Biggest U.S. airlines spent bulk of free cash flow on stock repurchases • Hacker News Board

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#111

Post by chewz » Tue, Mar 17, 2020, 2:46 PM UTC

boh wrote: post #109

chewz wrote: post #108

Earlier quoted context omitted.

There is valid business opportunity then.

For what? Making other airlines after the existing ones fail?

Or re-capitalizing existing ones.

Honestly I would not worry about airlines, restaurants and other non-essential business at the moment. They will be all right eventually, when demand for their services comes back. If not, someone else will step in.

I would rather be giving unlimited tax money to Roche for increasing capacity in producing as many tests as necessary and more, to LVHM for converting their Chanel No 5 production lines into producing hand-sanitizer, to Roll-Royce for producing ventilators and to other front-line business,

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#112

Post by malcolmxtucker » Tue, Mar 17, 2020, 3:22 PM UTC

em500 wrote: post #92

airlines55 wrote: post #62

Earlier quoted context omitted.

What could be more irresponsible than merely staying facts without also having the diligence to additionally write some apologetics for the facts themselves. What the reporter should have done, clearly, is get the opinion of one of those benevolent airline executives to explain why cash flow was spent on buybacks instead of literally anything else. They can tell us what we all know - that it is standard procedure and…

Both the journalist suggest that the airline execs should have done something different with the FCF without stating what (dividends? salaries? investments?) and why. From your tone and reply it seems you agree, so maybe you can clarify this. What else should they have done with their FCF? Would everything be OK if they paid everything in dividends like utilities? Plow everything into investments like Amazon? Into wh…

Do you have a background in corporate finance? If not, weird to form an opinion that the article seems like outrage porn without also holding the stance that buyback strategy was the way to go...

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#113

Post by boh » Tue, Mar 17, 2020, 4:05 PM UTC

chewz wrote: post #111

boh wrote: post #109

Earlier quoted context omitted.

For what? Making other airlines after the existing ones fail?

Or re-capitalizing existing ones. Honestly I would not worry about airlines, restaurants and other non-essential business at the moment. They will be all right eventually, when demand for their services comes back. If not, someone else will step in. I would rather be giving unlimited tax money to Roche for increasing capacity in producing as many tests as necessary and more, to LVHM for converting their Chanel No 5 p…

Lumping airlines and restaurants in the same category might make sense for the efficient market section of an economics textbook, but food trucks aren't "stepping in" for "front-line" businesses. For the past century being "alright eventually" has always demanded government support. Though businesses have never actually corrected any economic crisis in history, maybe this time they will? I guess blind faith has its benefits, but it's not a particularly strong strategy.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#114

Post by beagle3 » Tue, Mar 17, 2020, 4:20 PM UTC

AznHisoka wrote: post #90

beagle3 wrote: post #65

Earlier quoted context omitted.

No, they aren’t. Buybacks push stock price higher, which also makes a difference for option values in a way that dividend don’t. Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate. Furthermore, the dividend is cash, it cannot go to zero without g…

I am not a financial expert but how are buybacks reflected in a company’s balance sheet? My theory is that buybacks give companies a false sense of complacency. If they do $1 billion worth of buybacks, it doesn’t feel they are really “giving out” $1 billion back to investors. Rather, $1 billion in cash just got converted to a long term asset(their shares). Thus this is how airlines get into a cash crunch. They are lu…

Stocks bought back disappear (making each remaining share reflect a larger percentage of the company). It is in general the reverse of a public offering in which money comes in and new shares come into existence (making each previously existing share represent a smaller part of the company).

This is not technically exact, but probably a good mental model.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#115

Post by ardy42 » Tue, Mar 17, 2020, 5:27 PM UTC

duaoebg wrote: post #8

chewz wrote: post #3

So it would be logical if shareholders re-capitalize airlines now. Or let them fall if shareholders see no point in keeping airlines alive.

That would involve selling shares at a low price after buying them at a high price. This would make management look stupid.

> That would involve selling shares at a low price after buying them at a high price. This would make management look stupid.

They should be made to look stupid, since using "96% of free cash flow" to buy back shares means they left the companies that they manage grievously vulnerable to disruption.

They should pay for privatizing their gains and trying to collectivize their losses.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#116

Post by ardy42 » Tue, Mar 17, 2020, 5:29 PM UTC

boh wrote: post #102

chewz wrote: post #3

So it would be logical if shareholders re-capitalize airlines now. Or let them fall if shareholders see no point in keeping airlines alive.

There's a whole society that exists outside of these shareholders and they need airlines to travel.

> There's a whole society that exists outside of these shareholders and they need airlines to travel.

