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

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

#121

Post by dougweltman » Wed, Mar 18, 2020, 7:28 PM UTC

roenxi wrote: post #119

dougweltman wrote: post #97

Earlier quoted context omitted.

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).…

On 2 & 4, we seem to disagree on the central claim that new airlines can be spun up quickly in time for their liquidation not to jeopardize the travel sector in the future once this outbreak abates.

This requires two conditions, neither of which hold: a) properly functioning capital markets to launch these assets and build the operations around them (not the case -- asset prices are falling across the board and there's tons of forced selling), and b) the ability to spin up an airline quickly from a cold start.

And if we apply the thinking you've offered around (1), it might be just a tad more to the public benefit to have the government step in and buy on the cheap a majority of the business (massively diluting existing shareholders), keep the engine warm, and not have to deal with a cold start in 6, 9, 12 months. Then, just as with the banks, they'll unload the stock as the price recovers and the crisis has passed. Those gains go straight back to the treasury, as they did following the recaps in 2010.

What would less reckless behavior look like? How much money should the airlines hold on their balance sheets in order to cover catastrophic losses due to a pandemic (derided as "hoarding money" in some circles). Many businesses are a few bad weeks away from bankruptcy, and the airline industry, while indispensable, is famously brutal.

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

#122

Post by IkmoIkmo » Thu, Mar 19, 2020, 2:09 AM UTC

frgtpsswrdlame wrote: post #29

roenxi wrote: post #15

Earlier quoted context omitted.

Then the money would probably not be free cash. It would be held under some sort of actuarial title for dealing with risk. Maybe amortization? I'm not an accountant. If the business needs it to sustain operations then it probably isn't free cash flow.

The argument here is that they actually did need it to sustain operations since there's a significant chance they'll now receive a bailout. The whole point is they took cash they should have kept as a backup and then used it to boost share price instead.

Do we really want businesses to hold onto cash, sitting idle, just in case a once in a century pandemic like this hits your industry particularly hard?

I don't think that makes sense. People talk about 'socialised losses' as if it's the devil's work. I think socialised losses aren't that bad when talking about such unique events. Should companies really be holding on to cash for once in a century events? Imagine a 1950s CEO had been hoarding cash for 70 years. Now imagine how much wealth has been generated, by putting that cash to use, including by paying it out as cash to investors who'll go on to finance new businesses, new jobs, new research etc.

That having been said, while I'm not opposed to socialised losses / bailouts per se, I don't really quite see yet why airlines need bailouts. Their stock valuations rose due to bailouts. Now they drop some due to the crisis. They should be high enough to sell more stock it once bought and raise new capital. In good years you buy the stock back. In bad years you sell stock. What's the problem? Yes investors take losses, it's part of the game. That's why you diversify. If you don't, that's on you.

Not sure how far the US goes, but in the Netherlands all employees have unemployment insurance if they get laid off. And those who don't, get a little over $1k in social security, plus various subsidies on rent, healthcare etc. Companies in trouble can layoff people, and they're taken care of with the insurance premiums paid out in the good years. The company sells off stock and hunkers down. The government offers cheap lines of credit. Good businesses survive, a few bad ones die off. I don't see why a big bailout is necessary.

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