Biggest U.S. airlines spent bulk of free cash flow on stock repurchases(bloomberg.com)
bloomberg.com
Biggest U.S. airlines spent bulk of free cash flow on stock repurchases
https://www.bloomberg.com/news/articles/2020-03-16/u-s-airlines-spent-96-of-free-cash-flow-on-buybacks-chart
14 comments
Pay employees more, increase benefits, better service for customers, put money away for a rainy day? There are lots of ways to spend money that are good for the long term rather than making the rich richer.
Delta just paid every employee 14% of their pay earlier this year after a blockbuster 2019. I bet they are rethinking that decision.
Public companies aim to maximise shareholder value, however in competitive markets that usually involves improving service, having a happy workforce (higher benefits) so it all works. And putting money away for a rainy day will never be as beneficial for companies as for individuals.
If saving money for a rainy day is never going to be a top priority, then going bankrupt should be an option.
I think what's frustrating for me is that under these circumstances, there will be a lot of individuals and small businesses that will go under because they didn't save enough for a rainy day, but if your big enough, we have to save you.
I think what's frustrating for me is that under these circumstances, there will be a lot of individuals and small businesses that will go under because they didn't save enough for a rainy day, but if your big enough, we have to save you.
This is exactly the point.
There is never a reason to save if the government will always bail you out.
If you are forced to save because not saving could mean certain company death, you will save. And make sure you have a two year runway if zero business is happening.
But with the bailouts the companies are rightfully maximizing shareholder value.
The bailout should directly go to displaced workers and supporting them. It'll directly stimulate the economy and correctly punish the company got fucking itself.
There is never a reason to save if the government will always bail you out.
If you are forced to save because not saving could mean certain company death, you will save. And make sure you have a two year runway if zero business is happening.
But with the bailouts the companies are rightfully maximizing shareholder value.
The bailout should directly go to displaced workers and supporting them. It'll directly stimulate the economy and correctly punish the company got fucking itself.
If you think your stock is going to beat the market then share buybacks are similar to putting money away for a rainy fay. If you don't think your stock is going to beat the market then close the business.
These companies have gutted their research and development costs to increase free cash flow. For example, Boeing’s share repurchase program also accelerated as BA reached all time highs and became an extremely risky asset after the second MAX crash and endless FAA investigations. That’s a senseless use of capital yet they’re asking tax payers for bailouts.
We’re talking about airlines, not Boeing. How much R&D should they be doing?
You mean they couldn’t be doing R&D into better flight paths for fuel economy or risk? What about finding ways to better transact with the end client? Or a better way to deal with cargo? How’s about research into a machine to better load cargo into the plane?
What type of question is this?
What type of question is this?
They already do this, in fact it's critical to optimise things like this in a low margin industry like airlines. Any airline that doesn't calculate the best flight paths for fuel economy will quickly go out of business.
Because they couldn’t spend more money to improve things, yep, you’re right.
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They could hold on to some, just in case there was a disturbance that caused cashflow to stop for a while.
For example paying down debt instead of loading up like American Airlines did.
Then the money would probably not be free cash. It would be held under some sort of actuarial title for dealing with risk. Maybe amortization? I'm not an accountant.
If the business needs it to sustain operations then it probably isn't free cash flow.
If the business needs it to sustain operations then it probably isn't free cash flow.
The argument here is that they actually did need it to sustain operations since there's a significant chance they'll now receive a bailout. The whole point is they took cash they should have kept as a backup and then used it to boost share price instead.
Do we really want businesses to hold onto cash, sitting idle, just in case a once in a century pandemic like this hits your industry particularly hard?
I don't think that makes sense. People talk about 'socialised losses' as if it's the devil's work. I think socialised losses aren't that bad when talking about such unique events. Should companies really be holding on to cash for once in a century events? Imagine a 1950s CEO had been hoarding cash for 70 years. Now imagine how much wealth has been generated, by putting that cash to use, including by paying it out as cash to investors who'll go on to finance new businesses, new jobs, new research etc.
That having been said, while I'm not opposed to socialised losses / bailouts per se, I don't really quite see yet why airlines need bailouts. Their stock valuations rose due to bailouts. Now they drop some due to the crisis. They should be high enough to sell more stock it once bought and raise new capital. In good years you buy the stock back. In bad years you sell stock. What's the problem? Yes investors take losses, it's part of the game. That's why you diversify. If you don't, that's on you.
Not sure how far the US goes, but in the Netherlands all employees have unemployment insurance if they get laid off. And those who don't, get a little over $1k in social security, plus various subsidies on rent, healthcare etc. Companies in trouble can layoff people, and they're taken care of with the insurance premiums paid out in the good years. The company sells off stock and hunkers down. The government offers cheap lines of credit. Good businesses survive, a few bad ones die off. I don't see why a big bailout is necessary.
I don't think that makes sense. People talk about 'socialised losses' as if it's the devil's work. I think socialised losses aren't that bad when talking about such unique events. Should companies really be holding on to cash for once in a century events? Imagine a 1950s CEO had been hoarding cash for 70 years. Now imagine how much wealth has been generated, by putting that cash to use, including by paying it out as cash to investors who'll go on to finance new businesses, new jobs, new research etc.
That having been said, while I'm not opposed to socialised losses / bailouts per se, I don't really quite see yet why airlines need bailouts. Their stock valuations rose due to bailouts. Now they drop some due to the crisis. They should be high enough to sell more stock it once bought and raise new capital. In good years you buy the stock back. In bad years you sell stock. What's the problem? Yes investors take losses, it's part of the game. That's why you diversify. If you don't, that's on you.
