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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) wil

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.

akg_67 7y ago
Capitalize 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 ago
    Opportunity 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...
    - yyy888sss 7y ago
      Yes but assuming bankruptcy would have actually destroyed the US economy (highly debatable) then it was a low cost measure.
    - vonmoltke 7y ago
      It was not interest-free: https://projects.propublica.org/bailout/list https://projects.propublica.org/bailout/list
      - Retric 7y ago
        As that points out, not all loans where paid back. The interest from those that did result in a nominal profit, but it’s far from what private lenders received for loans in that time period. Thus opportunity cost, as it was a poor investment which is why it was called a bailout.
        aantix 7y ago
        If they had other opportunities at higher rates, they would have lent at that rate.
  - yohannparis 7y ago
    True, but still mean that the people bail them out. So the taxpayers soften the blow with a loan... Maybe let the companies go down, and give a loan to the taxpayers instead.
- wmeredith 7y ago
  The TARP bailouts turned over $10bill profit.
  - akg_67 7y ago
    How much TARP invested and how much it profited. Now compare that with how much Warren Buffett invested in Goldman Sachs and how much he profited. No wonder GS decided to become bank, access to taxpayers money is much cheaper.
AznHisoka 7y ago
But some of these airlines have a dividend already. American Airlines has a 2.5% dividend. That is returning cash to investors. Why buy back shares then? If they only paid a 2.5% dividend in 2015, they would have returned some cash to investors. But instead, they also spent $3.5 billion (!) on buybacks in 2015, almost half their market cap at the time. https://www.fool.com/investing/general/2016/01/15/expect-more-buybacks-at-american-airlines-group-in.aspx https://www.fool.com/investing/general/2016/01/15/expect-mor...
- tomp 7y ago
  Dividends and share buybacks are economically equivalent, the only difference is tax efficiency.
  - AznHisoka 7y ago
    While true, my point is they were already returning cash to investors in the form of a dividend. Why the need to do outrageously huge buybacks if they were already doing so?
    - ddeck 7y ago
      Because buying back shares is typically better for non US investors. I don't live in the US and I am not a US citizen, but if I owned those American Airlines shares, I'd need to pay 30% withholding tax to the US government on that dividend (strictly speaking it's withheld vs. actively paid). That's in addition to taxes that need to paid in one's own country (assuming no dual taxation treaty). With a share buyback, the share price rises (ideally) instead and when it is sold, there's no US tax on the capital gain for non resident non citizens.
  - beagle3 7y ago
    No, they aren’t. Buybacks push stock price higher, which also makes a difference for option values in a way that dividend don’t. Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate. Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in. What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards). Dividends and buybacks are similar when everything is hunky-dory but never equivalent.
roenxi 7y ago
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 7y ago
  Just don't forget that a lot of "capitalists" are pensioners, college endowments, etc.
  - roenxi 7y ago
    So we decide that we are going to give them government money. Plan A is to filter the money through a corporation first. I prefer plan B, which is give the money straight to the people involved - like pensioners or endowments - and be honest about what is happening. Lets not let charity get mixed up in running a business. We have a no-fault system in free market capitalism - if you go broke you don't run the business. Doesn't matter if it is your fault or not. And almost magically, that aligns incentives to get the best outcomes.
  - EarthIsHome 7y ago
    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 7y ago
      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.
Retric 7y ago
Airlines failure does not destroy the physical aircraft, or the skilled workforce. So, economically they can be restarted with minimal issues. Longer term the US so far from capital constrained and letting less efficient airlines fail is likely the best policy.
- kakwa_ 7y ago
  Well, yes and no. For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade. And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy. And it's only seeing it from the narrow view of one company failing. If the whole economy has a significant portion of companies failing, it will mess-up things a lot more.
  - Retric 7y ago
    While we are talking about deprecating assets, they can last a long time. New US carriers would not be limited to purchasing the old US carriers aircraft. Delta’s 747 for example are 26 years old on average, but they might easily be sold globally, with a new airline picking a fleet on the cheap from some other country’s failed airlines. Thus the assets are not really that critical a consideration. IMO, if US airlines can’t raise enough capital to handle a short therm disruption that’s a sign the markets think letting them fail is more efficient. Further, politics is unlikely to be making a more efficient choice than industry experts. Finally, if we are talking a multi year disruption airlines seem like a very low priority.
deleted 7y ago
[deleted]
timwaagh 7y ago
they are airlines, not banks. They are important but we need not fear collapse if they disappear. No doubt some will survive, somehow. Saving them would not be a waste of money, but the money can be better spent. For example on disease control and medical care.
- yyy888sss 7y ago
  Whats the difference with banks? If a bank goes bankrupt won't someone come in and buy at a low price? The deposits in the bank wont disappear..
boh 7y ago
Buybacks are a way for companies to let the market know they are no longer capable of making efficient use of capital, and so they give the money back to shareholders instead. The recent trend of buybacks within various industries presents a difficult argument against the efficacy of capitalism in general. It would seem companies no longer need tax cuts, can sustain higher minimum wages, have limited incentives to foster innovation through research and development, since buybacks have exceeded FCF since 2014. With the effectiveness of shareholders use of capital being fairly limited (something we were able to witness following the Trump administration's tax reforms), the only other viable option is to give a greater share to the government. If we're so concerned about Main Street pensioners and 401K shareholders when it comes to buybacks, then perhaps they'd prefer a fixed UBI paid by higher corporate taxes rather than be subject to the whims of the market (now especially). If that doesn't sound like a good idea, than maybe companies should do their job and actually spend the capital. As much as people argue against public entitlements, they seem to support the private entitlements fostered by buyback culture, if one doesn't seem productive, why does the other?

