April 19, 2024

Earn Money

Business Life

Airlines Are Calling for Bailouts. Should Taxpayers Say Yes?

With stock markets around the globe tanking, many companies have found themselves in positions they did not think possible just a few months ago. Investors have been dumping equities in a frenzy in an attempt to move into cash, and seem willing to pay any price to do so. The Dow Jones fell almost 13% on March 16, marking the worst decline since Black Monday of 1987. The S&P 500 had its third-worst day in history. The Nasdaq had its worst day of all time. Extreme monetary measures like interest rate cuts and quantitative easing seem to have had little effect on the markets.

All of this is to say that things are not going nearly as well as most corporate suites thought they were going to when they drew up their projections for 2020. Now, one would think that a forward-thinking executive would recognize the need to put aside some cash during the good times because, as any reasonable person knows, times are not always good.

Unfortunately, airline executives seem to have been anything but reasonable, and somehow, many carriers are now facing dire financial problems. On Monday, a group consiting of U.S. airlines and their labour unions tabled a request for a $58 billion bailout from the U.S. government. President Donald Trump said that his administration would back airlines “100%”. Similar ideas have been floated in Europe. So it seems like an airline bailout is likely. The real question is: Should it happen?

Where has all the cash gone?

Let’s look at the example of one airline: American Airlines Group Inc. (NASDAQ:AAL). The last four years have been incredibly lucrative for American. In 2015, the airline posted profits of $7.6 billion, a figure that is farily representative of the years that would follow. As anyone who has flown recently knows, this is not due to an improvement in service. If anything, the flying experience has gotten worse over the last few decades due to a consolidation of the industry and the proliferation of maddening additional fees for “extras” that used to be taken for granted, like baggage and changing flights. This is not a critique of American specifically; rather, it is a critique of the industry as a whole.

Between 2010 and 2019, major American air carriers spent a combined 96% of their free cash flow repurchasing shares, compared with 50% for the S&P 500 as a whole. They decided they had nothing better to do with their money than to give it back to shareholders (which, of course, included executives and directors holding lucrative stock options).

At various points over the last year, I have written about what I perceive to be the problem with buybacks as they have been practiced over the last decade or so. I understand the theory behind them. I understand that they are the most efficient way to return capital to shareholders. But I also know the theory of buybacks states that capital should only be returned to shareholders when it cannot be redeployed more efficiently within the business.

It’s pretty obvious that buybacks weren’t the best use of these companies’ cash flows. It’s pretty obvious they could have used a cash cushion. The fact that multibillion-dollar corporations cannot survive a slowdown in business lasting more than a few weeks is telling. So before taxpayer money is handed over to pay for the poor choices made by management, the American public should ask itself if it wants to encourage this kind of behaviour by writing the airlines a fat cheque.

Or should it push for structural change in the industry, and perhaps even demand the resignation of those responsible for the current problems? After all, if airlines are systemically important entities deserving of state support, then they clearly can’t be entrusted to people who can’t run them competently.

Disclosure: The author owns no stocks mentioned.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.

Video Transcript

Source Article