Not sure how far the US goes, but in the Netherlands all employees have unemployment insurance if they get laid off. And those who don't, get a little over $1k in social security, plus various subsidies on rent, healthcare etc. Companies in trouble can layoff people, and they're taken care of with the insurance premiums paid out in the good years. The company sells off stock and hunkers down. The government offers cheap lines of credit. Good businesses survive, a few bad ones die off. I don't see why a big bailout is necessary.
Which is a fair point but ... and I'm going to stop after this because I've made my point to the best of my ability ... but if they did that then the money wouldn't be called free cash flow because they've decided they need it for emergencies. They could be extremely risk tolerant and they'd still be sending all their FCF to shareholders. The amount would simply be smaller.
I'm totally on board that bailouts are the worst and are inappropriate; but the statistic in the article is an accounting identity. They call the money they send to shareholders FCF, so obviously around 100% of FCF is going to be going to shareholders. If they think there is a potentially better use for the money than going to shareholders it isn't classed as FCF.
I'm totally on board that bailouts are the worst and are inappropriate; but the statistic in the article is an accounting identity. They call the money they send to shareholders FCF, so obviously around 100% of FCF is going to be going to shareholders. If they think there is a potentially better use for the money than going to shareholders it isn't classed as FCF.
RE "wouldn't be called free cash flow": it still would, because it'd be their own personal decision to save it for a rainy day. When they'd have to save some amount for a rainy day due to regulations, that money wouldn't be considered free cash flow. FCF is, from what I understand, not automatically equal to what you send to shareholders, but sending it to shareholders is an option. Another option would be investing it, or putting it in your bank accounts, as Apple, Google, Microsoft etc are doing.
The airlines simply made a business decision and bet their company on never needing to sustain a drop in traffic, and they've lost the bet.
If you take whatever you have left after paying for rent, food and insurance, that's your FCF. You can now decide whether you want to save some or all of that, spend it on a new bed, or blow it on coke. The airlines chose what made them/their shareholders happy in the short term and potentially very sad in the long term.
The airlines simply made a business decision and bet their company on never needing to sustain a drop in traffic, and they've lost the bet.
If you take whatever you have left after paying for rent, food and insurance, that's your FCF. You can now decide whether you want to save some or all of that, spend it on a new bed, or blow it on coke. The airlines chose what made them/their shareholders happy in the short term and potentially very sad in the long term.
That's not true. The definition of free cash flow includes cash the firm keeps on hand. Any positive change in Apple's "cash and cash equivalents" counts as free cash flow, for example.
No, there's no actuarial or accountancy reason they'd have to do that. It's no different from someone running a restaurant business saving some in the bank instead of taking it all out.
The cash flow is "free" in the sense that you don't owe it to someone else, eg salaries, suppliers, etc. You can save it in a pot if you feel like it.
The cash flow is "free" in the sense that you don't owe it to someone else, eg salaries, suppliers, etc. You can save it in a pot if you feel like it.
I read it that airlines could have simply put the cash in a bank account. Pretty mch what Apple does. becasue that amount of free cash would sure be handy right now.
Apple has a lot of cash, but they also do more stock buybacks than anyone. ~$20 billion just last quarter!
https://ycharts.com/companies/AAPL/stock_buyback
https://ycharts.com/companies/AAPL/stock_buyback
And if they run into any issues because of this outbreak, they are out of luck in my book.
This would result in the board being sacked for sitting on spare cash and not maximising shareholder return.
Did Apple board got sacked?
Apple has done more buybacks than anyone! And pays a dividend.
> Since 2012, Apple has been buying back shares at the extraordinary rate of around $10 billion per quarter.
Shareholders demanded it.
> Since 2012, Apple has been buying back shares at the extraordinary rate of around $10 billion per quarter.
Shareholders demanded it.
Apple has gigantic amounts of free cash flow, which is why they have $100 billion of cash on their balance sheet, despite their buybacks.
Just back of the envelope, if every Fortune 100 had $100 billion in cash, that would be $10 trillion sitting in accounts as, what, a rainy day fund?
Apple keeps a massive cash hoard in case they want to do a very large strategic acquisition. Airlines would be doing mergers not acquisitions.
IMO it’s entirely appropriate that if a black swan even cripples an industry like air travel for a government to offer low-interest loans until they can start generating cash again.
This is actually significantly more efficient than each company having to put billions of capital on the sidelines “just in case” their entire multi-billion dollar revenue stream goes to $0 for a few months. Capital efficiency is very important to overall economic growth.
Apple keeps a massive cash hoard in case they want to do a very large strategic acquisition. Airlines would be doing mergers not acquisitions.
IMO it’s entirely appropriate that if a black swan even cripples an industry like air travel for a government to offer low-interest loans until they can start generating cash again.
This is actually significantly more efficient than each company having to put billions of capital on the sidelines “just in case” their entire multi-billion dollar revenue stream goes to $0 for a few months. Capital efficiency is very important to overall economic growth.
It's not on the sidelines. Like 0.001% of "cash" is actually cash. Apple holds like a third of its "cash" in equities. Airlines could do the same, or hold
short-term debt, or pay down their own debt (which would free up capital for other uses). (They could also hold long-term debt in other companies, but I'm not sure where that shows up in the balance sheet.)
Money is returned to shareholders as buyback or dividend and shareholders can capitalize company in times of need (or when they see an opportunity for expansion or market takeover).
This is more effective, quicker and cheaper way of capital alocation. It also eliminates political agenda.
This is more effective, quicker and cheaper way of capital alocation. It also eliminates political agenda.
What about some equity in return for a bail out..
A firm who returns free cash flow to shareholders and then defaults on debt is transferring money from bondholders to shareholders.
Save it as a buffer against changes in conditions?
From an economics perspective FCF is a company's failure to make efficient use of capital. They can just as easily pay more taxes. Individual shareholders have a limited capacity to efficiently allocate capital when compared to larger enterprises (that's pretty much the point of having corporations).