akg_67 7y ago

Capitalize 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 ago
  Opportunity 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...
  - yyy888sss 7y ago
    Yes but assuming bankruptcy would have actually destroyed the US economy (highly debatable) then it was a low cost measure.
  - vonmoltke 7y ago
    It was not interest-free: https://projects.propublica.org/bailout/list https://projects.propublica.org/bailout/list
    - Retric 7y ago
      As that points out, not all loans where paid back. The interest from those that did result in a nominal profit, but it’s far from what private lenders received for loans in that time period. Thus opportunity cost, as it was a poor investment which is why it was called a bailout.
      - aantix 7y ago
        If they had other opportunities at higher rates, they would have lent at that rate.
- yohannparis 7y ago
  True, but still mean that the people bail them out. So the taxpayers soften the blow with a loan... Maybe let the companies go down, and give a loan to the taxpayers instead.
wmeredith 7y ago
The TARP bailouts turned over $10bill profit.
- akg_67 7y ago
  How much TARP invested and how much it profited. Now compare that with how much Warren Buffett invested in Goldman Sachs and how much he profited. No wonder GS decided to become bank, access to taxpayers money is much cheaper.

AznHisoka 7y ago

But some of these airlines have a dividend already. American Airlines has a 2.5% dividend. That is returning cash to investors. Why buy back shares then? If they only paid a 2.5% dividend in 2015, they would have returned some cash to investors. But instead, they also spent $3.5 billion (!) on buybacks in 2015, almost half their market cap at the time. https://www.fool.com/investing/general/2016/01/15/expect-more-buybacks-at-american-airlines-group-in.aspx https://www.fool.com/investing/general/2016/01/15/expect-mor...

tomp 7y ago
Dividends and share buybacks are economically equivalent, the only difference is tax efficiency.
- AznHisoka 7y ago
  While true, my point is they were already returning cash to investors in the form of a dividend. Why the need to do outrageously huge buybacks if they were already doing so?
  - ddeck 7y ago
    Because buying back shares is typically better for non US investors. I don't live in the US and I am not a US citizen, but if I owned those American Airlines shares, I'd need to pay 30% withholding tax to the US government on that dividend (strictly speaking it's withheld vs. actively paid). That's in addition to taxes that need to paid in one's own country (assuming no dual taxation treaty). With a share buyback, the share price rises (ideally) instead and when it is sold, there's no US tax on the capital gain for non resident non citizens.
- beagle3 7y ago
  No, they aren’t. Buybacks push stock price higher, which also makes a difference for option values in a way that dividend don’t. Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate. Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in. What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards). Dividends and buybacks are similar when everything is hunky-dory but never equivalent.

roenxi 7y ago

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 7y ago
Just don't forget that a lot of "capitalists" are pensioners, college endowments, etc.
- roenxi 7y ago
  So we decide that we are going to give them government money. Plan A is to filter the money through a corporation first. I prefer plan B, which is give the money straight to the people involved - like pensioners or endowments - and be honest about what is happening. Lets not let charity get mixed up in running a business. We have a no-fault system in free market capitalism - if you go broke you don't run the business. Doesn't matter if it is your fault or not. And almost magically, that aligns incentives to get the best outcomes.
- EarthIsHome 7y ago
  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 7y ago
    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.

Retric 7y ago

Airlines failure does not destroy the physical aircraft, or the skilled workforce. So, economically they can be restarted with minimal issues. Longer term the US so far from capital constrained and letting less efficient airlines fail is likely the best policy.

kakwa_ 7y ago
Well, yes and no. For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade. And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy. And it's only seeing it from the narrow view of one company failing. If the whole economy has a significant portion of companies failing, it will mess-up things a lot more.
- Retric 7y ago
  While we are talking about deprecating assets, they can last a long time. New US carriers would not be limited to purchasing the old US carriers aircraft. Delta’s 747 for example are 26 years old on average, but they might easily be sold globally, with a new airline picking a fleet on the cheap from some other country’s failed airlines. Thus the assets are not really that critical a consideration. IMO, if US airlines can’t raise enough capital to handle a short therm disruption that’s a sign the markets think letting them fail is more efficient. Further, politics is unlikely to be making a more efficient choice than industry experts. Finally, if we are talking a multi year disruption airlines seem like a very low priority.

deleted 7y ago

[deleted]

timwaagh 7y ago

they are airlines, not banks. They are important but we need not fear collapse if they disappear. No doubt some will survive, somehow. Saving them would not be a waste of money, but the money can be better spent. For example on disease control and medical care.

yyy888sss 7y ago
Whats the difference with banks? If a bank goes bankrupt won't someone come in and buy at a low price? The deposits in the bank wont disappear..

boh 7y ago

Buybacks are a way for companies to let the market know they are no longer capable of making efficient use of capital, and so they give the money back to shareholders instead. The recent trend of buybacks within various industries presents a difficult argument against the efficacy of capitalism in general. It would seem companies no longer need tax cuts, can sustain higher minimum wages, have limited incentives to foster innovation through research and development, since buybacks have exceeded FCF since 2014. With the effectiveness of shareholders use of capital being fairly limited (something we were able to witness following the Trump administration's tax reforms), the only other viable option is to give a greater share to the government. If we're so concerned about Main Street pensioners and 401K shareholders when it comes to buybacks, then perhaps they'd prefer a fixed UBI paid by higher corporate taxes rather than be subject to the whims of the market (now especially). If that doesn't sound like a good idea, than maybe companies should do their job and actually spend the capital. As much as people argue against public entitlements, they seem to support the private entitlements fostered by buyback culture, if one doesn't seem productive, why does the other?