We are in the era of mass delusions. Millions of Americans believe that antifa planned the January 6th attack. Thousands of day traders believe that Elon Musk is looking out for them. Millions of GOP voters swear to defend America’s “free markets”, though today this economic phenomenon can only be seen in museums. Good grief, a not insignificant number of people apparently buy SPAC IPOs! But there’s another mass delusion which no one is talking about. Many Americans apparently believe that the shareholders of US airlines must be bailed out in order to ensure that the industry is able (eventually) to support a strong US economic recovery. This is a lie. Yes, we need a viable airline industry to enable a strong and sustainable economic recovery. No, we don’t have to bribe airline CEOs and stock holders to achieve this. The fact that both Democrats and Republicans in Congress are equally deluded in their support for airline CEO bailouts (having approved ~ $60 billion and counting) makes this a bipartisan hallucination. Airline CEOs are pushing a big lie in order to rip off American taxpayers. Back in the day, Republicans called women with children who needed help, “welfare queens”. Well, what’s good for the goose is good for the gander. Airline CEOs who tell the big lie that keeping them in their jobs and keeping their companies out of bankruptcy is in the best interests of taxpayers are, truly, welfare queens of the coronavirus pandemic.
In this long piece in The American Prospect, long-time industry watcher Hubert Horan, continues his excellent series on the US airline industry after deregulation and their strategy during the coronavirus pandemic (see excerpt below). His has been a lonely voice in the wilderness during the crisis, slicing through the industry’s public relations smog to make the essential swindle clear. A full list of his recent articles and Congressional testimonies can be found here. The irreplaceable Naked Capitalism blog has featured much of Horan’s work.
In the Spring of 2020, when US air travel came to an abrupt halt, airline CEOs launched a big lie campaign of Trumpian dimensions. They falsely equated “saving employee jobs” with “saving shareholders”. They conned Democrats into believing that 1. Airline industry revenues would fully recover in a short period of time, and 2. if we gave billions to airline owners, they would in return not lay anyone off during the short period of time until recovery (or as long as we keep paying them).
The following pieces of legislation designed to “save” the industry look a lot like a Charlie Brown kickoff context:
- March 2020, CARES Act includes Payroll Support Program (PSP) giving $32 billion to US airlines in exchange for not laying off employees until October 2020 (when the world would surely be back to normal)
- December 2020, law passed adding $16 billion to PSP and extending the date before layoffs are permitted until March 2021 (when the world would definitely be back to normal)
- March 2021, House passed $1.9 trillion package which would give another $12 billion to the airlines for another PSP extension to avoid layoffs until September 2021 (when the world… oh nevermind).
What a farce. $60 billion in exchange for a fairy tale. The airline con artist/CEOs claim that their employees and the airline industry are essential for a strong American recovery. True! But putting the companies through an orderly Chapter 11 bankruptcy process would not stop airlines from flying for a single day! That is the whole point of Chapter 11! And as the Covid nightmare grinds on, month by month, even with robust vaccination programs, does anyone really think lucrative international and business travel is going to fully recover this year or in the first half next year? Fourth quarter 2020 revenues for the big three legacy carriers was one third that of 2019. It took 3 years for air travel volumes to fully recover after 9/11 and 6 years after the 2008 financial crisis and recession. The odds of QAnon correctly forecasting the next inauguration of Donald Trump are higher!
Featured Posts on American Carnage:
- Trump’s Pre-Covid Economic Miracle Was a Myth
- Why Trump’s Incessant Lying Is a Dire Threat to Civilization
Yes, this money temporarily prevents the loss of (any) airline jobs. But just like eviction and foreclosure moratoriums, this is just kicking the can down the road. Do I want to see airline job losses? Of course not. But we have no more of a moral obligation to permanently, indefinitely, pay their salaries than we do for anyone else who’s lost their job because of the coronavirus. Are pilots and other airline workers more important then teachers and healthcare workers? Why should we maintain airline employment (and pay) at close to 2019 levels and not also pay all other US employers not to fire any workers?