[0] Save cash for a rainy day
The us economy is a house of cards
So it would be logical if shareholders re-capitalize airlines now. Or let them fall if shareholders see no point in keeping airlines alive.
That would involve selling shares at a low price after buying them at a high price. This would make management look stupid.
> That would involve selling shares at a low price after buying them at a high price. This would make management look stupid.
It is difficult for management not to look stupid if it is stupid. Airlines were doing well because everything was doing well, not because airlines management was non-stupid.
Not having a car accident on an open road with no other cars in a perfect weather does not make one a good driver. It just makes one not a bad driver.
It is difficult for management not to look stupid if it is stupid. Airlines were doing well because everything was doing well, not because airlines management was non-stupid.
Not having a car accident on an open road with no other cars in a perfect weather does not make one a good driver. It just makes one not a bad driver.
> That would involve selling shares at a low price after buying them at a high price. This would make management look stupid.
They should be made to look stupid, since using "96% of free cash flow" to buy back shares means they left the companies that they manage grievously vulnerable to disruption.
They should pay for privatizing their gains and trying to collectivize their losses.
They should be made to look stupid, since using "96% of free cash flow" to buy back shares means they left the companies that they manage grievously vulnerable to disruption.
They should pay for privatizing their gains and trying to collectivize their losses.
That’s how they transfer value to their investors. It costs money, but so do dividends.
Maybe management is stupid?
Why would the shareholders do that if they think the government may step in and bail them out?
that's why the government should never bail out shareholders. Bail out the company, sure - if the company is vital for "the system" (which airlines are, long-term) - but only after bankruptcy, i.e. wiping out the shareholders.
Preferably also some debt holders should be wiped out. Otherwise it becomes too cheap to leverage your company if you need to pay only risk-free rate on your debt.
There's a whole society that exists outside of these shareholders and they need airlines to travel.
> There's a whole society that exists outside of these shareholders and they need airlines to travel.
Then wipe out the shareholders and let the companies reorganize under new ownership.
Then wipe out the shareholders and let the companies reorganize under new ownership.
There is valid business opportunity then.
For what? Making other airlines after the existing ones fail?
Or re-capitalizing existing ones.
Honestly I would not worry about airlines, restaurants and other non-essential business at the moment. They will be all right eventually, when demand for their services comes back. If not, someone else will step in.
I would rather be giving unlimited tax money to Roche for increasing capacity in producing as many tests as necessary and more, to LVHM for converting their Chanel No 5 production lines into producing hand-sanitizer, to Roll-Royce for producing ventilators and to other front-line business,
Honestly I would not worry about airlines, restaurants and other non-essential business at the moment. They will be all right eventually, when demand for their services comes back. If not, someone else will step in.
I would rather be giving unlimited tax money to Roche for increasing capacity in producing as many tests as necessary and more, to LVHM for converting their Chanel No 5 production lines into producing hand-sanitizer, to Roll-Royce for producing ventilators and to other front-line business,
Lumping airlines and restaurants in the same category might make sense for the efficient market section of an economics textbook, but food trucks aren't "stepping in" for "front-line" businesses. For the past century being "alright eventually" has always demanded government support. Though businesses have never actually corrected any economic crisis in history, maybe this time they will? I guess blind faith has its benefits, but it's not a particularly strong strategy.
So then they won’t mind trading stock to the government for cash, right? Hah... never met a corporate executive who didn’t magically become a socialist when the chips were down.
The government picking well-connected winners for private profit is just "American capitalism".
As for socialism, I'll quote Harry Truman's 1952 speech,
As for socialism, I'll quote Harry Truman's 1952 speech,
"Socialism is a scare word they have hurled at every advance the people have made in the last 20 years.
Socialism is what they called public power.
Socialism is what they called social security.
Socialism is what they called farm price supports.
Socialism is what they called bank deposit insurance.
Socialism is what they called the growth of free and
independent labor organizations.
Socialism is their name for almost anything that helps
all the people."Of course they prioritized sending money to investors, the incentives align to promote that outcome. They know they're a thin margin industry and that if anything serious happens they go tits up. Looking stupid for not saving money in the bankruptcy hearing is free. Having assets that you saved for tough times spent in order to delay the bankruptcy cost you those assets.
Worth noting that this will be the 3rd industry which Warren Buffett has been both invested in and bailed out of during a crisis.
Buffet why he has avoide Airlines:
>"I think there have been almost 100 airline bankruptcies. I mean, that is a lot," he said. "It's been a disaster for capital."
Airline bailouts are still distaste for capital. Berkshire did not buy Airlines so that they will be bailed out. They are thinking that they got a bad century out of the way. Their thinking is that Airlines are becoming business that has no bankruptcies or bailouts over long term.
>"I think there have been almost 100 airline bankruptcies. I mean, that is a lot," he said. "It's been a disaster for capital."
Airline bailouts are still distaste for capital. Berkshire did not buy Airlines so that they will be bailed out. They are thinking that they got a bad century out of the way. Their thinking is that Airlines are becoming business that has no bankruptcies or bailouts over long term.
That could be part of his investment strategy. In which case, I gotta give credit where it may be due.
I feel like even civilian airlines have some national defense / security aspect to them since they’re so critical to our infrastructure (e.g. troop transports). I don’t want to return to the days before deregulation, but I think there should be federally enforced rules around remaining operational even during times of severe economic crisis.
That being said, nobody expects a 100 year event, and it would be irresponsible to ask shareholders to offer $100 plane tickets that don’t likely don’t even cover the cost of a seat while also maintaining an emergency budget. I’ve heard airlines have razor thin margins for at least economy class seats, and I’d rather support a one time bailout than have to pay business fare going forward.
