The Really Really Yucky Airlines Bailout
I’ve held back from saying much about the 2020 bailouts because they are even stinkier than the 2008 ones, yet the people putting them together and receiving them don’t care what you think. If the Trump Administration could stare down two years of Russiagate, with the press braying daily and all sorts of spook state people warning about the danger to our
precious bodily fluids elections, they have nothing to worry about when they are handing boatloads of cash out to friendly or at least friendly out-of-desperation recipients.
The airlines are a particularly unsympathetic lot of corporate welfare queens. As most of you know, the largest US carriers spent 96% of their free cash flow on stock buybacks, well above the 50% average for the S&P 500. This Bloomberg factoid does not include whether the airlines borrowed to make these purchases, which was common in the post-crisis era.
It’s bad enough that airlines went whole hog into propping up stock prices so as to goose executive pay. It’s even worse because airlines are a high fixed cost, cyclical business. They more than just about any business ought to keep cash around for a rainy day and they didn’t.
Now admittedly, airlines are less ugly than banks, since they haven’t engaged in large scale incompetence (like regularly all together making stupid loans and acting like they shouldn’t be blamed because pretty much every other bank did so too), borrower fraud (like steering people of color to subprime loans, or switching mortgage documentation at closing), investor fraud (lying about loan quality) and other forms of chicanery (pervasive bad servicing). However, they are producing a lot of greenhouse gas emissions, and electric planes are a long way away. So a smaller airline business would not be a bad thing.
Nevertheless, if the Feds are going to rescue reckless businessmen, they ought to put their boots on the necks of the miscreants, particularly in making sure they build up big cash coffers so they don’t do a rerun any time soon.
Instead, what the airlines get is the way of bailout conditions is so minimal as to be a too-obvious exercise in optics. For instance, some of the money is in cheap loans, and some in grants that will be forgiven if the carriers fly right. The carriers are whining that it isn’t all grants. They actually have a point since as companies with high operational leverage, more debt is not a hot idea (even if the interest rate is low, the principal has to be paid off or refinanced). More grants and much more stringent conditions would have been a better mix. Instead we get:
A ban on laying off workers or cutting pay prior to September 30 (the Financial Times reports that airlines “will receive a payment equal to roughly three-quarters of its payroll for the second and third quarters of 2019”). Needless to say, this is pathetic
Prohibition of share buybacks before September 2021
Restrictions on executive pay until March 2022
The deals have been struck individually, but according to the Wall Street Journal:
On Friday Mr. Mnuchin told the largest carriers that 30% of the assistance would need to be repaid and that airlines would have to offer stock warrants on a portion of those funds.
The Financial Times description isn’t clearly worded, but as I take it, in Delta’s case, Treasury would get as much as 5% in warrants. That’s chump change.
Needless to say, the bare minimum of a sensible deal would include at least 40% board seats, much stronger and explicit requirement to build cash reserves, and veto rights on lots of issues. One would want an equity stake now, but that’s legally problematic, and the need for speed makes it a non-starter. And the point isn’t for the government to make a killing as much as to make sure the airlines act more like utilities and less like high-fliers until they get their balance sheets sorted out. That could take a while given that the damage to the economy means it’s going to be a long time, if ever, before people fly as much as they did pre-pandemic.
So in a less dysfunctional world, you’d want a lot of controls and access to internal financial and operational information, as opposed to caring much about financial upside to the government.
But in a less capital-serving bailout, another problem is who the minders would be. Remember AIG? The government appointed three trustees. There’s no evidence they did anything other than collect fees and confer a veneer of legitimacy.
Board members are trained to not rock boat so as to get even more board seats. As a result, “seasoned” board members are with a very few exceptions, constitutionally unsuited to play a real oversight role. The lack of independent-minded, vigilant yet business savvy types to parachute into a rescue supervision role is a big problem even if one generously assumes an Administration that got religion about not toadying to Corporate America.
A final issue is that some of these airlines will not make it even with a rescue. Pray tell, how does Jet Blue survive? It’s a budget airline catering to tourists. Even the middle class Americans that manage to keep their jobs and something resembling their pre-coronacrisis paychecks are going to be so traumatized that a lot of them will hunker down and save more, which among other things means traveling less.
So unless we get a coronavirus treatment shortly, we’re going to face a slow recovery even if we don’t see a rise in infections shortly after lockdowns are relaxed or next year. It is hard to see how the airlines won’t be back for more dough.