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Over the last decade, airlines spent 96% of their free cash flow buying back stock[1]. This improves the stock value for investors (and executives). Rather than

• jariel 7y ago
  "This improves the stock value for investors" Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almost the same financial thing. Shareholders 'own' the $1 in the company's bank, or they 'own' it if it's paid back to shareholders. Stock buybacks or dividend payouts should basically have a null effect on the value of the company. They are kind of 'neutral' exercises. Edit: 'null value' obviously taking into consideration fewer shares, i.e. if the company buys shares from the market at market prices, it shouldn't directly affect the value of the other shares it's financially neutral.
  • kdamica 7y ago
    A buyback has the added effect of reducing the number of shares, increasing their Earnings per Share (EPS). Since EPS is a widely-used metric for valuing a company, it's not quite the same as a dividend.
    • jariel 7y ago
      In a 'perfect' buyback which was spread across all investors equally -> it's neutral. (Percentage ownership remains the same, cash was transferred to investors) That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average. Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation. The question of how much cash on hand certain businesses should have to have ... is a separate issue. If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
    • smabie 6y ago
      EPS isn't used to value a company, it's used to value the price of a single share.
  • JaimeThompson 7y ago
    If it was essentially the same as putting the money in the bank then they should be able to use that stock to keep themselves going instead of getting a bailout. But that will not work because their stocks are down so much.
  • throwawayjava 7y ago
    Only if you assume perfect liquidity and either 1) a constant or monotonically increasing stock price or else 2) a huge cash reserve such that selling stock at basement prices or taking out highly leveraged loans is never necessary. If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times. If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1. Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.
    • jariel 7y ago
      Of course - I'm not denying that 'stock buybacks' have a strategic impetus, of course they do. Every financial decision does. I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all. The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal. Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
      • iso947 7y ago
        Aren’t $1k of dividends taxed more than $1k or capital gains?
      • jessaustin 7y ago
        They aren't a "special win" in general. When they occur a month before a downturn that generates a bailout, they are.
        • jariel 7y ago
          Even a 'month before' some unforeseen event, it's not a 'special win'. It's barely a special win in any event.
  • clairity 7y ago
    stock buybacks are rarely perfectly neutral for all shareholders. it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. dividends allow you to diversify right away, but have greater tax implications. the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits. and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying). the benefits are not uniform to every shareholder, especially through time.
    • xyzzyz 7y ago
      it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting. Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
      • clairity 7y ago
        not every shareholder participates in the decision-making behind a buyback, and in some cases they can't all participate in the buyback itself (especially with majority privately-held entities).
        • xyzzyz 7y ago
          We are talking about publicly traded companies here. You can always participate in the buyback: just sell your shares, they're publicly traded, so there should be no difficulty. It doesn't matter much who's on the other side of your trade, as the arbitrageurs will ensure that the buyback is priced into the spot price.
• wtvanhest 7y ago
  I think people don't really understand buybacks. The nuances of dividend vs share buybacks can be debated, but at the end of the day, each are just ways to return capital to shareholders like pension funds, 401ks etc. They didn't 'spend it' then returned it to investors which is what companies should do unless they have a different way to invest it for better returns.
  • majormajor 7y ago
    There's a third option: building up cash reserves for the inevitable down times. This is one of those "privatized profits, socialized risk" situations. It's not attractive to save money when you know you can get bailed out or go through bankruptcy without too much pain.
    • SpicyLemonZest 7y ago
      What amount of cash reserves would have allowed them to survive their business becoming illegal?
      • ogre_codes 7y ago
        If you aren't massively over-leveraged, your survival prospects are much higher under any circumstances. If the airlines had serviced their debt instead of accumulating debt while rewarding shareholders, recovery would be a lot easier. Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
        • smabie 6y ago
          Buying back shares is, in some ways, paying off your debt. Whenever you need money, you can just create more shares and sell them back. The problem is that you lose some diversification benefits: when you need to sell more shares is often (though not always) correlated to a drop in your own stock price. Ideally though, you're inflating the balloon so to speak so you can deflate it when need be. Or you think that your stock is undervalued right now.
• monksy 7y ago
  Lets not forget that they've been devaluing and increasing the price of the product/service. Yes the costs are cheaper but compared to what it used to be you're getting much less for your money.
  • lizavp 6y ago
    I seem to remember getting an included meal for US domestic flights that are 5+ hours. Now you get snack with the option of a paid meal. One thing I like about Air Asia is that you can pre-order your paid meals.
• koboll 7y ago
  >Rather than requesting bailouts and rule changes, imo they should be selling that stock to raise capital. This strategy has already been kneecapped by plummeting share prices, and trying to sell massive amounts of shares right now would only lead to even further diminishing marginal returns. Airlines are a crucial national infrastructure, and they know this, which is why they've been incentivized not to give a shit about recession resistance. Bailouts are fine, as long as they are coupled with corrective action. Those who accept them should be unable to buy back stock in the future, and required to build up the capital reserves necessary to weather another pandemic.
  • throwawayjava 7y ago
    And it's not like this is totally unprecedented. That's exactly what we did with banks in 2008.
  • dforrestwilson 7y ago
    A patently bad argument. No company was forecasting a pandemic in their 5-year plan. Doesn’t mean American or any other firm should receive special treatment. American Airlines alone has a market cap today of $4.7B. They could dilute by 20% and stay alive.
  • bgorman 7y ago
    You know what is an alternative plan with built in protections for creditors that will redoubtably watch the restructuring more closely than congress? Bankruptcy. United Airline's value is not in its people, or its service, or its business model. The value is in its airplanes, its exclusive rights to fly to some airports and lobbying prowess (Ever wonder why flights to LaGuardia don't fly to the west Coast? United). The creditors who take over United Airlines will not take the majority of these airplanes and send them to another country. If there is any value to United as an entity at all, Chapter 11 bankruptcy is what they need to go through, not congress. In chapter 11 bankrupcy new creditors will come in and punish the existing investors/executives who got United in this situation. If United truly has no value, chapter 7 is the way and United's assets will be repurposed the most efficient way possible for United's creditors and the economy as a whole. I frankly cannot think of a less sympathetic organization.
• dntbnmpls 7y ago
  > Rather than requesting bailouts and rule changes, imo they should be selling that stock to raise capital. Sell stock to raise capital after airline stocks have dropped 70%? Usually you want to raise capital when stocks rise ( like tesla did ). Also, if airlines start increasing float during a market selloff, it would put even greater downward pressure on their stock price and it would make their financial data ( EPS, etc ) look that much worse. Your idea is one of the worse things airlines could do, but given their awful track record, they might do it.
• c3534l 7y ago
  Buying treasury stock is what happens when you're undervalued in the market, but don't have many expansion opportunities. They don't want to raise capital because they don't think the demand exists for more airports, more supply: right now they're trying to compete on price, driving costs down. The airlines are not in a growth phase, raising capital seems incredibly silly. They're also making the calculation that the people are leaving the market and selling under value. This makes sense. The market is low right now because of COVID-19, people need liquidity to handle underemployment and low-spending. Profits are down and money isn't coming in, and treasury stock is an important counter-balancing force on a receding market. Airlines don't see any major opportunity to make money off of new infrastructure, so they're injecting that money back into the economy. A pet peeve of mine, but you lump together investors and executives together as if having money in the financial markets is something reserved for the elites, and not inherent in every pension and 401(k) plan.