That being said, nobody expects a 100 year event, and it would be irresponsible to ask shareholders to offer $100 plane tickets that don’t likely don’t even cover the cost of a seat while also maintaining an emergency budget. I’ve heard airlines have razor thin margins for at least economy class seats, and I’d rather support a one time bailout than have to pay business fare going forward.
> nobody expects a 100 year event
It's not. SARS was only 18 years ago. Now we have SARS-CoV in 2020.
https://en.wikipedia.org/wiki/Severe_acute_respiratory_syndr...
We, as a society, need to stop accepting dumb excuses.
It's not. SARS was only 18 years ago. Now we have SARS-CoV in 2020.
https://en.wikipedia.org/wiki/Severe_acute_respiratory_syndr...
We, as a society, need to stop accepting dumb excuses.
SARS wasn't a massive global catastrophe, just like almost all flu epidemics aren't massive global catastrophes but for the opposite reason: it was too deadly, which limited its ability to spread and made it relatively easy to eradicate through contact tracing and testing. This kind of pandemic really does seem to be a 100-year event that requires a disease with a very special set of properties.
The planes, airports, pilots and ground vrews are still there. Maybe unemployed, but the infrastructure doesn't simply disapear. So any government could always just step in and requirate them. If airlines would operate as effeciently is a different story. But that is basically what the German government has in the books for all civilian trucks if, you know, the Russiians would have attacked.
But I gree it would be best to keep these operations in civilian hands, all processes and tools are already there to move people and goods around.
But I gree it would be best to keep these operations in civilian hands, all processes and tools are already there to move people and goods around.
I expect we'll soon find out an awful lot of businesses have done the same or close to the same that are about to ask for bailout money (casinos, hotels, etc.). I've long been worried about the strength of the market in the U.S. because prices have seemed to mainly be because of buybacks and financial maneuvering rather than because of strong fundamentals, increased productivity/innovation, etc. I hope the gov lets a few of these businesses fail or put absolutely draconian repayment terms on them if only to show that companies can't depend on the government to bail them out every time something bad happens they weren't prepared for.
Btw most of these shareholders have been smart enough to sell immediately when the markets began falling so they will buy these stocks at the bottom and get bailed out all over again by the taxpayer and watch the capital multiply.
I'm all for getting rich but pump and dumps should be (are?) illegal.
I'm all for getting rich but pump and dumps should be (are?) illegal.
> Btw most of these shareholders have been smart enough to sell immediately when the markets began falling so they will buy these stocks at the bottom and get bailed out all over again by the taxpayer and watch the capital multiply.
If they sold, then they're no longer shareholders; there are new shareholders, and they will be the ones to receive any potential bailout.
There's two sides to every transaction. If people were selling, someone was buying. If someone will be buying, someone will be selling. The sort of people who invest in distressed companies (and I think all airlines count as that right now) tend to be hedge funds and other sophisticated investors; they're hardly going to give any potential gains to previous shareholders asking for their stocks back because they changed their mind hearing about a bailout.
If they sold, then they're no longer shareholders; there are new shareholders, and they will be the ones to receive any potential bailout.
There's two sides to every transaction. If people were selling, someone was buying. If someone will be buying, someone will be selling. The sort of people who invest in distressed companies (and I think all airlines count as that right now) tend to be hedge funds and other sophisticated investors; they're hardly going to give any potential gains to previous shareholders asking for their stocks back because they changed their mind hearing about a bailout.
Please don't be facetious. The OP was clearly implying that the ones who make it ahead in such situations is that very "sophisticated" class of inveators. They surely did not mean that a literal specific investor will somehow get gains from not owning a stock he has sold. Talk about a ridiculous strawman.
Ah if only that was the case. Turns out, when the government is involved then the taxpayer is buying but the government is deciding what to buy.
There is no hedge fund buying airlines right now. There will be a shitload of them lining up once the government commits to buying the debt because then they know there's only upside from there.
There is no hedge fund buying airlines right now. There will be a shitload of them lining up once the government commits to buying the debt because then they know there's only upside from there.
Gee, maybe you should buy the shared after the announcement then, and pick up some of that free money for yourself?
(Ignoring, for the moment, that bailouts generally zero out equity holders to ensure debt holders get paid.)
Your cynicism is healthy, but I'm not sure you understand how this process works.
(Ignoring, for the moment, that bailouts generally zero out equity holders to ensure debt holders get paid.)
Your cynicism is healthy, but I'm not sure you understand how this process works.
No shit I will. But I happen to be loaded and the cast majority of people are not.
It's the people without money to deploy, the people who depend on fixed income (elderly, retired) and the people who had all their money in some index fund or mutual fund (your average Joe) that get screwed.
It's the people without money to deploy, the people who depend on fixed income (elderly, retired) and the people who had all their money in some index fund or mutual fund (your average Joe) that get screwed.
If they're bailed out the government should take over the stock and if they survive the government can recoup the money it cost to bail them out by selling stock again.
It's how it works in most countries at least.
It's how it works in most countries at least.
When they get bailed out, what do you think happens to the shares they hold?
Company is worth $100, has 100 shares. You own 1 share, worth $1.
Company takes $100 from Gov't, not a handout but rather in exchange for stock. Now it's worth $200, there are 200 shares, 100 owned by the government, 99 by other shareholders and 1 by you.
In this situation, you're back where you started.
Company is worth $100, has 100 shares. You own 1 share, worth $1.
Company takes $100 from Gov't, not a handout but rather in exchange for stock. Now it's worth $200, there are 200 shares, 100 owned by the government, 99 by other shareholders and 1 by you.
In this situation, you're back where you started.
The math there doesn't work out. There aren't magically 100 more shares. Either the stock has to split (reducing the value of each share by half) or there are enough shares withstanding to sell.
> What do people expect them to do with free cash flow?
Pay down debt and keep enough money in the bank to weather turbulence ahead.
