Congress and President Donald Trump, having doled out $25 billion in payroll grants plus a similar sum in low-interest loans to the airline industry in April, are seeking a second bailout, possibly as part of a general stimulus bill.
The urge to rescue the airlines flows from good intentions, but it is not a smart way to help the economy and it will reward CEOs for serial mismanagement and self-enrichment.
If you want to help airline employees — and we should — help them directly. Renew the $600-a-week benefit for all unemployed people.
There is no reason to single out employees of a particular industry for favored treatment. And the airline industry is among the least deserving. In fact, the bailout will reward the carriers for egregious overcompensation and share buybacks.
In the years before the pandemic, partly thanks to weak antitrust enforcement, airlines reaped flush profits as 2015 and beyond were the best years for the industry ever.
But the industry's use of its profits was unconscionable. Despite the history of airlines bleeding cash in recessions — and therefore needing to preserve capital for a rainy day — from 2014 through 2019 the big four carriers (American, Delta, United and Southwest) plowed $42 billion into stock repurchases in the hope of improving their share prices. That was more than the total of their free cash flow — the cash they generated after paying interest, taxes and maintenance.
American Airlines, the biggest carrier, poured nearly $13 billion into stock repurchases despite having negative free cash flow. The companies also resorted to massive borrowing, increasing their debt on average by 56% from 2014 to 2019. American's debt soared from $18 billion to $33 billion.
The borrowing binge fit the Wall Street strategy of leveraging up to increase risk. Temporarily it worked; airline stock prices moved higher. And stock price was key to executive pay. Over the six years, the chief executives of the four carriers pocketed almost $340 million in stock sales. American's CEO, Doug Parker, was the biggest winner, with stock sales totaling $150 million. And those figures don't include stock received but not yet sold.
You would think such fabulous rewards were the mark of extraordinary success. But over the six-year period of all those stock buybacks and mostly flush profits, American's stock rose only 13%, compared with 75% for the Standard & Poor's 500. And since the pandemic, airline stocks have plunged.
Executives got rich while delivering mediocre or worse returns because their pay was calibrated over short-term periods, not unlike a slugger who gets a bonus for hitting a home run in April before slumping for the rest of the year.
Normally, excessive compensation is a problem for the shareholders. If they get fleeced, it's their investment and their problem. Similarly, with share buybacks: Capital levels are properly determined by management.
But when the government steps in with a bailout, capital and compensation become a public concern. If the government is going to prop up the industry, it should require that the airlines maintain adequate capital — just as it does with banks. So far, Uncle Sam's bailouts amount to a one-way option: Take a big gamble and clean up in good years; the U.S. Treasury will write the check in bad years. That's not capitalism. It's socialism for the corner office.
The April bailout came with conditions, but they were woefully inadequate. For instance, the government got warrants to purchase airline stock, but it would have been cheaper to buy the stock on the open market. (In, other words, the carriers got a generous deal.) And restrictions were put on dividends and share buybacks for only two years — after which, the carriers can be expected to return to their gambling ways.
It is true that the pandemic was unforeseeable. But it was predictable that, eventually, the economy would experience some kind of calamity — and when it did, the airlines would suffer. That's the nature of the industry. Southwest, for one, was sufficiently prepared that it didn't need government loans.
The argument for a bailout rests on the premise that airlines are important to national security. But bailouts save the shareholders. The assets — the planes, the gates and so on — endure, even if the ownership changes. The history of the industry is riddled with bankruptcies and yet planes keep flying.
The other argument is that bailouts maintain a higher level of workforce than would otherwise be possible, given that revenue has plunged. But it's dubious economics to employ people where they aren't needed. When and if airline traffic recovers, so will employee levels. In the meantime, it would be better to send checks directly to the people, until they find work in sectors that are growing.
If the government insists on a bailout, require every CEO who received stock-related profits from the last five years to give back any money above a minimum level for salary. If the airlines are solvent a decade later, a portion of their pay can be returned. The airlines should also be compelled to sell stock at current depressed levels to subsidize their revenue needs.
If executives are unwilling to forgo their gains, Congress can seize any carrier that fails, dismiss the chief executive and run it as a public trust. Let's end the farce in which airlines are risk-taking enterprises in good times and the public's burden in bad.
Roger Lowenstein is the author, most recently, of "America's Bank: The Epic Struggle to Create the Federal Reserve." He wrote this piece for the Los Angeles Times.