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Why Do the Airlines Need a Bailout?
by
Courtland Allen
https://slate.com/business/2020/03/airlines-bailout-coronavirus.html
I hope all of you hacking on businesses out there remember to be financially prudent with your earnings, because there are no bailouts like this for indie hackers.
In fact, I know quite a few people in SF who run unprofitable venture-funded startups and who are now completely dependent on investors bailing them out in the coming months. It's unlikely to end well for most, and I can't imagine the terrible terms the others will get.
The cheap capital and debt allowed some companies that had no place in existing to survive too long. It locked up a lot of resources (office space, people, .etc) and raised costs for everyone else.
It sucks the correction is happening in such a brutal fashion :(
I'm so glad I have the Indie Hackers community to talk business sense into people, and for the relentless focus on profitability and customer satisfaction :D
Ya very annoying that the government picks and chooses who gets bailed out and whatnot
Things are different with a public company - they are expected to return excess cash to shareholders instead of holding on to it. They were not prepared for a pandemic just like most other businesses.
Through most of their history, the airlines have been money-losing businesses that sold a commodity product with little pricing power. It is only in recently that they gained pricing power through consolidation.
There are numerous extremely successful public companies that have large stockpiles of cash. Apple is one example. It's not required that a public company spend every dime returning cash to shareholders, nor is it good long-term business (people love it in the short term because people are foolish).
American Airlines alone spent over $12 billion on stock buybacks over the last four years, primarily to enrich their C-Suite and their largest investors. They could've banked that money and their stock would've continued to do just fine. "They were not prepared for a pandemic" isn't really a great excuse for an industry that is likely to be one of the largest global vectors for infection. They should have been prepared, and they certainly should keep enough operational cash on hand that they don't need a government bailout less than two months after people decided not to fly.
First people on this forum of all people should understand that the job of C level employees and of investors are tough. Why shame them for making money? It's not the job of a CEO to account for something with such a low possibility of happening. I don't remember the earlier outbreaks of this century but Ebola didn't essentially destroy our economy not did the swine flu. They had to no historical bases to look back on. And they will not need a bailout if people returned to flying in 2 months. They are assuming the current lockdown will extend to August or December. No business can or should survive that long with no money. A business is not an individual. They don't need an emergency fund to cover 6 months expenses. If your business is suddenly not profitable at scale for 6 months there is no favorable outcome. The current situation is not something that happens regularly or will happen again anytime soon most likely. A company does not benefit from large savings.
Every job is tough. If you're going to come at me and tell me that C-level employees and (particularly) investors are doing 20x or more the work of the average white-collar employee, let alone blue-collar, I'm going to laugh at you.
There's historical precedent for this: it's called "all of human history" in which pandemics have regularly wreaked havoc across entire continents, if not the entire globe.
Many businesses do not need to cover six months or more worth of diminished profits, this is true. The airline industry, however, is a unique case in that it is one of the primary vectors by which illness can now travel. This isn't the 1800s when a virus would have a hard time crossing even state lines because doing so could take weeks depending on the size of the state. You can now contract coronavirus, get on a plane, fly literally halfway around the world, and get off the plane before you've started showing symptoms (but are still infectious).
The US and other countries managing to avoid the worst of SARS, Ebola, etc was lucky. But those incidents should, if anything, have been a wake-up call to various industries--particularly the travel industry--that sooner or later a pandemic like this was coming. People have known this was on the way for a long time, but it's easier to just kick back and not worry about it in the good times, and then beg for handouts when they stop.
Having money on hand for a rainy day is in the best interest of shareholders. Every business knows that it should have some cash on hand for bad days. People too.
The problem arises when you are guaranteed you will be bailed out because of how critical your existence is for the rest of the world. In that case, when things are good, you profit, and when things are bad, you don't lose anything. A different structure needs to be set up for such entities to keep them fair.
People are saying the government should bailout small businesses as well. They do. But cutting interest rates and by offering banks additional money(i.e attempting to inject 1.5 trillion) these actions incentives banks to lend to small and medium businesses during this time. Banks will make a killing off bailing out small businesses who qualify for a loan. From their standpoint this is a temporary loss of sales. If your business was healthy before the virus it will be presumably healthy after. The government can't just hand out money and loans directly to people claiming to have a small business. They don't have the infrastructure in place for that. Banks do.
This comment was deleted 6 years ago
@cwbuecheler's comments are particularly enlightening.