Pay down debt and keep enough money in the bank to weather turbulence ahead.
FCF is supposed to go to shareholders: it's what's left over after spending money running and growing the business. And this problem (and related solutions) will probably apply not just to airlines but also restaurants, retailers, etc.
In normal circumstances, chewz is right and they should either call up more capital from existing shareholders or go under. But these are not normal circumstances. 1) Everyone is capital constrained, and 2) airlines collectively are extremely important to the economy. This isn't a handful of one-off bankruptcies of a few laggards.
Investors are capital constrained and would need to sell off their other holdings at the very moment everybody else is trying to unload those same assets at depressed prices, risking a broader liquidity crunch that goes well beyond airlines, as other sectors are also in trouble.
So the next best solution is for governments to lend them cheap money to hold them over, or to recap with equity (diluting current shareholders, possibly by a lot) and gradually sell off that equity after conditions return to normal. That's what happened to the banks: in a sense, they went 90% bankrupt with existing shareholders getting massively diluted, but the companies were able to continue without the massive disruptions caused by them all going belly-up.
When it's a normal economic cycle, even most recessions, the right approach is to let the laggards die and let the shareholders get wiped out. When there's lots of volatility, it's better to let the shareholders get 60%, 80%, 90% wiped out but keep the companies alive.
In normal circumstances, chewz is right and they should either call up more capital from existing shareholders or go under. But these are not normal circumstances. 1) Everyone is capital constrained, and 2) airlines collectively are extremely important to the economy. This isn't a handful of one-off bankruptcies of a few laggards.
Investors are capital constrained and would need to sell off their other holdings at the very moment everybody else is trying to unload those same assets at depressed prices, risking a broader liquidity crunch that goes well beyond airlines, as other sectors are also in trouble.
So the next best solution is for governments to lend them cheap money to hold them over, or to recap with equity (diluting current shareholders, possibly by a lot) and gradually sell off that equity after conditions return to normal. That's what happened to the banks: in a sense, they went 90% bankrupt with existing shareholders getting massively diluted, but the companies were able to continue without the massive disruptions caused by them all going belly-up.
When it's a normal economic cycle, even most recessions, the right approach is to let the laggards die and let the shareholders get wiped out. When there's lots of volatility, it's better to let the shareholders get 60%, 80%, 90% wiped out but keep the companies alive.
If they go under the aircraft will still be there. Just new owners. Ban foreign buyouts then let them go bankrupt and be sold to the highest bidders.
We're about due for different owners of capital; the situation has been far too static. The bailouts in '08 kept a bunch of very poor managers in charge. 100% wipe-outs were appropriate in '08, and they will be appropriate again this time. Of all the people we need to feel sorry for, capitalists are the last. And I say that as an ardent capitalist. The social contract there is very clear and literally written down in many cases.
We're about due for different owners of capital; the situation has been far too static. The bailouts in '08 kept a bunch of very poor managers in charge. 100% wipe-outs were appropriate in '08, and they will be appropriate again this time. Of all the people we need to feel sorry for, capitalists are the last. And I say that as an ardent capitalist. The social contract there is very clear and literally written down in many cases.
1) Where will the money come from to buy the aircraft? Are you saying this with any sense of how long it will take to start a new airline like AA or Delta or whatever? Agency costs under a liquidation are absolutely massive.
2) Nobody is suggesting that protecting shareholders be a policy consideration, and that was true in '08 as well when the banks effectively went bankrupt (well, 90% of the way at least). The shareholders got wiped out when banks had to hand over 90% of their shares to the government in return for equity. When before you might have owned 10%, you then own 1%. That's the point of being a shareholder: you're last in line and take on that risk.
3. Instead, the concern is over the broader economic disruption of airlines suddenly no longer operating when other businesses rely on travellers: hotels, restaurants, stores, etc.
4. I get your point that it might be better to wipe the slate clean: iirc, some airlines are running software that's 40+ years old. Under normal circumstances, if that's a real problem, those airlines will have a disadvantage against newcomers, of which there are many. The difference here is when these businesses are failing not to an operational shortcoming, but something much larger.
You're talking about Chapter 11 liquidation as if it's nothing. There are massive agency costs there and assets stop operating until they can be sold. Chapter 9 is less disruptive (owners get wiped out, creditors own the business and the business finds new creditors to put in some money), and if there's a risk of wide-scale economic disruption, better still is something a little short of Ch. 9: a "bailout" where the government basically wipes out most of the equity and can put in some capital in return.
2) Nobody is suggesting that protecting shareholders be a policy consideration, and that was true in '08 as well when the banks effectively went bankrupt (well, 90% of the way at least). The shareholders got wiped out when banks had to hand over 90% of their shares to the government in return for equity. When before you might have owned 10%, you then own 1%. That's the point of being a shareholder: you're last in line and take on that risk.
3. Instead, the concern is over the broader economic disruption of airlines suddenly no longer operating when other businesses rely on travellers: hotels, restaurants, stores, etc.
4. I get your point that it might be better to wipe the slate clean: iirc, some airlines are running software that's 40+ years old. Under normal circumstances, if that's a real problem, those airlines will have a disadvantage against newcomers, of which there are many. The difference here is when these businesses are failing not to an operational shortcoming, but something much larger.
You're talking about Chapter 11 liquidation as if it's nothing. There are massive agency costs there and assets stop operating until they can be sold. Chapter 9 is less disruptive (owners get wiped out, creditors own the business and the business finds new creditors to put in some money), and if there's a risk of wide-scale economic disruption, better still is something a little short of Ch. 9: a "bailout" where the government basically wipes out most of the equity and can put in some capital in return.
(1) Hold an auction. If the only person who turns up is a homeless bum with a dollar then the aircraft now costs a dollar and we have a homeless industrialist on our hands.
