4 ms·

If an individual is expected to have a 3-6 month 'emergency fund', would it be reasonable to expect the same of a corporation?

vsareto 7y ago
That 3-6 month projection of operating expenses goes out the window once an emergency happens. Business require many more things to sustain itself. The recommendation is good for every day people because the actual cost to keep a healthy human sustained is actually pretty cheap (food, water, shelter). A business does not have human needs, it might need oil, metal, ores, chemicals, etc. to do its job. If the prices of those things spike dramatically, your 3-6 month emergency fund could quickly turn into 1-3 months.
- 0xffff2 7y ago
  Have prices spiked dramatically? The only variable costs to an airline that I can think of are fuel and parts. With worldwide travel demand evaporating, it seems unlikely to me that either of those things are in short supply.
  - vsareto 7y ago
    Oil and airline parts may not necessarily go down in price for every emergency. Forcing companies to keep 3-6 months cash for Covid-19 is too little too late. This would be regulation that has to consider many more emergencies.
  - mardifoufs 7y ago
    You could take all of the profit (including buybacks) American made in the last 6 years and that would still be only enough to fund 4 months of operations. I'm against the bailouts because I think we shouldn't make some investments riskless and subsidized , but to blame airlines for not having 6 months of reserve is just weird. Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all. The reality of the industry is that they had to keep prices super low to satisfy consumers expecting always cheaper flight and at the same time satisfy shareholders who are aware of how cyclical the industry is and require a big RoI to justify their risk. That requires a lot of leverage, high efficiency and a low margin of error in their cashflow predictions.
    - wastedhours 7y ago
      Not to mention the only way to park $14bn would have been to diversify it across an investment portfolio that could be liquidised easily. That cash would also have seen some damage during this time too.
    - thrwaway4000 7y ago
      >Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all. If they are the only airliner left standing after four months I think the outlook would be quite different. That only works if the government doesn't bail out their competitors leaving them at a disadvantage.
      - mardifoufs 7y ago
        Maybe that will give you better chances of survival but think about it from an airlines perspective. Is it rational to basically ignore shareholders to hold reserves in case of a black swan that would cut your entire cashflow in the hope of surviving a few months at best? You're basically giving no return on investment to your shareholders, which could have made use of the money in a more productive way than just parking it in cash/equivalents, so that they get the privilege of seeing that money burnt down at a phenomenal rate if that improbable worst case scenario happens? And all of that while investing in a riskier industry? Again, the investors took a risk and should not be bailed out. But the buybacks and the lack of reserves make sense. You can't take a risk without expectation of return only to get an extremely risky solution (that may or may not save half of your equity value) to an improbable event.
- pjmorris 7y ago
  > If the prices of those things spike dramatically, Futures contracts have existed for a very long time for exactly this reason. [0] It's up to management to use them responsibly. For an example from the last crisis, Ford managed to avoid needing a bailout while GM and Chrysler took part in one. Management makes a difference. I'd want to steer out of a situation where management uses government to finance its carelessness. [0] https://en.wikipedia.org/wiki/Futures_contract https://en.wikipedia.org/wiki/Futures_contract
  - vsareto 7y ago
    >It's up to management to use them responsibly. There's the rub, by mandating a cash reserve, does that necessarily include required futures on critical operating items? Who decides what's critical? What happens if they don't follow those rules? GM and Chrysler are still around. I don't know how well they've done compared to Ford, but until the bailouts stop coming or the laws don't change, there may not be a reason to do this.
    - abofh 7y ago
      Pretty sure GM bought Chrysler
      - arrosenberg 7y ago
        Fiat bought Chysler.

vsareto 7y ago

That 3-6 month projection of operating expenses goes out the window once an emergency happens. Business require many more things to sustain itself. The recommendation is good for every day people because the actual cost to keep a healthy human sustained is actually pretty cheap (food, water, shelter). A business does not have human needs, it might need oil, metal, ores, chemicals, etc. to do its job. If the prices of those things spike dramatically, your 3-6 month emergency fund could quickly turn into 1-3 months.

0xffff2 7y ago
Have prices spiked dramatically? The only variable costs to an airline that I can think of are fuel and parts. With worldwide travel demand evaporating, it seems unlikely to me that either of those things are in short supply.
- vsareto 7y ago
  Oil and airline parts may not necessarily go down in price for every emergency. Forcing companies to keep 3-6 months cash for Covid-19 is too little too late. This would be regulation that has to consider many more emergencies.
- mardifoufs 7y ago
  You could take all of the profit (including buybacks) American made in the last 6 years and that would still be only enough to fund 4 months of operations. I'm against the bailouts because I think we shouldn't make some investments riskless and subsidized , but to blame airlines for not having 6 months of reserve is just weird. Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all. The reality of the industry is that they had to keep prices super low to satisfy consumers expecting always cheaper flight and at the same time satisfy shareholders who are aware of how cyclical the industry is and require a big RoI to justify their risk. That requires a lot of leverage, high efficiency and a low margin of error in their cashflow predictions.
  - wastedhours 7y ago
    Not to mention the only way to park $14bn would have been to diversify it across an investment portfolio that could be liquidised easily. That cash would also have seen some damage during this time too.
  - thrwaway4000 7y ago
    >Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all. If they are the only airliner left standing after four months I think the outlook would be quite different. That only works if the government doesn't bail out their competitors leaving them at a disadvantage.
    - mardifoufs 7y ago
      Maybe that will give you better chances of survival but think about it from an airlines perspective. Is it rational to basically ignore shareholders to hold reserves in case of a black swan that would cut your entire cashflow in the hope of surviving a few months at best? You're basically giving no return on investment to your shareholders, which could have made use of the money in a more productive way than just parking it in cash/equivalents, so that they get the privilege of seeing that money burnt down at a phenomenal rate if that improbable worst case scenario happens? And all of that while investing in a riskier industry? Again, the investors took a risk and should not be bailed out. But the buybacks and the lack of reserves make sense. You can't take a risk without expectation of return only to get an extremely risky solution (that may or may not save half of your equity value) to an improbable event.
pjmorris 7y ago
> If the prices of those things spike dramatically, Futures contracts have existed for a very long time for exactly this reason. [0] It's up to management to use them responsibly. For an example from the last crisis, Ford managed to avoid needing a bailout while GM and Chrysler took part in one. Management makes a difference. I'd want to steer out of a situation where management uses government to finance its carelessness. [0] https://en.wikipedia.org/wiki/Futures_contract https://en.wikipedia.org/wiki/Futures_contract
- vsareto 7y ago
  >It's up to management to use them responsibly. There's the rub, by mandating a cash reserve, does that necessarily include required futures on critical operating items? Who decides what's critical? What happens if they don't follow those rules? GM and Chrysler are still around. I don't know how well they've done compared to Ford, but until the bailouts stop coming or the laws don't change, there may not be a reason to do this.
  - abofh 7y ago
    Pretty sure GM bought Chrysler
    - arrosenberg 7y ago
      Fiat bought Chysler.