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Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of l

Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage. 2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk. 3. Buy back your own stock, which gives back to shareholders. I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency. I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.

markharper 7y ago
There's also option 4: - Increase worker pay and benefits
- ff317 7y ago
  And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...
- kube-system 7y ago
  You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.
ceejayoz 7y ago
"Keep it in cash" isn't looking like such a bad idea right now.
- seiferteric 7y ago
  Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.
  - ff317 7y ago
    Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time: * Government regulation impacts * Union strikes * Aircraft groundings due to faulty (or less-long-lived than anticipated) parts * Ticket search companies undercutting their profits * Oil (and thus fuel, one of their main costs) price surges * Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world. * Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust. * Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc) * Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
- brockwhittaker 7y ago
  Sure, but that still wasn't the best option. 1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower. 2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.
peterbraden 7y ago
Traditionally you also have dividends as well. Stock buybacks are basically tax avoidance.
- ghaff 7y ago
  Many companies still pay dividends as well. But, yes, functionally both dividends and stock buybacks return money to shareholders, i.e. the owners of the company. However, as you say, in the US the tax code tends to favor capital gains over dividends.
- sanderjd 7y ago
  Yeah what I keep not being sure of with this whole debate is: are people mad about companies using buybacks instead of dividends because of the tax avoidance angle, or are they mad at the entire idea of companies giving back money to shareholders either way? It seems like buybacks are the boogeyman, but that an argument like "if they had kept their $45B over the past few years, they wouldn't need $50B now" applies just as well to dividends.
  - pseudalopex 7y ago
    People can be mad about or rationally opposed to more than one thing at a time.
    - sanderjd 7y ago
      Sure, maybe it's both. What I'm saying is that it seems muddled to me in these articles, I can't quite tell which thing is actually the problem, or whether it is both.
billylindeman 7y ago
4. Pay a dividend
- em500 7y ago
  For the line of thought in articles like these, there's no difference if airlines had spend $45B on dividend payouts in the past four years rather than on buybacks.
- brockwhittaker 7y ago
  No, because dividends don't benefit from compounding stock prices. If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.
sroussey 7y ago
4. Dividends
adjkant 7y ago
4. Increase pay/benefits to your rank and file employees for helping you get so much cash 5. Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund 6. Focus on improving world impact through starting philanthropic activities
- brockwhittaker 7y ago
  > Increase pay/benefits to your rank and file employees for helping you get so much cash The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain. > Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?
  - adjkant 7y ago
    > The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain. I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much... No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either. > What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole? First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.
- 7y ago
starlust2 7y ago
How about being prepared so that you don't need to be bailed out by the federal government? How about spending that money to provide better service? It's not a revisionist history that virtually everyone complains about the declining level of service and increased fees.
- fullshark 7y ago
  Both the declining level of service and increased fees are a byproduct of consumer preference: namely they choose flights based on sticker price.
- brockwhittaker 7y ago
  You could also look at it the other way (the correct way): Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class. We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so. Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.
wastedhours 7y ago
And as has been said on other threads about this topic - were the individual airlines to have saved that money (taking the hit on interest rates before deploying it now), the amounts we're talking about would barely cover a few months of total operations per airline. Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.
al_chemist 7y ago
4. Invest it in your core biz. 5. Invest it in research 6. Buy other companies to extend your core biz.
- basch 7y ago
  6a. Buy a company to get into a new line of business (Comcast/NBC, Yammer/LinkedIn/GitHub), a transformational divestment followed by rebirth (IBM, Nokia) 6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.) 6c. Buy competitor and dismantle it to consolidate and reduce competition.
JoshTko 7y ago
Buy pandemic insurance to protect your company in case of downturn.
viklove 7y ago
> 3. Buy back your own stock, which gives back to shareholders. You mean props up the share price so board members can hoard more wealth?

markharper 7y ago

There's also option 4: - Increase worker pay and benefits

ff317 7y ago
And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...
kube-system 7y ago
You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.

ceejayoz 7y ago

"Keep it in cash" isn't looking like such a bad idea right now.

seiferteric 7y ago
Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.
- ff317 7y ago
  Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time: * Government regulation impacts * Union strikes * Aircraft groundings due to faulty (or less-long-lived than anticipated) parts * Ticket search companies undercutting their profits * Oil (and thus fuel, one of their main costs) price surges * Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world. * Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust. * Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc) * Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
brockwhittaker 7y ago
Sure, but that still wasn't the best option. 1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower. 2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.

peterbraden 7y ago

Traditionally you also have dividends as well. Stock buybacks are basically tax avoidance.

ghaff 7y ago
Many companies still pay dividends as well. But, yes, functionally both dividends and stock buybacks return money to shareholders, i.e. the owners of the company. However, as you say, in the US the tax code tends to favor capital gains over dividends.
sanderjd 7y ago
Yeah what I keep not being sure of with this whole debate is: are people mad about companies using buybacks instead of dividends because of the tax avoidance angle, or are they mad at the entire idea of companies giving back money to shareholders either way? It seems like buybacks are the boogeyman, but that an argument like "if they had kept their $45B over the past few years, they wouldn't need $50B now" applies just as well to dividends.
- pseudalopex 7y ago
  People can be mad about or rationally opposed to more than one thing at a time.
  - sanderjd 7y ago
    Sure, maybe it's both. What I'm saying is that it seems muddled to me in these articles, I can't quite tell which thing is actually the problem, or whether it is both.

billylindeman 7y ago

4. Pay a dividend

em500 7y ago
For the line of thought in articles like these, there's no difference if airlines had spend $45B on dividend payouts in the past four years rather than on buybacks.
brockwhittaker 7y ago
No, because dividends don't benefit from compounding stock prices. If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.

sroussey 7y ago

4. Dividends

adjkant 7y ago

4. Increase pay/benefits to your rank and file employees for helping you get so much cash 5. Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund 6. Focus on improving world impact through starting philanthropic activities

brockwhittaker 7y ago
> Increase pay/benefits to your rank and file employees for helping you get so much cash The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain. > Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?
- adjkant 7y ago
  > The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain. I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much... No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either. > What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole? First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.
7y ago

starlust2 7y ago

How about being prepared so that you don't need to be bailed out by the federal government? How about spending that money to provide better service? It's not a revisionist history that virtually everyone complains about the declining level of service and increased fees.

fullshark 7y ago
Both the declining level of service and increased fees are a byproduct of consumer preference: namely they choose flights based on sticker price.
brockwhittaker 7y ago
You could also look at it the other way (the correct way): Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class. We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so. Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.

wastedhours 7y ago

And as has been said on other threads about this topic - were the individual airlines to have saved that money (taking the hit on interest rates before deploying it now), the amounts we're talking about would barely cover a few months of total operations per airline. Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.

al_chemist 7y ago

4. Invest it in your core biz. 5. Invest it in research 6. Buy other companies to extend your core biz.

basch 7y ago
6a. Buy a company to get into a new line of business (Comcast/NBC, Yammer/LinkedIn/GitHub), a transformational divestment followed by rebirth (IBM, Nokia) 6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.) 6c. Buy competitor and dismantle it to consolidate and reduce competition.

JoshTko 7y ago

Buy pandemic insurance to protect your company in case of downturn.

viklove 7y ago

> 3. Buy back your own stock, which gives back to shareholders. You mean props up the share price so board members can hoard more wealth?