U.S. airlines want a $50B bailout. They spent $45B buying back their stock • Hacker News Board

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#81

Post by ff317 » Tue, Apr 07, 2020, 4:56 PM UTC

seiferteric wrote: post #20

ceejayoz wrote: post #10

Earlier quoted context omitted.

"Keep it in cash" isn't looking like such a bad idea right now.

Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.

Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time:

* Government regulation impacts

* Union strikes

* Aircraft groundings due to faulty (or less-long-lived than anticipated) parts

* Ticket search companies undercutting their profits

* Oil (and thus fuel, one of their main costs) price surges

* Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world.

* Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust.

* Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc)

* Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#82

Post by ceejayoz » Tue, Apr 07, 2020, 4:56 PM UTC

opo wrote: post #42

ComputerGuru wrote: post #2

Just remember that the Federal government ended up making money on the automaker and bailouts (quite apart from all the jobs that were saved).

>Just remember that the Federal government ended up making money on the automaker ... The estimates I've read are that the federal government lost between 9 and 10 billion on the automaker bailouts. For example: >...In the end, taxpayers lost $10.2 billion. https://www.thebalance.com/auto-industry-bailout-gm-ford-chr... >...the U.S. recovered all but about $9 billion of the auto bailout money. https://www.marketplace…

The automaker bailouts were part of a much larger overall program, that did make a minimal profit.

https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

> TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#83

Post by JoshTko » Tue, Apr 07, 2020, 4:56 PM UTC

brockwhittaker wrote: post #8

dominotw wrote: post #3

is there an explanation for stock buybacks that isn't ' evil stockholders'? edit: this was an actual question not a rhetorical one. curious why the downvotes?

Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage. 2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk. 3. Buy back your own stock, which gives back to shareholde…

Buy pandemic insurance to protect your company in case of downturn.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#84

Post by sudosteph » Tue, Apr 07, 2020, 4:57 PM UTC

It's obvious that buy-backs are basically a hack for struggling companies to sacrifice long-time gains for short-term posturing. So what would a fair regulation around stock buy backs look like?

We could make it illegal, but that seems like it would favor people who want to do corporate takeovers. Also, I've seen legitimate uses of stock buybacks, such as buying it back to give it as a grant to new employees.

We could limit the amount bough or spent, or require that some percentage of stock's bought back be re-allocated to employees as grants or options.

I'm not an economic person though, just spit-balling.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#85

Post by Cerium » Tue, Apr 07, 2020, 4:57 PM UTC

grumple wrote: post #51

jm20 wrote: post #12

I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…

> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd. Aren't there a number of companies that have been hoarding cash for some time? [1] 1. https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet...

Indeed, I work at a company with no debt and significant cash reserves. I had not idea it was so rare until the past few weeks.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#86

Post by btilly » Tue, Apr 07, 2020, 4:57 PM UTC

dominotw wrote: post #3

is there an explanation for stock buybacks that isn't ' evil stockholders'? edit: this was an actual question not a rhetorical one. curious why the downvotes?

Investors invest in companies because they expect to receive money back in the future. Therefore investment won't happen unless companies have ways to pay back investors.

When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it.

Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company.

Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion.

You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same.

The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#87

Post by cactus2093 » Tue, Apr 07, 2020, 4:58 PM UTC

atonse wrote: post #30

jm20 wrote: post #12

I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…

Sure they could've held it. Apple did it for a while. You could invest it and make even more, or invest a bit in not treating your passengers like f*cking cattle and constantly charging millions of fees, maybe?

Passengers are choosing to be treated like cattle, by aggressively bargain hunting for the lowest available sticker price.

You have lots of options to get better service - economy plus, priority boarding, buying food onboard that you no longer get by default. And of course upgrading to business class.

All these things cost more and you could either pay for it by default on every ticket like in the old days, or you can purchase them separately. Consumer demand has overwhelmingly indicated a preference for the latter. Sure the airlines could lower their margins and drive down prices on these things for customers slightly. We'd be in the exact same situation now though without any cash reserves so I don't see how that would have helped.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#88

Post by Supermancho » Tue, Apr 07, 2020, 4:59 PM UTC

tathougies wrote: post #52

Finnucane wrote: post #35

Earlier quoted context omitted.

You might not expect that some particular disaster is going to happen, but you can expect that some setback is going to occur, eventually. The good times do not last forever. It's not like the principle of having a reserve for bad times is a new idea (see also: ant, grasshopper). If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why sho…

Yeah, but most setbacks lead to a 10% drop in flights, not 99. This is quite material. A company that anticipated up to a 20% drop in flights and saved to last a year with that, will only be able to last a few months with a basically 100% drop in flights. That is exactly what we're seeing now.

I know everyone likes "the good ol' days" but this is a teachable moment. Sometimes you get the bear, sometimes the bear gets you.

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#89

Post by MrPatan » Tue, Apr 07, 2020, 4:59 PM UTC

The trick here is, did they have the cash? Or did they bought shares with borrowed money?

Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock

#90

Post by nicoburns » Tue, Apr 07, 2020, 4:59 PM UTC

jm20 wrote: post #12

I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…

The problem is all of the people making money on the stock market. The (somewhat shaky) justification for them making that money is that they are taking on risk. If they are not in fact taking risk, because their short-sighted investments are going to be bailed out by government, then we really need to start questioning why the private investors are the ones making the money in the good times, and not the government who is actually taking on the risk.