But the $60 billion does something far more important (for CEOs) than delaying job losses temporarily. It allows the companies to (at least temporarily) avoid bankruptcy. Getting a $60 billion handout from Uncle Sam was a clear signal to financial markets that US airlines were now Too Big to Fail and so Wall Street has helped them raise billions in new debt and equity (such that they are now leveraged to the hilt with total debt of 6x 2019 operating cash flow for the big three). So for airline CEOs, who collectively own more than $300 million of stock and stock options, the PSP enabled them to maintain the fiction that the companies can “fly through” this bit of turbulence and come out the other end fully intact and avoid bankruptcy. Although this seems very unlikely, if it does occur, the value of their (now highly levered) stock will skyrocket. And isn’t that really what American capitalism is all about these days? Protecting shareholders from losing money while ensuring they still capture all the upside? And you can bet your bottom dollar that the minute the PSP term ends, those CEOs who are now proclaiming how it’s essential to keep 100% of their staff employed, will slash their workforce (to align with lower passenger volume) without a second thought. This is a bad joke.
Now, some will say that taxpayers are being fairly compensated for bankrolling airline payrolls indefinitely because the government received stock warrants which, if executed, would give Washington ownership of an estimated 10 to 20% of the big four airlines. You will recall that this scheme was originally the brain child of Steve Mnuchin, that friend of the working man. Presumably he got input from Wilbur Ross. The point here is that the airlines would be bust already without this money. So if Steven Mnuchin or any other Wall Street deal makers was negotiating for himself, instead of on behalf of the US government, he would demand MOST of the stock in exchange for keeping the companies afloat today. Why should we get a measly 10% of your stock when you are out of business without us? This actually makes clear how much we are getting screwed. We are bailing out the CEOs and stock holders from a downside where they get zilch and in return they get to get 80 to 90% of the upside.
Doug Parker, CEO of American Airlines: “Bankruptcy is failure. We’re not going to do that. I don’t think people should view bankruptcy as a financial tool; it’s failure.”
Yes, Doug, correct: your failure. It’s your failure Doug, not my failure, not our failure. It’s the failure of your bank account to recover on the taxpayers dime. It’s the failure of your employment continuing. If American enters bankruptcy, it would be the failure of your dirty greedy slimy scheme to screw the American people for your own personal gain.
I am not aware of any Democratic or Republican elected officials speaking out against this swindle. Why is this? Well, Democrats are for it because the airline unions support it and because most only have a dim idea of what bankruptcy means. From the perspective of the unions, avoiding bankruptcy is just as desirable as it is for CEOs. In Chapter 11, while CEOs lose their jobs and shareholders get wiped out, the workforce will be cut. In bankruptcy, the Wishful Thinking Plan of the CEOs will be tossed out (as will they) and an attempt will be made to downsize the companies to a size appropriate to a (likely) environment of lower travel. For unions, better to save as many jobs as long as you can especially since Washington is offering a blank check. Since Republican’s shoveled $1.5 trillion of borrowed money to corporations and wealthy individuals during the Trump Administration, Democrats feel morally entitled to spend money on just about anything — and who can blame them? Republicans are for airline CEO bailouts because they believe in the “discipline of the market” and “creative destruction” except when it comes to campaign contributors, potential campaign contributors, complicated stuff that won’t play on Hannity, or rich people in general. But it is way past time for the rest of us to call these fast-talking con men what they are: Queen-sized grifters.
Full disclosure: I am short several US airline stocks.
The Airline Industry after Covid-19: Value Extraction or Recovery?
By Hubert Horan
The Fundamental Conflict between
Airline Equity and Overall Economic Welfare
Unfortunately, the U.S. airlines seem to be deliberately ignoring both the magnitude of the current crisis and their ample historical experience in recovering from crises. The industry requires a much more ambitious restructuring effort than has ever been undertaken before, and it needed to start six months ago. This did not happen, however, because there is a fundamental, irreconcilable conflict between the interests of the airline owners in preserving the value of their equity and the public’s interest in taking the actions necessary to ensure the most efficient possible future service.
Instead of beginning a difficult recovery effort, U.S. airlines have spent months obscuring the depth of the crisis. First, the airlines insisted that the coronavirus problem was akin to a ship dealing with a major storm but that clear skies would quickly return. When it became obvious that this was not a passing storm, the industry behaved as if problems in the engine room were causing delays, but insisted repairs would restore full efficiency within six to twelve months. In reality, however, the industry had hit an iceberg. If dealt with immediately, there would be no risk of the ship sinking, but the damage would reduce the ship’s performance for an indefinite period and would take extensive work to fix. Yet the airlines’ refusal to urgently address their serious structural issues have only made these problems much worse.
