
U.S. airlines want a $50B bailout. They spent $45B buying back their stock - spking
https://www.stamfordadvocate.com/business/article/U-S-airlines-want-a-50-billion-bailout-They-15182769.php
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jm20
I really hate that this argument keeps popping up. There's plenty of reasons
to hate bailouts or airlines or anything else, but who the hell could have
predicted the world was going to shut down like this in 2015-2019? We were in
one of the biggest bull markets in the history of the United States, business
was good, and the companies used some of that money to buy back stock. People
make it sound like they were buying back their stock as they were cutting
flights and laying off employees. _No_ business is going to hoard 50 billion
dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's
just absurd.

The reality of the situation is that these airlines employ a _lot_ of people
and enable even more commerce and economic activity through their operation.
You can disagree with a bailout all you want, but if they go under, the
economy most likely suffers by a lot more than $50B.

~~~
t0mas88
The right way to structure this is to issue $50B worth of stock to the
government. The airlines can buy it back with future profits to prop up the
price once things are back to normal, while keeping the company afloat and
retain jobs now.

The shareholders would protest, and should be allowed a right of first
refusal. Put in money at the same price per share to avoid dilution if you
want to. Their alternative is bankruptcy, so they don't have much other
options.

~~~
tathougies
No. The right way is to issue 50B of stock back to the public. The
shareholders who received 50B and are holding it in their personal emergency
funds can buy it back, or new investors can. There's more than enough private
capital available without requiring the government to step in.

~~~
t0mas88
The public currently wouldn't buy the stock due to bankruptcy risk. If the
government commits to buying what's left at the same terms the public would
start buying as well reducing the burden on taxpayers.

Historically this kind of deal has been profitable for governments in the
cases that I know of (in banking), while at the same time keeping more jobs
and thus reducing economic impact of unemployment.

~~~
andysandwich
Delta and United were each able to raise over $2B in credit. They have plenty
of airplanes and facilities to use as collateral. Coming out of 2019 United
had about $29B equity (assets - liabilities).

They don't really need a bailout to stay in business. The grant money for
employees is contingent upon them keeping open flight routes that they'd
otherwise close. Sec. of Transportation wants low traffic (small) cities to
have access to medical supplies and whatnot (at least that's what she says, of
course she's pro-business as well).

~~~
whatok
Capital markets are open right now. There's a price but they are open.

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ckastner
Having worked in the financial industry for close to two decades, and with
most of my friends in the same industry, it is remarkable to what lengths
regulators went after the 2008 banking crisis.

Banks are vital middlemen between many parties and as such, were already
heavily regulated back then, but after the massive tax-payer funded bailouts,
regulation went into overdrive.

For example, Banks are expected to survive short- to mid-term dire periods.
However, the 2008 crisis showed that most banks were not in that position. So
the regulators went into overdrive and regulated most of the weak spots they
had identified, and (IMO) most importantly, really stepped up stress tests.
Banks have to demonstrate that they can survive interest rate shocks, market
crashes, political crises, etc. for a certain amount of time.

And these things get audited _extensively_. A friend of mine works at a bank
under direct ECB oversight, and the sheer amount of data, models, simulations,
etc. they need to produce is just staggering.

Perhaps it is time to apply some of these methods to other industries that
might only survive with a taxpayer bailout. For example, a global pandemic as
we are experiencing right now, is not exactly something that was unimaginable
before.

Airlines could be expected to maintain contingency plans for such scenarios,
and required to maintain appropriate financial buffers, with stock buybacks,
dividends etc. forbidden as long as those buffers are below the levels
required by those scenarios.

~~~
mabbo
> Perhaps it is time to apply some of these methods to other industries that
> might only survive with a taxpayer bailout

I feel as though the problem here is that we can't survive losing some of
these companies. "Too big to fail" is the problem. There's so little diversity
in these ecosystem that losing one company is an economic disaster.

Maybe the regulations around these sorts of things ought to just apply to any
company that represents more than X% of a given industry, or any company worth
more than Y% of the entire stock market. And these don't even have to be _big_
X and Y values. If you're that big, you've grown beyond being just a simple
company and you've become an integral part of society that must remain
functional.

Go even further: tax those companies that meet these standards an extra small
amount, and then reduce the taxes of their smaller competitors by the same
total value. Incentivize competition to increase the diversity, so that there
aren't many companies we can't afford to lose.

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gfrff
Seems like they should sell the government 50 billion dollars of stock at the
lower of current prices and 90% of the stock price at the time they did the
buy back. They'll have lost money on the buybacks. They'll stay in business
though.

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legitster
I don't necessarily buy this argument - if they would have distributed their
earnings via dividend, they would be in the exact same boat (maybe a little
bit worse because of the additional tax on dividends). Keeping share prices up
is an objective of executive compensation because it benefits the average
shareholder.