Then wipe out the shareholders and let the companies reorganize under new ownership.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#117

Post by kakwa_ » Tue, Mar 17, 2020, 5:56 PM UTC

Retric wrote: post #41

dougweltman wrote: post #30

FCF is supposed to go to shareholders: it's what's left over after spending money running and growing the business. And this problem (and related solutions) will probably apply not just to airlines but also restaurants, retailers, etc. In normal circumstances, chewz is right and they should either call up more capital from existing shareholders or go under. But these are not normal circumstances. 1) Everyone is capit…

Airlines failure does not destroy the physical aircraft, or the skilled workforce. So, economically they can be restarted with minimal issues. Longer term the US so far from capital constrained and letting less efficient airlines fail is likely the best policy.

Well, yes and no.

For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade.

And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy.

And it's only seeing it from the narrow view of one company failing. If the whole economy has a significant portion of companies failing, it will mess-up things a lot more.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#118

Post by Retric » Tue, Mar 17, 2020, 8:33 PM UTC

kakwa_ wrote: post #117

Retric wrote: post #41

Earlier quoted context omitted.

Airlines failure does not destroy the physical aircraft, or the skilled workforce. So, economically they can be restarted with minimal issues. Longer term the US so far from capital constrained and letting less efficient airlines fail is likely the best policy.

Well, yes and no. For the assets, such as the physical aircraft, if left unattended for long, they will slowly degrade. And if a company fails, it's not that easy to recreate the same one from scratch, all the organizational structures of the company, the partnerships, the contracts with suppliers, etc, need to be reestablished. Not impossible, but at the same time, not that easy. And it's only seeing it from the nar…

While we are talking about deprecating assets, they can last a long time. New US carriers would not be limited to purchasing the old US carriers aircraft. Delta’s 747 for example are 26 years old on average, but they might easily be sold globally, with a new airline picking a fleet on the cheap from some other country’s failed airlines. Thus the assets are not really that critical a consideration.

IMO, if US airlines can’t raise enough capital to handle a short therm disruption that’s a sign the markets think letting them fail is more efficient. Further, politics is unlikely to be making a more efficient choice than industry experts. Finally, if we are talking a multi year disruption airlines seem like a very low priority.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#119

Post by roenxi » Tue, Mar 17, 2020, 8:44 PM UTC

dougweltman wrote: post #97

roenxi wrote: post #40

Earlier quoted context omitted.

If they go under the aircraft will still be there. Just new owners. Ban foreign buyouts then let them go bankrupt and be sold to the highest bidders. We're about due for different owners of capital; the situation has been far too static. The bailouts in '08 kept a bunch of very poor managers in charge. 100% wipe-outs were appropriate in '08, and they will be appropriate again this time. Of all the people we need to f…

1) Where will the money come from to buy the aircraft? Are you saying this with any sense of how long it will take to start a new airline like AA or Delta or whatever? Agency costs under a liquidation are absolutely massive. 2) Nobody is suggesting that protecting shareholders be a policy consideration, and that was true in '08 as well when the banks effectively went bankrupt (well, 90% of the way at least). The shar…

(1) Hold an auction. If the only person who turns up is a homeless bum with a dollar then the aircraft now costs a dollar and we have a homeless industrialist on our hands.

Ditto (4) for the software; it doesn't get deleted because the ownership changes.

(2) A sibling comment to yours suggested exactly that. We aren't protecting the business (nobody wants to fly at the moment, that is why they are about to go broke). So we can't be protecting consumers; the capital itself can't catch COVID-19 so isn't under much threat so logically a bailout is either protecting shareholders or workers.

And my position, radical as the free marketer that I am, is we should protect the workers during the process, but sack the shareholders and provide crisis support to the vulnerable insofar as they used to be shareholders.

(3) Yeah; but bailing out the airlines doesn't actually help that when you inspect it. Nobody is using the airlines; they need to be mothballed ASAP and maintained on a skeleton crew for 6 months.

A bailout of the airlines under these conditions isn't the worst idea; the bank bailouts in '08 were substantially worse because they went to the people who caused the crisis. But it is much more dangerous than it seems making decisions in a crisis, from outside the company, saying 'it can't possibly be their fault; lets give hem a boost!'. The view from the outside might be misleading and we might be rewarding reckless behavior. We have this company concept precisely because it contains the damage to a sacrificial legal entity that we can kill off.

Re: Biggest U.S. airlines spent bulk of free cash flow on stock repurchases

#120

Post by aantix » Wed, Mar 18, 2020, 1:52 PM UTC

Retric wrote: post #100

vonmoltke wrote: post #81

Earlier quoted context omitted.

It was not interest-free: https://projects.propublica.org/bailout/list

As that points out, not all loans where paid back. The interest from those that did result in a nominal profit, but it’s far from what private lenders received for loans in that time period. Thus opportunity cost, as it was a poor investment which is why it was called a bailout.

If they had other opportunities at higher rates, they would have lent at that rate.