If Washington doesn’t do something, all U.S. airlines are going under.
That was the message that industry lobby Airlines for America delivered on Monday, arguing that under the most likely scenario, all seven major U.S. passenger carriers would run out of money between July and December. The group asked for $50 billion in assistance from the federal government, divided evenly between grants (free money) and low-interest loans.
That’s a lot. For comparison, the feds spent $50 billion to bail out General Motors during the financial crisis—most of which was repaid.
It has been a little more than two years since American Airlines CEO Doug Parker told investors, in an instant business school cautionary tale, “I don’t think we’re ever going to lose money again.” How time flies when a viral pandemic ravages the earth.
Help is on the way, President Donald Trump said on Monday. The coronavirus outbreak and the sudden decline in air travel is “not their fault,” the president observed, “they were having record seasons.”
Fact check: true. Airlines are coming off a remarkable 10-year run. Delta’s profits for each of the past five years, back from 2019 to 2015, were $4.8 billion, $3.9 billion, $3.2 billion, $4.2 billion, and $4.5 billion. Mergers have given the big four (Delta, United, American, and Southwest) about 80 percent of the U.S. market. With oil prices low and the economy humming along, it has been a great time to run an airline.
So now that the lean times are here—admittedly, a surprising turn of events for us all—where did all that money go? Why are multibillion-dollar airlines held to a budgeting standard that, if it were adopted by a typical American household, would seem totally irresponsible? And why, if they blew through all that cash, should we help them now?
The last question is the easiest to answer: because we have no choice, if we want to maintain our national travel infrastructure.
The first question—where’s the money?—is also not so complicated. Over the past decade, according to Bloomberg, U.S. airlines spent 96 percent of their cash profits on stock buybacks to enrich investors and their own executives, whose positions often come with stock holdings.*
As for why airlines behave with relatively little foresight, that’s more complicated.
Investors see little reason for airline companies—or any other companies—to have cash on hand. In 2017, analysts at McKinsey concluded that the 500 largest companies in the U.S. (excluding banks) had about 20 percent of their revenues in cash. That was too much, they thought. “While companies do need to hold some cash to do business,” they wrote, “in the past we’ve found that companies can typically do with cash balances of less than 2 percent of revenues.” (This cash is mostly held off shore, but that’s another story.)
By keeping cash in the bank, executives weren’t just depressing their own salaries. They were also making their companies look bad. They risked the ire of activist investors who saw cash as “unproductive capital,” workers who saw cash reserves as raises that hadn’t been paid, and even savvy consumers, who would protest stingy service and aging equipment.
And so at the end of a record decade in profits, according to Bloomberg, American had $7 billion on hand, United $4.9 billion, and Delta $2.9 billion.
Those rainy-day funds still sound like a lot of money, but there’s another problem with airlines. Historically, they were considered a bad investment prone to bankruptcies. In 2007, Warren Buffett wrote, “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”* (Even Buffett came around and bought stock in the big four in 2016.) Despite this recent merger-driven boomlet, they are low-margin, capital-intensive businesses.
Low margins mean your savings don’t get you far. At the rate it’s going now, United’s blockbuster 2019 profits will be spent down in less than 90 days. The company says it’s losing $1.5 billion a month.
Capital-intensive means it’s hard to tighten your belt. You can save some money on fuel and food, but not on labor or rent. You still have to pay banks or leasing companies for your planes. You can’t save those seats for later, or fly twice as many flights when business picks up again. There is no factory to shut down. Even if you ground flights, many costs are fixed.
Which brings us to the current pandemic-induced crisis, and the fifth reason—after the unprecedented disruption, shareholder capitalism, low margins, and a capital-intensive business—that airlines do not have enough money sitting around: moral hazard. America won’t let the airlines fail, and the people who run the airlines know it.
Nobody wants to bail out executives and shareholders who spent years lining their pockets as hundreds of thousands of owner-operated restaurants go out of business. But letting the planes go down would put nearly a million people out of work and deprive the country of nearly all its long-distance travel infrastructure.
The mergers that helped the companies throw off such big profits have left us with corporations so fundamental to American life they are basically utilities. Let McDonald’s go under and you still have Burger King. Let American Airlines shutter and Dallas will be as distant as Timbuktu.
The question for Congress, then, is not whether to save the airlines—but how to redraw corporate governance to fix its bad incentives.
After Sept. 11, Congress passed an airline bailout of grants and loans. It was designed to help airlines obtain insurance again, but it also included caps on CEO pay and “golden parachutes” for departing executives.
In a bigger bailout, the public can demand more significant oversight. “We won’t let this look like the bank bailout of 2008, nor can you compare the two,” Sara Nelson, the president of the flight attendants’ union, said on Twitter. “The airline industry didn’t cause the pandemic and money should come with significant conditions to help workers and keep planes flying, not enrich shareholders or pad executive bonuses. Airlines must commit to maintaining payroll. It means no bonuses, no buybacks, & no breaking union contracts in bankruptcy. Companies should commit to pay a min $15 wage and board seats for workers.”
It’s a good template for how Washington should approach the crisis: With an open mind toward fixing corporate America’s problems. In the New York Times, the antitrust advocate Tim Wu writes that we should force airlines to cap or abolish fees and take steps to undo industry consolidation. Over in Europe, Italy has announced it will nationalize Alitalia, and other European airlines will not be far behind.
Whatever we decide to do with the airlines will be just an appetizer to the considerably more fraught negotiation that’s just around the bend, over the future of death-plane producer Boeing, whose departing CEO Dennis Muilenburg walked away with more than $60 million earlier this year.
One thing is for sure: The central condition of any assistance has got to require airlines keep their profits in the bank for the next time this happens (as was required for automakers after the 2008 crash—Ford has $37 billion in reserve). This pandemic is a surprise. The next one won’t be. If you’re expected to keep your savings on hand, so should American, United, Southwest, and Delta.
For more on the economic impact of the coronavirus, listen to Tuesday’s What Next.
Correction, March 17, 2020: This post originally misspelled Warren Buffett’s last name. It also misstated that airlines spent 96 percent of their profits on stock buybacks. They spent 96 percent of free cash flow on stock buybacks.