Instead of beginning the necessary restructuring process, the executives of all four airlines have been single-mindedly focused on protecting current equity holders, because those owners would like to capture all the gains from any post-pandemic stock appreciation. Bankruptcy restructuring was critical to industry recovery in every previous post-deregulation crisis and would allow the airlines to rapidly stem their current cash drains and bring costs back into line with reduced revenues. But that is totally off the table because it would wipe out current equity holders and threaten bondholders and other major investor groups. Broader, industry-wide, government-supervised options are even further beyond the pale.
Doug Parker, CEO of American (the carrier seen as the most likely to file bankruptcy because it had the largest pre-pandemic debt load) emphatically ruled out any restructuring option. “Bankruptcy is failure. We’re not going to do that. I don’t think people should view bankruptcy as a financial tool; it’s failure.” Having been involved in multiple prior bankruptcy cases, Parker fully understands that bankruptcy would not mean the failure of American Airlines’ business. He is simply focused on protecting its current shareholders from failure.
In March, Congress provided $50 billion to the industry through the cares Act, half in grants conditioned on retaining staff through September, and half in loans at below market rates with very few conditions. That cash ($43 billion of which went to the Big Four) did nothing to improve efficiency or market demand, or address the massive gap between revenues and costs. The sole purpose of the bailout was to transfer wealth from taxpayers to the owners of these airlines by creating a “too big to fail” put. Congress signaled that it was committed to doing whatever it took to protect the industry’s ownership and control status quo. Even though the airlines did not have a plausible plan to close their massive cash drains, the subsidies prevented equity values from collapsing towards zero and allowed current owners and managers to raise an additional $40 billion from lenders who had been effectively told that they did not have to worry about bankruptcy risks. The combination of the subsidies and the loans they made possible account for essentially all of the Big Four’s current liquidity. Without this “too big to fail” put, it is possible that all of the legacy carriers would already be in bankruptcy.
Once taxpayers provided some limited access to capital markets, the legacies were desperate to raise whatever funds they could, and ended up pledging almost every unencumbered airplane, airport slot, trademark, and route authority as collateral and paying interest rates as high as 10 percent. This process of burning the furniture to keep the house heated even required surrendering control of the cash generated by the airlines’ frequent flyer programs—a maneuver which depended on the highly questionable claim that the spun-off programs would be worth substantially more than the programs combined with the rest of the airline.
The efforts of current owners to capture all future equity appreciation are an attempt to subvert long-standing bankruptcy precedents. Under a conventional reorganization process, owners of companies whose business models collapse—which hemorrhage cash for extended periods and which cannot meet ongoing financial obligations—do not get to keep exclusive control of the company. In a bankruptcy, equity owners are assigned the lowest claim on the assets of the company and are often completely wiped out. On the other hand, parties that provide funding to prevent a financial collapse (taxpayers in this case) should receive one of the highest priority claims. But allowing courts or government agencies to have any say in the current airline recovery process would allow them to point out current ownership’s responsibility for multiple pre-pandemic problems that contributed to the present crisis.
One of the many preexisting problems was the $42.4 billion of cash these airlines have squandered on stock repurchases since 2014. Designed to inflate short-term equity values, stock buybacks exceeded the free cash flow these airlines were generating, increasing Big Four airline debt from $47 to $75 billion since 2015. These buybacks eliminated the reserves needed to cope with an inevitable downturn. All of this was done at the direction of the Big Four corporate boards, who had incentivized the four CEOs with $431 million in stock-based compensation.
Today, the airlines’ complete refusal to pursue bankruptcy restructuring is a “bet the industry” proposition. These companies want outsiders to believe that they can achieve a full industry recovery under the current ownership and control status quo, without going through a restructuring in bankruptcy. But if they are wrong, and conditions do not rapidly improve, ongoing cash burns and asset erosion could make it impossible to salvage these businesses or achieve a strong recovery. Unfortunately, current owners have no incentive to reconsider their current course until the point at which solvency and survival are at risk. Immediately addressing the damage caused by the Covid-19 iceberg could have ensured the long-term integrity of the ship. But after months of insisting that they hadn’t hit an iceberg, and later that there was no structural damage to worry about, the risks of permanent damage to the ship are significantly increasing.