Ditto (4) for the software; it doesn't get deleted because the ownership changes.
(2) A sibling comment to yours suggested exactly that. We aren't protecting the business (nobody wants to fly at the moment, that is why they are about to go broke). So we can't be protecting consumers; the capital itself can't catch COVID-19 so isn't under much threat so logically a bailout is either protecting shareholders or workers.
And my position, radical as the free marketer that I am, is we should protect the workers during the process, but sack the shareholders and provide crisis support to the vulnerable insofar as they used to be shareholders.
(3) Yeah; but bailing out the airlines doesn't actually help that when you inspect it. Nobody is using the airlines; they need to be mothballed ASAP and maintained on a skeleton crew for 6 months.
A bailout of the airlines under these conditions isn't the worst idea; the bank bailouts in '08 were substantially worse because they went to the people who caused the crisis. But it is much more dangerous than it seems making decisions in a crisis, from outside the company, saying 'it can't possibly be their fault; lets give hem a boost!'. The view from the outside might be misleading and we might be rewarding reckless behavior. We have this company concept precisely because it contains the damage to a sacrificial legal entity that we can kill off.
Ditto (4) for the software; it doesn't get deleted because the ownership changes.
(2) A sibling comment to yours suggested exactly that. We aren't protecting the business (nobody wants to fly at the moment, that is why they are about to go broke). So we can't be protecting consumers; the capital itself can't catch COVID-19 so isn't under much threat so logically a bailout is either protecting shareholders or workers.
And my position, radical as the free marketer that I am, is we should protect the workers during the process, but sack the shareholders and provide crisis support to the vulnerable insofar as they used to be shareholders.
(3) Yeah; but bailing out the airlines doesn't actually help that when you inspect it. Nobody is using the airlines; they need to be mothballed ASAP and maintained on a skeleton crew for 6 months.
A bailout of the airlines under these conditions isn't the worst idea; the bank bailouts in '08 were substantially worse because they went to the people who caused the crisis. But it is much more dangerous than it seems making decisions in a crisis, from outside the company, saying 'it can't possibly be their fault; lets give hem a boost!'. The view from the outside might be misleading and we might be rewarding reckless behavior. We have this company concept precisely because it contains the damage to a sacrificial legal entity that we can kill off.
On 2 & 4, we seem to disagree on the central claim that new airlines can be spun up quickly in time for their liquidation not to jeopardize the travel sector in the future once this outbreak abates.
This requires two conditions, neither of which hold: a) properly functioning capital markets to launch these assets and build the operations around them (not the case -- asset prices are falling across the board and there's tons of forced selling), and b) the ability to spin up an airline quickly from a cold start.
And if we apply the thinking you've offered around (1), it might be just a tad more to the public benefit to have the government step in and buy on the cheap a majority of the business (massively diluting existing shareholders), keep the engine warm, and not have to deal with a cold start in 6, 9, 12 months. Then, just as with the banks, they'll unload the stock as the price recovers and the crisis has passed. Those gains go straight back to the treasury, as they did following the recaps in 2010.
What would less reckless behavior look like? How much money should the airlines hold on their balance sheets in order to cover catastrophic losses due to a pandemic (derided as "hoarding money" in some circles). Many businesses are a few bad weeks away from bankruptcy, and the airline industry, while indispensable, is famously brutal.
This requires two conditions, neither of which hold: a) properly functioning capital markets to launch these assets and build the operations around them (not the case -- asset prices are falling across the board and there's tons of forced selling), and b) the ability to spin up an airline quickly from a cold start.
And if we apply the thinking you've offered around (1), it might be just a tad more to the public benefit to have the government step in and buy on the cheap a majority of the business (massively diluting existing shareholders), keep the engine warm, and not have to deal with a cold start in 6, 9, 12 months. Then, just as with the banks, they'll unload the stock as the price recovers and the crisis has passed. Those gains go straight back to the treasury, as they did following the recaps in 2010.
What would less reckless behavior look like? How much money should the airlines hold on their balance sheets in order to cover catastrophic losses due to a pandemic (derided as "hoarding money" in some circles). Many businesses are a few bad weeks away from bankruptcy, and the airline industry, while indispensable, is famously brutal.
Just don't forget that a lot of "capitalists" are pensioners, college endowments, etc.
So we decide that we are going to give them government money. Plan A is to filter the money through a corporation first. I prefer plan B, which is give the money straight to the people involved - like pensioners or endowments - and be honest about what is happening.
Lets not let charity get mixed up in running a business. We have a no-fault system in free market capitalism - if you go broke you don't run the business. Doesn't matter if it is your fault or not. And almost magically, that aligns incentives to get the best outcomes.
Lets not let charity get mixed up in running a business. We have a no-fault system in free market capitalism - if you go broke you don't run the business. Doesn't matter if it is your fault or not. And almost magically, that aligns incentives to get the best outcomes.
Pensioners and wage earners are not capitalists. They depend on wages to live. Calling yourself a capitalist doesn't make you have capital.
True capitalists are those who do not need wages (e.g. CEOs of airliners, billionaires, etc.).
True capitalists are those who do not need wages (e.g. CEOs of airliners, billionaires, etc.).
In Australia we have Superannuation (compulsory contributions retirement fund) so actually pensioners are expected to live partly off capital gains/sale of shares. Of course their portfolios usually get more defensive (less stock more bonds) the older they get.
That is very similar to what we have in the US; we have 401(k)s, 403(b)s, 457(b)s etc. that tie our retirement to the stock market. In many cases, employers force their employees to enroll in them.
Think about these retirement accounts this way: capitalists take our money now under the presumption we will get it back when we're 60+. In the mean time, while we're working for a living wage, the capitalists get to profit off our labor now. They get to continue destroying the planet and exploiting other wage earners. They don't need a wage to live.