> The reason that I'm harping on share buybacks is that in theory, money for
> them is supposed to consist of cash that's surplus to the companies' needs.
> But in the real world, companies frequently borrow money to help fund
> buybacks. That works great to prop up their stock prices - until one day,
> there's a problem.

I've been told by corporate accountants that this is a huge misunderstanding
of how corporate finance works. Companies borrow money all the time for
everything, because sitting on cash is the equivalent of slowly losing it.

~~~
andysandwich
I'm not a financial expert, but there's a line in their 10-K's about how their
loan agreements prevent them from paying dividends. I think that leaves
buybacks as the only way of letting owners take profit from their earnings.
Not sure why that's such a moral issue here?

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ryeights
In good times, people complain about companies like Apple "hoarding cash".
Now, people complain about companies redistributing profits to their
shareholders--many of which are ordinary people holding shares in their
401(k)'s or otherwise. They really cannot win.

~~~
treyfitty
Apples cash hoard was all sitting overseas because it couldn’t be repatriated,
no? That’s kind of a different scenario... they didn’t really choose to hold
cash. They just didn’t want to pay the tax to bring it to the states.

~~~
ryeights
>they didn’t really choose to hold cash.

I'm not sure what you mean by this, but if companies are going to hold large
amounts of cash, it would be fiscally irresponsible not to seek the best
possible tax treatment for it within the law. If people think it's
inappropriate for companies to hold cash overseas, those concerns should be
addressed towards lawmakers.

~~~
adjkant
When the companies are the main lobbyists of corporate tax law, they
effectively become judge/jury/executioner. You can say "Boycott Apple" but
that's not really viable either for an injustice that is not seen by most as
severe enough to give up something so centrally important to them. That
importance should not give Apple a free pass to do any minor things they care
to though, regardless of morality. These are not easy problems and for
companies to throw their hands up to "well the law says X", especially as they
lobby for X to stay, then IMO falls back morally on the company.

~~~
ryeights
Good point.

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ComputerGuru
Just remember that the Federal government ended up making money on the
automaker and bailouts (quite apart from all the jobs that were saved).

~~~
opo
>Just remember that the Federal government ended up making money on the
automaker ...

The estimates I've read are that the federal government lost between 9 and 10
billion on the automaker bailouts.

For example:

>...In the end, taxpayers lost $10.2 billion.

[https://www.thebalance.com/auto-industry-bailout-gm-ford-
chr...](https://www.thebalance.com/auto-industry-bailout-gm-ford-
chrysler-3305670)

>...the U.S. recovered all but about $9 billion of the auto bailout money.

[https://www.marketplace.org/2018/11/13/what-did-america-
buy-...](https://www.marketplace.org/2018/11/13/what-did-america-buy-auto-
bailout-and-was-it-worth-it/)

>...(quite apart from all the jobs that were saved).

Yea without the bailout, there would likely have been more job losses as
consolidation occurred in the industry.

~~~
ceejayoz
The automaker bailouts were part of a much larger overall program, that did
make a minimal profit.

[https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program](https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program)

> TARP recovered funds totalling $441.7 billion from $426.4 billion invested,
> earning a $15.3 billion profit or an annualized rate of return of 0.6% and
> perhaps a loss when adjusted for inflation.

~~~
basch
Altogether, accounting for both the TARP and the Fannie and Freddie bailout,
$634B has gone out the door.

Money has been coming back in two ways: $390B of principal has been repaid,
and the Treasury has collected revenue from its investments of $364B.

In total, the government has realized a $121B profit as of March 19, 2020.

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nknealk
Two thoughts:

* there's a structured process for when a company can't pay its bills but is possibly viable in the long run if it can restructure its obligations called Chapter 11. The airline industry has tons of examples of companies that continue operations through chapter 11 proceedings and end up as profitable on the other side. I don't see why that process is suddenly off limits today. It would require equity holders (and likely some liability holders) to take a haircut, but I'd argue investors knew the risks they were taking given the history of the airline industry.

* if the $45B was returned to shareholders in the form of dividends, would that be somehow less evil? I keep seeing articles citing share buyback numbers, but the whole point of publicly traded companies is to return capital to shareholders.

~~~
andysandwich
The airlines also have plenty of access to credit, collateralized by their
airplanes. The loan portion of the bailout, from my understanding, is
contingent upon them using up all those lines (which they haven't, both Delta
& United were each able to borrow $2B in March in preparation for the
shutdown). E.g. United borrowed $2B from JPMorgan Chase
[https://ir.united.com/static-
files/fafc24ea-c999-4dc7-b6b3-d...](https://ir.united.com/static-
files/fafc24ea-c999-4dc7-b6b3-d0e2212f281b)

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paulgpetty
I think there is a lot to weigh on many different levels about whether a
bailout juxtaposed against buybacks is a good or bad thing. But I’m surprised
by how little talk there is of individual investor opportunity. This seems
like the bottom of airline stock prices. Here’s a list of their tickers:
[https://topforeignstocks.com/stock-lists/the-complete-
list-o...](https://topforeignstocks.com/stock-lists/the-complete-list-of-
airline-stocks-on-the-nyse/) … which stocks would you buy? JetBlue, American &
United seem like bargains & no one can guarantee returns financially but lots
of people will fly again.

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sudosteph
It's obvious that buy-backs are basically a hack for struggling companies to
sacrifice long-time gains for short-term posturing. So what would a fair
regulation around stock buy backs look like?

We could make it illegal, but that seems like it would favor people who want
to do corporate takeovers. Also, I've seen legitimate uses of stock buybacks,
such as buying it back to give it as a grant to new employees.

We could limit the amount bough or spent, or require that some percentage of
stock's bought back be re-allocated to employees as grants or options.

I'm not an economic person though, just spit-balling.

