Skip to content Skip to sidebar Skip to footer

Airline bailouts and capital regulation - Barokong

The airlines are about to get a huge bailout. Why are they in such trouble? Well, yes, nobody is flying so their revenues are cratering. But why not just stop flying for a while? The answer is, they have loads and loads of debt.

U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writesBrandon Kochkodin on Bloomberg

American Airlines Group Inc...led the pack, with negative cumulative free cash flow during the decade while it repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. As the industry reels under the weight of the coronavirus outbreak corporate leaders are seeking federal assistance to ease the burden.
Let's be clear. It is a myth that buybacks are bad because they reduce investment. And free cash flow isn't a very interesting divisor. But buybacks do have a downside: they reduce equity and increase debt. Fine if you and the creditors are willing to take a bath in bad times. Not good if debt means taxpayers have to bail out in bad times. Too big to fail is spreading like a virus.

If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don't pay creditors will take them to bankruptcy court, seize assets, break them up and there won't be airlines when the virus is over.

Enter the federal bailout, as always really a bailout of the creditors.

Does this all sound like banks 2008? It is.

If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around.  Issue equity, retain earnings.

Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.

The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.

If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don't just send a check.

Post a Comment for "Airline bailouts and capital regulation - Barokong"