There is no question that our airlines provide a network that moves people, goods, and mail around the country and overseas – essential to a prosperous and growing economy. Surely, it is in the national interest to see that they continue to operate. But that goal can be accomplished without bailing them out of the predicament they have created for themselves by returning 96% of their free cash over the past decade to shareholders rather than shoring up their balance sheets and preparing for the rainy day that has now arrived.
That use of funds drove share prices up and, not incidentally, the executive compensation schemes that are based, in part at least, on those share prices. Now they and their Democratic allies are pressing Treasury Secretary Steven Mnuchin to save them from the consequences of their profligacy.
The carriers are attempting to conflate bankruptcy with the economic death of the companies, and the end of their service to consumers, the loss of flights that have been taking them to visit Grandma or attend a business meeting. Not true.
In 1983, Continental Airlines went broke, to emerge three years later after mergers with People Express, Frontier, and New York Air. In 2002, United Airlines declared bankruptcy. So did Delta in 2005 and American in 2011. All are still around, flying us hither and yon, providing decent jobs, directly and indirectly, for millions. Others did merge into or transfer assets to stronger airlines or disappear. One such was Trump Shuttle, which Donald Trump, with financing from Citibank, bought for $365 million from Eastern Airlines in 1988 to service the Washington-Boston corridor. In 1990, despite initial success in winning significant market share in an overserved market, the airline ran out of cash and defaulted in 1990. There is no shortage of transport on the corridor it once served.
Under the supervision of the bankruptcy courts, airlines’ shareholders and lenders would be poorer, and labor unions might be required to negotiate new contracts. But the carriers would be able to pay for fuel, meet their payrolls, cover maintenance and other costs necessary to keep them in the air. The alternative is a $50 billion bailout for airlines, the biggest of which Bloomberg estimates have devoted 96% of their free cash flow to share buybacks in the past decade rather than strengthening their balance sheets in preparation for a crisis.
Mnuchin is deciding just what terms will be needed to protect taxpayers and reward them for the risk they are being asked to take. Impatient Democrats want Mnuchin to get those checks out to the airlines without demanding what House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer call “unreasonable conditions.” They worry that airlines, faced with significant quid pro quos in return for a bailout, would again choose bankruptcy as the lesser evil.
Although airline employees are generally well paid, especially compared with waitpersons (average annual income including tips probably $20,000-$25,000), they are entitled to ask their government for help with problems created by that government’s decision to shut down the economy, even though many earn far more than the taxpayers who will eventually pay the bill. Flight attendants earn about $50,000 annually, according to the Bureau of Labor Statistics, and pilots around $140,000.
That assistance, however, need not be coupled with a bailout of the carriers’ shareholders and creditors. Those investors took their risks, earned reasonable returns, including a flow of cash that might otherwise have gone into shoring up balance sheets. Help the innocent workers, but let the culpable investors and managers rely on the bankruptcy that they have relied on during past troubles.
The courts will, in the words of Don Gaffney, a longtime bankruptcy attorney (with the firm Snell & Wilmer, with which I have a relationship) who has dealt with airline bankruptcies in the past, “radically shrink or wipe out” shareholders and creditors. The latter might end up converting some of the debt to equity or stretching out repayments. Yes, renegotiated labor contracts might not initially be as rich as those they are replacing, but few will emerge from this crisis exempt from sacrifice.
The courts would enable the carriers to pay their workers, buy fuel, maintain their aircraft, and do all that is necessary to continue operating. Low fuel costs, which come to about 10% of operating costs due to low oil prices, will make that easier than otherwise would be the case. Initial operations will probably be at a level appropriate to currently constrained demand, expanding as the virus is defeated and travel gradually returns to precrisis levels. The Department of Transportation has been charged with preserving route structures while the carriers are in retreat, and initial indications are that Secretary Elaine Chao is interpreting that mandate in a way that will allow her to do that job as well as it can be done. And $50 billion will be available to fund the second relief act that Democrats say is needed.
Even more important, we will not have created the moral hazard that signals to other companies and industries that they will own their successes but taxpayers will own their failures – that we have transformed our system from market capitalism to lemon socialism.