~~~
AnimalMuppet
> It's obvious that buy-backs are basically a hack for struggling companies to
> sacrifice long-time gains for short-term posturing.

No, I don't think that's obvious. Buy-backs _are_ used that way, sometimes,
but they're also used by companies that are doing well to return some money to
the shareholders.

Why would they do that, when they could just issue dividends? I can see at
least two reasons. First, dividends require one transaction per stock owner,
whereas buying stock has much less overhead. Second, dividends create an
expectation that you're going to continue to issue them, which is an
expectation you may not wish to create.

Given that issue with your starting position, I don't think your conclusions
are valid.

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BiasRegularizer
Almost all major airlines in the world are receiving government bailouts:
France, Germany, UK, Japan, Sweden, HongKong, UAE, Singapore. The airline
industry is a notoriously cut-throat industry with lots of protectionism from
nations, one can't just expect US airlines to sit on $50B cash and not put it
to work.

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mgh2
Video here:
[https://www.youtube.com/watch?v=x-DNaDlSqBQ](https://www.youtube.com/watch?v=x-DNaDlSqBQ)

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willart4food
So what? The times were right and the opted for a stock buyback with excess
cash.

I don't own airlines stocks, but when a company where I am a shareholders does
a stock-buyback with excess cash I am v=so very happy.

I am OK with banning stock buyback during the period between bailout and full
repayment of the loan, but what happened before of after the loan should not
be part of the argument for the bailout.

There are no bad politicians, only bad voter.

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sunstone
Sure bail them out and take an equity position.

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MrPatan
The trick here is, did they have the cash? Or did they bought shares with
borrowed money?

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dominotw
is there an explanation for stock buybacks that isn't ' evil stockholders'?

edit: this was an actual question not a rhetorical one. curious why the
downvotes?

~~~
brockwhittaker
Sure — what are your other options if you have lots of cash?

1\. Keep it in cash and get sub-inflationary levels on it, and perform poorly
due to your lack of leverage.

2\. Invest it in other market securities, effectively running some hedge fund.
Not a great idea, distracting from your core biz, and shareholders may not
appreciate the exposure to outside risk.

3\. Buy back your own stock, which gives back to shareholders.

I'm not saying it was the best thing companies could have done with their
money, but there aren't a ton of amazing ways to deploy billions of dollars in
cash unless you're expanding operations outside your area of core competency.

I think that lots of people here are creating a lot of revisionist history
right now. Almost nobody had any problem with share buybacks for the past five
to ten years. The biggest note was that it would increase stock price over
time due to the lower availability of shares and higher earnings per share,
but hardly the critique most people have these days.

~~~
ceejayoz
"Keep it in cash" isn't looking like such a bad idea right now.

~~~
brockwhittaker
Sure, but that still wasn't the best option.

1\. We had the sharpest market drop in _history_. Models could predict this,
but while this drop is say a 1 in 30 year event across all industries, this
drop for certain sectors (like airlines) is more of a 1 in 100 year event. If
companies all planned all the time for once in a century events, global growth
would be much slower.

2\. Most companies in most industries are still better for having done share
buybacks. We're only back at 2017 stock levels. They've been buying back since
2010. The best return most companies got for their cash was doing this, and
I'm not sure that's changed with this downturn. Most companies will be back to
normal pricing in a year's time from now anyway, and their share buybacks will
still have been as brilliant of a decision as ever.

~~~
ceejayoz
United went bankrupt in 2002. Air Canada, 2003. US Airways, 2004. Northwest
and Delta in 2005. American in 2011. This pandemic may be a once-in-a-century
event, but "we're out of money" is not, especially for airlines.

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vernie
"Actually, that was good."

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lofikrom
I thought part of capitalism was that businesses go out of business.

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qzw
Banks have legally mandated reserve requirements. Is it time for companies in
certain FRB (Frequently Requiring Bailouts) industries to also have some level
of required cash reserves? What would be some arguments against, apart from ye
olde “too much government regulation”?

