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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 seem

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.

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.