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A buyback is a form of capital return to shareholders. Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to cust

A buyback is a form of capital return to shareholders. Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers. When executive compensation is tied to operating profit or market capitalization, there is an incentive to reduce the product quality (the air traveler experience, in this case) to the minimum competitive level and boost the share price. A buyback boosts the share price in two inter-related ways. First, it reduces the amount of shares available in the secondary market (the "float"), which distributes the market cap across a smaller number of shares. Second, it provides artificial demand for the stock, impacting the price upward by buying shares. Warren Buffett has stated that he likes investing in equities in part because companies reinvest their profits in their business. A buyback doesn't do that because when you spend $5B on your own stock, you're not spending it on providing a better experience to your customers, and you're not spending it on R&D. You're just spending it on concentrating shareholder ownership and driving up the stock price. Guess who often gets paid in shares? Executives. It's common for a CEO to get a small portion of his compensation as salary and a large portion as shares and options. The point is that these companies could have reinvested that money in their business, but instead they aimed to boost share price and financial optics. That's not to say the airlines don't care about the little guy. Some shareholders are regular folks. Plus, at least Delta paid out a bonus to employees a few months ago. But there is indeed a reason to dislike large buybacks.

opportune 7y ago
Why is a buyback worse than a dividend? Both are a form of delivering ROI, it just happens that one is better for shareholders due to the tax system. In fact if airlines had actually reinvested that money, they would be even more fucked up than they are now. At least now they have free cash flow to make a temporary drop in revenue hurt less. Reinvesting money in the corporate world often involves converting cash flow into debt, which they’re probably going to have to do now to meet their existing financial obligations. Much better than if they were midway through financing some large fleet expansion and had less FCF on hand to weather the travel slowdown
- majormajor 7y ago
  I don't understand who buybacks are better for. A dividend would've returned money to all the people who held onto shares and wasn't paying attention to how much they should be selling off to capture the buyback and just had all the gains wiped out...
  - opportune 7y ago
    Absent a market selloff, they're better for shareholders for two reasons: one, it manifests earnings as capital gains/stock appreciation rather than dividends, and two, it has positive future ROI. Point 1 is not super important because of the existence of qualified dividends. Point 2 is like this: let's say I'm a company with 1000 outstanding shares valued at $100 each and want to pay a yearly dividend (for simplicity) of $5/share. All market movements notwithstanding and absent any changes, that means I'm basically giving investors a 5% yearly ROI. But, let's say I instead bought back my shares with all my earnings. The first year, I buy back 5% of the outstanding shares. Now there are 950 outstanding shares and total earnings are still $5000/year. Next year each remaining shareholder gets an extra 5% of earnings per share (this compounds). And rather than pay tax each year on dividends, shareholders defer all their taxes until they exit their position. One argument is that dividends aren't really worse in this case because investors could still choose to spend the cash on purchasing more shares, accomplishing the same thing. But the deferred taxes change the math.
  - toast0 7y ago
    In the absence of taxes, a buyback is equivilent to a dividend with automatic reinvestment. It's better as a shareholder in many cases to be able to control when you recognize the gain from the return to investors.
    - mrscottson 7y ago
      Hilarious but probably time to leave this site...I got down voted into oblivion for pointing out the US economy would probably collapse due to repo operations 44 days ago... Too bad, I guess anyone thinking outside the box and pointing out that our herd is going off a cliff is problematic...
ksec 7y ago
Except if they reinvest back to Customer they would still have the same problem today. And generally speaking better leg room, amenities, and services dont sell more tickets. Your competitor will be gaining on you via even lower price. As shown by all the budget Airline. It was the customer than decides the more expensive plane ticket wasn't worth it. I am not sure I have a solution to this problem.
a3n 7y ago
> A buyback is a form of capital return to shareholders. > Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers. And bailouts are a form of wealth redistribution from people of modest means to wealthy executives and investors who, it turns out, are actually not willing to shoulder the risk associated with passive profits. > That's not to say the airlines don't care about the little guy. They actually like the little guy, you can fit more of them on a plane.
formercoder 7y ago
You should at least mention the criteria for returning capital to shareholders - no NPV positive projects available. We can debate whether or not that is true but it’s not fair to just say “they should have reinvested in the business instead of returning capital”.

opportune 7y ago

Why is a buyback worse than a dividend? Both are a form of delivering ROI, it just happens that one is better for shareholders due to the tax system. In fact if airlines had actually reinvested that money, they would be even more fucked up than they are now. At least now they have free cash flow to make a temporary drop in revenue hurt less. Reinvesting money in the corporate world often involves converting cash flow into debt, which they’re probably going to have to do now to meet their existing financial obligations. Much better than if they were midway through financing some large fleet expansion and had less FCF on hand to weather the travel slowdown

majormajor 7y ago
I don't understand who buybacks are better for. A dividend would've returned money to all the people who held onto shares and wasn't paying attention to how much they should be selling off to capture the buyback and just had all the gains wiped out...
- opportune 7y ago
  Absent a market selloff, they're better for shareholders for two reasons: one, it manifests earnings as capital gains/stock appreciation rather than dividends, and two, it has positive future ROI. Point 1 is not super important because of the existence of qualified dividends. Point 2 is like this: let's say I'm a company with 1000 outstanding shares valued at $100 each and want to pay a yearly dividend (for simplicity) of $5/share. All market movements notwithstanding and absent any changes, that means I'm basically giving investors a 5% yearly ROI. But, let's say I instead bought back my shares with all my earnings. The first year, I buy back 5% of the outstanding shares. Now there are 950 outstanding shares and total earnings are still $5000/year. Next year each remaining shareholder gets an extra 5% of earnings per share (this compounds). And rather than pay tax each year on dividends, shareholders defer all their taxes until they exit their position. One argument is that dividends aren't really worse in this case because investors could still choose to spend the cash on purchasing more shares, accomplishing the same thing. But the deferred taxes change the math.
- toast0 7y ago
  In the absence of taxes, a buyback is equivilent to a dividend with automatic reinvestment. It's better as a shareholder in many cases to be able to control when you recognize the gain from the return to investors.
  - mrscottson 7y ago
    Hilarious but probably time to leave this site...I got down voted into oblivion for pointing out the US economy would probably collapse due to repo operations 44 days ago... Too bad, I guess anyone thinking outside the box and pointing out that our herd is going off a cliff is problematic...

ksec 7y ago

Except if they reinvest back to Customer they would still have the same problem today. And generally speaking better leg room, amenities, and services dont sell more tickets. Your competitor will be gaining on you via even lower price. As shown by all the budget Airline. It was the customer than decides the more expensive plane ticket wasn't worth it. I am not sure I have a solution to this problem.

a3n 7y ago

> A buyback is a form of capital return to shareholders. > Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers. And bailouts are a form of wealth redistribution from people of modest means to wealthy executives and investors who, it turns out, are actually not willing to shoulder the risk associated with passive profits. > That's not to say the airlines don't care about the little guy. They actually like the little guy, you can fit more of them on a plane.

formercoder 7y ago

You should at least mention the criteria for returning capital to shareholders - no NPV positive projects available. We can debate whether or not that is true but it’s not fair to just say “they should have reinvested in the business instead of returning capital”.