1) While employees have these retirement accounts, we are forced to contribute to them. We are forced into ensuring the well-being of capitalism.
2) Being forced to contribute to these accounts is diametrically opposed to the interests of our class. It makes us wish well for the stock market because our retirement is tied to it. But a more profitable stock market leads to more exploitation of the labor of my class. For these profits to exist, either you keep labor costs low, or increase prices.
I would prefer to extricate our retirement from the stock market and capitalism.
Think about these retirement accounts this way: capitalists take our money now under the presumption we will get it back when we're 60+. In the mean time, while we're working for a living wage, the capitalists get to profit off our labor now. They get to continue destroying the planet and exploiting other wage earners. They don't need a wage to live.
1) While employees have these retirement accounts, we are forced to contribute to them. We are forced into ensuring the well-being of capitalism.
2) Being forced to contribute to these accounts is diametrically opposed to the interests of our class. It makes us wish well for the stock market because our retirement is tied to it. But a more profitable stock market leads to more exploitation of the labor of my class. For these profits to exist, either you keep labor costs low, or increase prices.
I would prefer to extricate our retirement from the stock market and capitalism.
Capitalize profits socialize losses that is American corporate way. Executives keep the profit and expect taxpayers to bailout losses.
"Barack Obama says banks paid back all the federal bailout money"
https://www.politifact.com/factchecks/2012/oct/25/barack-oba...
https://www.politifact.com/factchecks/2012/oct/25/barack-oba...
Opportunity cost, the banks in no way payed out what that money was worth at the time. Hand me 1 billion interest free for 5 years and sure I will pay the money back, but...
It was not interest-free: https://projects.propublica.org/bailout/list
As that points out, not all loans where paid back. The interest from those that did result in a nominal profit, but it’s far from what private lenders received for loans in that time period.
Thus opportunity cost, as it was a poor investment which is why it was called a bailout.
Thus opportunity cost, as it was a poor investment which is why it was called a bailout.
If they had other opportunities at higher rates, they would have lent at that rate.
Yes but assuming bankruptcy would have actually destroyed the US economy (highly debatable) then it was a low cost measure.
True, but still mean that the people bail them out. So the taxpayers soften the blow with a loan...
Maybe let the companies go down, and give a loan to the taxpayers instead.
But some of these airlines have a dividend already. American Airlines has a 2.5% dividend. That is returning cash to investors. Why buy back shares then?
If they only paid a 2.5% dividend in 2015, they would have returned some cash to investors. But instead, they also spent $3.5 billion (!) on buybacks in 2015, almost half their market cap at the time. https://www.fool.com/investing/general/2016/01/15/expect-mor...
If they only paid a 2.5% dividend in 2015, they would have returned some cash to investors. But instead, they also spent $3.5 billion (!) on buybacks in 2015, almost half their market cap at the time. https://www.fool.com/investing/general/2016/01/15/expect-mor...
Dividends and share buybacks are economically equivalent, the only difference is tax efficiency.
No, they aren’t. Buybacks push stock price higher, which also makes a difference for option values in a way that dividend don’t.
Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate.
Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in.
What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards).
Dividends and buybacks are similar when everything is hunky-dory but never equivalent.
Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate.
Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in.
What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards).
Dividends and buybacks are similar when everything is hunky-dory but never equivalent.
I am not a financial expert but how are buybacks reflected in a company’s balance sheet?
My theory is that buybacks give companies a false sense of complacency. If they do $1 billion worth of buybacks, it doesn’t feel they are really “giving out” $1 billion back to investors. Rather, $1 billion in cash just got converted to a long term asset(their shares). Thus this is how airlines get into a cash crunch. They are lulled to believe they can go crazy with buybacks with no consequences.
If instead they did a special dividend for $1 billion, they would immediately feel the consequences. It is money taken straight out of their bank. Thus they would of course consider more carefully how much to give as a dividend.
Just my theory and why I am against buybacks and for dividends only.
My theory is that buybacks give companies a false sense of complacency. If they do $1 billion worth of buybacks, it doesn’t feel they are really “giving out” $1 billion back to investors. Rather, $1 billion in cash just got converted to a long term asset(their shares). Thus this is how airlines get into a cash crunch. They are lulled to believe they can go crazy with buybacks with no consequences.
If instead they did a special dividend for $1 billion, they would immediately feel the consequences. It is money taken straight out of their bank. Thus they would of course consider more carefully how much to give as a dividend.
Just my theory and why I am against buybacks and for dividends only.
Stocks bought back disappear (making each remaining share reflect a larger percentage of the company). It is in general the reverse of a public offering in which money comes in and new shares come into existence (making each previously existing share represent a smaller part of the company).
This is not technically exact, but probably a good mental model.
This is not technically exact, but probably a good mental model.
While true, my point is they were already returning cash to investors in the form of a dividend.
Why the need to do outrageously huge buybacks if they were already doing so?
Why the need to do outrageously huge buybacks if they were already doing so?
Because buying back shares is typically better for non US investors.
I don't live in the US and I am not a US citizen, but if I owned those American Airlines shares, I'd need to pay 30% withholding tax to the US government on that dividend (strictly speaking it's withheld vs. actively paid).
That's in addition to taxes that need to paid in one's own country (assuming no dual taxation treaty).
With a share buyback, the share price rises (ideally) instead and when it is sold, there's no US tax on the capital gain for non resident non citizens.
I don't live in the US and I am not a US citizen, but if I owned those American Airlines shares, I'd need to pay 30% withholding tax to the US government on that dividend (strictly speaking it's withheld vs. actively paid).
That's in addition to taxes that need to paid in one's own country (assuming no dual taxation treaty).
With a share buyback, the share price rises (ideally) instead and when it is sold, there's no US tax on the capital gain for non resident non citizens.
