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I think you misunderstood what our parent post meant. They are not questioning that airlines are not very profitable but that because of the low profit margins,

by esturk 7y ago

I think you misunderstood what our parent post meant. They are not questioning that airlines are not very profitable but that because of the low profit margins, the airlines should've saved those money and not spend it on stock buyback.

AmericanChopper 7y ago
The outrage around stock buybacks is silly. It’s pretty much the same outcome as paying a dividend, just achieved in a slightly different way. The real problem is the current incentive structure. If your industry knows it will be bailed out, then the incentive is to not have enough cash on hand. Because anybody who saved for a rainy day will end up in a worse position than those who didn’t, and then just got a bailout. I’d say the solution is to either be more willing to let companies fail, or to structure bailouts in a way that represents a massive failure for shareholders, by significantly diluting their equity for instance.
- mcphage 7y ago
  You’re saying “don’t hate the player, hate the game”, but the thing is: we can hate both.
  - AmericanChopper 7y ago
    If you’re hating people for making completely rational decisions, then you’re just going to end up being pretty hateful. My first point was that doing a share buyback is essentially the same thing as paying a dividend from a profit-allocation perspective. They’re both just different ways to use profits to return value to shareholders. The outrage over using that particular instrument is mostly just based on ignorance. The outrage over these companies deciding to return that value to shareholders, rather than using it to prepare for ups and downs (in a notoriously unstable industry) is mostly justified. However it is entirely misplaced. It’s not just that they can win by doing the wrong thing, but due to the nature of historical bailouts, they risk massively losing out by doing the right thing. There is no system of economics that can survive by rewarding failure. Failure must always be a possible outcome when taking a risk. These companies are simply taking advantage of a government provided incentive to fail. You have every right to get mad at them for making the rational decision, but that is just getting mad for the sake of getting mad.
    - mrgordon 7y ago
      In my comment I specifically cited dividends in addition to buybacks as I agree they both represent money that was returned to shareholders and could have been saved. I don’t agree with your claim that the companies are incentivized to be insolvent so they get nice bailouts or they’ll get left behind. Looking at the auto industry in 2008, GM desperately needed a bailout and got $18 billion and the government ended up taking over the company, going bankrupt, and then the assets were sold off cheaply to make a new company. How is that advantageous for the shareholders (who lost everything!) compared to the other auto companies like Ford which did not need a bailout and were simply forced to take a smaller amount of money (~$5 billion) to boost their coffers and build investor confidence during the crisis. Ford never needed the cash (except arguably as a confidence buffer) and never went bankrupt so the shareholders made out better.

by esturk 7y ago

AmericanChopper 7y ago

The outrage around stock buybacks is silly. It’s pretty much the same outcome as paying a dividend, just achieved in a slightly different way. The real problem is the current incentive structure. If your industry knows it will be bailed out, then the incentive is to not have enough cash on hand. Because anybody who saved for a rainy day will end up in a worse position than those who didn’t, and then just got a bailout. I’d say the solution is to either be more willing to let companies fail, or to structure bailouts in a way that represents a massive failure for shareholders, by significantly diluting their equity for instance.

mcphage 7y ago
You’re saying “don’t hate the player, hate the game”, but the thing is: we can hate both.
- AmericanChopper 7y ago
  If you’re hating people for making completely rational decisions, then you’re just going to end up being pretty hateful. My first point was that doing a share buyback is essentially the same thing as paying a dividend from a profit-allocation perspective. They’re both just different ways to use profits to return value to shareholders. The outrage over using that particular instrument is mostly just based on ignorance. The outrage over these companies deciding to return that value to shareholders, rather than using it to prepare for ups and downs (in a notoriously unstable industry) is mostly justified. However it is entirely misplaced. It’s not just that they can win by doing the wrong thing, but due to the nature of historical bailouts, they risk massively losing out by doing the right thing. There is no system of economics that can survive by rewarding failure. Failure must always be a possible outcome when taking a risk. These companies are simply taking advantage of a government provided incentive to fail. You have every right to get mad at them for making the rational decision, but that is just getting mad for the sake of getting mad.
  - mrgordon 7y ago
    In my comment I specifically cited dividends in addition to buybacks as I agree they both represent money that was returned to shareholders and could have been saved. I don’t agree with your claim that the companies are incentivized to be insolvent so they get nice bailouts or they’ll get left behind. Looking at the auto industry in 2008, GM desperately needed a bailout and got $18 billion and the government ended up taking over the company, going bankrupt, and then the assets were sold off cheaply to make a new company. How is that advantageous for the shareholders (who lost everything!) compared to the other auto companies like Ford which did not need a bailout and were simply forced to take a smaller amount of money (~$5 billion) to boost their coffers and build investor confidence during the crisis. Ford never needed the cash (except arguably as a confidence buffer) and never went bankrupt so the shareholders made out better.