
Biggest U.S. airlines spent bulk of free cash flow on stock repurchases - vo2maxer
https://www.bloomberg.com/news/articles/2020-03-16/u-s-airlines-spent-96-of-free-cash-flow-on-buybacks-chart
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chewz
So it would be logical if shareholders re-capitalize airlines now. Or let them
fall if shareholders see no point in keeping airlines alive.

~~~
duaoebg
That would involve selling shares at a low price after buying them at a high
price. This would make management look stupid.

~~~
zentiggr
Hmmmm.. isn't the market about finding truth and moving accordingly?

~~~
gwd
To ideological purists. To most people it's about making money.

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dougweltman
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.

~~~
roenxi
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.

~~~
tomp
Just don't forget that a lot of "capitalists" are pensioners, college
endowments, etc.

~~~
EarthIsHome
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.).

~~~
yyy888sss
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.

~~~
EarthIsHome
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.

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sub7
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.

~~~
Lazare
> 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.

~~~
sub7
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.

~~~
Lazare
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.

~~~
sub7
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.

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dforrestwilson
Worth noting that this will be the 3rd industry which Warren Buffett has been
both invested in and bailed out of during a crisis.

~~~
nabla9
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.

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roenxi
Wiki says:

> 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](https://en.wikipedia.org/wiki/Free_cash_flow)

~~~
Dobbs
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.

~~~
yyy888sss
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.

~~~
aNoob7000
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.

~~~
Justsignedup
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.

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yingw787
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.

~~~
redis_mlc
> 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...](https://en.wikipedia.org/wiki/Severe_acute_respiratory_syndrome)

We, as a society, need to stop accepting dumb excuses.

~~~
makomk
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.

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atlasunshrugged
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.

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ForHackernews
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.

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dsfyu404ed
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.

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notyourday
> 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.

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OliverJones
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.

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projectileboy
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.

~~~
zipwitch
The government picking well-connected winners for private profit is just
"American capitalism".

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."

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geogra4
The us economy is a house of cards

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em500
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.

~~~
airlines55
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!

~~~
em500
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?