In some countries the tax regime has different levels of tax for dividends and capital gains, so in some countries buybacks are better for the shareholders than dividends.
Airlines failure does not destroy the physical aircraft, or the skilled workforce. So, economically they can be restarted with minimal issues. Longer term the US so far from capital constrained and letting less efficient airlines fail is likely the best policy.
Well, yes and no.
For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade.
And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy.
And it's only seeing it from the narrow view of one company failing. If the whole economy has a significant portion of companies failing, it will mess-up things a lot more.
For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade.
And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy.
And it's only seeing it from the narrow view of one company failing. If the whole economy has a significant portion of companies failing, it will mess-up things a lot more.
While we are talking about deprecating assets, they can last a long time. New US carriers would not be limited to purchasing the old US carriers aircraft. Delta’s 747 for example are 26 years old on average, but they might easily be sold globally, with a new airline picking a fleet on the cheap from some other country’s failed airlines. Thus the assets are not really that critical a consideration.
IMO, if US airlines can’t raise enough capital to handle a short therm disruption that’s a sign the markets think letting them fail is more efficient. Further, politics is unlikely to be making a more efficient choice than industry experts. Finally, if we are talking a multi year disruption airlines seem like a very low priority.
IMO, if US airlines can’t raise enough capital to handle a short therm disruption that’s a sign the markets think letting them fail is more efficient. Further, politics is unlikely to be making a more efficient choice than industry experts. Finally, if we are talking a multi year disruption airlines seem like a very low priority.
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they are airlines, not banks. They are important but we need not fear collapse if they disappear. No doubt some will survive, somehow. Saving them would not be a waste of money, but the money can be better spent. For example on disease control and medical care.
Whats the difference with banks? If a bank goes bankrupt won't someone come in and buy at a low price? The deposits in the bank wont disappear..
Buybacks are a way for companies to let the market know they are no longer capable of making efficient use of capital, and so they give the money back to shareholders instead. The recent trend of buybacks within various industries presents a difficult argument against the efficacy of capitalism in general. It would seem companies no longer need tax cuts, can sustain higher minimum wages, have limited incentives to foster innovation through research and development, since buybacks have exceeded FCF since 2014. With the effectiveness of shareholders use of capital being fairly limited (something we were able to witness following the Trump administration's tax reforms), the only other viable option is to give a greater share to the government. If we're so concerned about Main Street pensioners and 401K shareholders when it comes to buybacks, then perhaps they'd prefer a fixed UBI paid by higher corporate taxes rather than be subject to the whims of the market (now especially). If that doesn't sound like a good idea, than maybe companies should do their job and actually spend the capital. As much as people argue against public entitlements, they seem to support the private entitlements fostered by buyback culture, if one doesn't seem productive, why does the other?
Well, they returned cash to shareholders in good times. Guess it's time for them to sell new shares to get the cash to tide them over bad times. Buy high, sell low? Oops. Stuff happens.
But the current capital markets will impose no such discipline, sad to say.
But the current capital markets will impose no such discipline, sad to say.
This article looks a lot like outrage porn. It suggests that there is something wrong with spending 96% of FCF on buybacks without stating it explicitly. I doubt most people without some decent corporate finance training can form an informed opinion about this.
What could be more irresponsible than merely staying facts without also having the diligence to additionally write some apologetics for the facts themselves.
What the reporter should have done, clearly, is get the opinion of one of those benevolent airline executives to explain why cash flow was spent on buybacks instead of literally anything else. They can tell us what we all know - that it is standard procedure and could never comprehend the complexity of corporate finance! That it was for our good, after all, in a way, and that, well, that's how Things Are.
Personally, and this is just me, we should ban the plebeians , oh I mean the uniformed, from making dangerous observations of fact!
What the reporter should have done, clearly, is get the opinion of one of those benevolent airline executives to explain why cash flow was spent on buybacks instead of literally anything else. They can tell us what we all know - that it is standard procedure and could never comprehend the complexity of corporate finance! That it was for our good, after all, in a way, and that, well, that's how Things Are.
Personally, and this is just me, we should ban the plebeians , oh I mean the uniformed, from making dangerous observations of fact!
Both the journalist suggest that the airline execs should have done something different with the FCF without stating what (dividends? salaries? investments?) and why.
From your tone and reply it seems you agree, so maybe you can clarify this. What else should they have done with their FCF? Would everything be OK if they paid everything in dividends like utilities? Plow everything into investments like Amazon? Into what? Buying all their airplanes, rather than leasing airplanes? Stashing everything in a huge pot of treasuries like Apple? Giving their crew and support staff big raises?
From your tone and reply it seems you agree, so maybe you can clarify this. What else should they have done with their FCF? Would everything be OK if they paid everything in dividends like utilities? Plow everything into investments like Amazon? Into what? Buying all their airplanes, rather than leasing airplanes? Stashing everything in a huge pot of treasuries like Apple? Giving their crew and support staff big raises?
Can we just let the airlines go bankrupt? For environmental reasons, air travel should be much rarer and much more expensive than it has been.
Businesses are going to need to learn to deal with teleconferencing. Employees can be given more time off and travel more slowly by train or ferry. There has to be some happy medium between total lockdown frozen economy and maximum-velocity economy that is killing people and the planet.
Businesses are going to need to learn to deal with teleconferencing. Employees can be given more time off and travel more slowly by train or ferry. There has to be some happy medium between total lockdown frozen economy and maximum-velocity economy that is killing people and the planet.
> free cash flow to firm (FCFF) is a way of looking at a business's cash flow to see what is available for distribution among all the securities holders of a corporate entity. [0]
What do people expect them to do with free cash flow? The point of free cash flow is to get the money back to shareholders. These aren't high-growth industries.
[0] https://en.wikipedia.org/wiki/Free_cash_flow