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Biggest U.S. airlines spent bulk of free cash flow on stock repurchases
- geogra4 7y agoThe us economy is a house of cards
- chewz 7y agoSo it would be logical if shareholders re-capitalize airlines now. Or let them fall if shareholders see no point in keeping airlines alive.
- duaoebg 7y agoThat would involve selling shares at a low price after buying them at a high price. This would make management look stupid.
- swarnie_ 7y agoMaybe management is stupid?
- zentiggr 7y agoHmmmm.. isn't the market about finding truth and moving accordingly?
- gwd 7y agoTo ideological purists. To most people it's about making money.
- notyourday 7y ago> 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.
- stingraycharles 7y agoThat’s how they transfer value to their investors. It costs money, but so do dividends.
- ardy42 7y ago> 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.
- atlasunshrugged 7y agoWhy would the shareholders do that if they think the government may step in and bail them out?
- tomp 7y agothat'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.
- beefield 7y agoPreferably 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.
- boh 7y agoThere's a whole society that exists outside of these shareholders and they need airlines to travel.
- chewz 7y agoThere is valid business opportunity then.
- boh 7y agoFor what? Making other airlines after the existing ones fail?
- chewz 7y agoOr 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,
- boh 7y agoLumping 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.
- ardy42 7y ago> 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.
- projectileboy 7y agoSo 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 7y agoThe 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."
- roenxi 7y agoWiki 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 7y agoPay 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.
- wil421 7y agoDelta just paid every employee 14% of their pay earlier this year after a blockbuster 2019. I bet they are rethinking that decision.
- yyy888sss 7y agoPublic 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 7y agoIf 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 7y ago
- dsfyu404ed 7y agoOf 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.
- dforrestwilson 7y agoWorth noting that this will be the 3rd industry which Warren Buffett has been both invested in and bailed out of during a crisis.
- chewz 7y agohttps://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
- 55555 7y agoThat could be part of his investment strategy. In which case, I gotta give credit where it may be due.
- nabla9 7y agoBuffet 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.
- yingw787 7y agoI 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 7y ago> 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_syndrome https://en.wikipedia.org/wiki/Severe_acute_respiratory_syndr... We, as a society, need to stop accepting dumb excuses.
- makomk 7y agoSARS 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.
- hef19898 7y agoThe 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.
- atlasunshrugged 7y agoI 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.
- sub7 7y agoBtw 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.
- tyfon 7y agoIf 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.
- Lazare 7y ago> 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.
- 7y ago
- notyourday 7y ago> 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.
- dougweltman 7y agoFCF 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.
- akg_67 7y agoCapitalize profits socialize losses that is American corporate way. Executives keep the profit and expect taxpayers to bailout losses.
- aantix 7y ago"Barack Obama says banks paid back all the federal bailout money" https://www.politifact.com/factchecks/2012/oct/25/barack-obama/barack-obama-says-banks-paid-back-all-federal-bail/ https://www.politifact.com/factchecks/2012/oct/25/barack-oba...
- Retric 7y agoOpportunity 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...
- OliverJones 7y agoWell, 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.
- em500 7y agoThis 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 7y agoWhat 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 7y agoBoth 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?
- malcolmxtucker 7y agoDo you have a background in corporate finance? If not, weird to form an opinion that the article seems like outrage porn without also holding the stance that buyback strategy was the way to go...
- ForHackernews 7y agoCan 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.