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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 t

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.

roenxi 7y ago
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.
- luckylion 7y ago
  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.
- QuesnayJr 7y ago
  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.
IkmoIkmo 7y ago
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.

roenxi 7y ago

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.

luckylion 7y ago
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.
QuesnayJr 7y ago
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.

IkmoIkmo 7y ago

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.