips they may not be eligible for a visa in the future if the purpose of the trip no longer exists.
To be even better, it should not be locked to the same person either. If I have no use to fly (example) Hawaiian Airlines, I should be able to sell that voucher to others.
I have three flights booked through July with United, and I'm likely going to have to cancel all three of them without a refund. Another rub is that they've changed the flight schedules on all my flights 4x now since February, and there is no option to view the original schedule of my flights. I believe a few of my trips have been ruined by these schedule changes (e.g. won't be able to make it for dinner with friends, or now can't get back before an ungodly hour in the early AM), but I can't confirm the original schedules...
If they changed it by like 2 hours or more, you are entitled to a refund. Call them. I had a flight scheduled for tomorrow that got changed and I called and got a refund for it (I'm not even in the state so i lucked out there as I was planning on cancelling it myself).
You can also wait and see if they cancel it. I had 2 more flights this week and they both got cancelled recently and I'm getting refunds. They are probably just waiting until a week before like it was for me in the hopes that people cancel themselves for the BS travel vouchers.
We can't be held responsible for their own financial mismanagement - likewise they should not be eligible for any bailout funds - or they can sell their stock on the market to raise funds.
We've decided as a society that it is acceptable to have massive oligopolistic too-big-to-fail corporations in control of critical sectors. We have no choice but to bail them out.
But it might go away for a year or two, which is enough time to do an incredible amount of economic damage -- far more than what we save by not bailing them out.
They don't need to be indispensable. they just need to be critical enough that not bailing them out is much more expensive than bailing them out.
The solution is to prevent this scenario from ever happening in the first place, by either requiring sufficient competition, or requiring sufficient capital reserves (see: banking and reinsurance), or just nationalizing the thing.
we can ensure they don't fail by taking ownership - if they're unwilling to raise funds by selling an equity stake, on the market or otherwise, they can declare bankruptcy and be bought then.
Many many years ago Air New Zealand essentially went bankrupt (after it had been privatized) so the NZ gov bought it out. Then a few decades later privatized it again at a profit.
Why would you want to continue doing business with a company that screws you over to the point where you need to chargeback? By that point, you're burning the bridge and should be totally OK with it.
Yeah, chargeback time. I once had a car rental agency refuse to give me the car I had reserved and paid for, then refuse to give me a refund for the money I had paid ahead of time. Just charge them back when they pull this crap.
So the financial equivalent of being beaten and dragged off a plane. Airlines couldn't be anymore customer-hostile unless they needle behind the ear, shrink-wrapped people and threw them into piles like rolls of carpet.
Same in the US. I had 3 flights scheduled for this week and they were offering me the shitty vouchers if i cancelled myself but lo and behold, a week before each one they informed me they were cancelled or rescheduled and I can get an actual cash refund.
> "But instead of honoring their obligation to give refunds, many airlines have only been offering vouchers and credits for future travel, which customers often must use before the end of the year."
This happened to me with Alaska Air on a nonrefundable fare, but I have to use the credit 1 year from the date of cancellation, which in my case would be around March of 2021. My hope is a vaccine will be available by then, or at least by the time I actually fly in 2021.
I originally purchased the tickets with another credit that expired at the end of April 2020. If you try to cancel on Alaska's web site, before you press submit, you have to check a box that says "By cancelling this flight online, I agree to FORFEIT all credits/vouchers I used to purchase the flight." That's when I called a representative and explained the situation - and had a great experience - all credits refunded and extended for another year. Just took one 15 minute call. Happy to fly Alaska again.
I don't feel bad for them ... they used the previous bailout to buy back their stock and then spent their profits to buy back more. Maybe they should put some of those shares back on the market if they need money?
That's a very good point ... I wouldn't be long on restaurants at the moment either. The difference is that I think we'll return to restaurants once COVID-19 isn't a threat. I think that our "practice" at telecommuting has fundamentally changed business travel (we need it much less than we thought we did) and that the current contraction in air travel is unlikely to completely re-expand. Pleasure travel is different and it remains to be seen how quickly people will "trust" being in public again.
> "The key element for us is to avoid running out of cash so refunding the canceled ticket for us is almost unbearable financially speaking," IATA Director General Alexandre De Juniac said.
I think he just said that it's too financially risky for a consumer to book a flight, lest they be forced to have their ticket converted to an unsecured loan, "secured" with something that they didn't want (a flight next year) that may expire anyway. They're selling you a gift card.
I'm surprised that people are still flying in closed up metal tubes during this pandemic. If anything the airlines should be giving discounts to lure consumers, and even that is morally questionable.
Flights at this point should be freight or emergency only, for national medical needs and repatriation.
