Do The Right Thing
March 19, 2020·29 comments
The airline industry is presenting itself as a victim of circumstance, pleading for emergency bailouts because of an external crisis. But something else has been happening for six years beneath the surface. The Big 4 airlines spent $42 billion buying back their own stock while their actual operating performance deteriorated, all while their CEOs extracted massive personal wealth. The question isn't whether airlines deserve emergency support. It's whether we're about to bail out management teams that deliberately weakened their companies for personal gain.
- The numbers tell a specific story: Since 2014, the four major airlines poured more money into stock buybacks than they generated in free cash flow, meaning they borrowed to pay shareholders. During this same period, every operational metric declined: earnings, free cash flow, and operating cash flow all peaked in 2015 and fell steadily afterward.
- The CEOs became spectacularly wealthy while their companies grew fragile: Doug Parker at American sold $150 million worth of stock while his company was buying back $13 billion. During one 12-month stretch, he was selling between $4 million and $11 million per month in personal stock. None of these CEOs bought a single share in their own company using their own money.
- This wasn't accident or bad timing. The buybacks and debt increases were intentional strategy to prop up stock prices in the short term. Management compensation was explicitly tied to stock performance, creating a system where financial engineering looked better than operational excellence.
- The hedge funds sitting on 25% of these airlines made the same bet: They backed the stock buyback strategy because it inflated their holdings. Warren Buffett's Berkshire and Primecap Management are being presented as victims who deserve bailout protection, but they would do exactly this if positions were reversed.
- Now we face a choice about what a bailout actually means: Do we rescue the employees and the utility function these companies provide, or do we bail out the financial strategy that intentionally positioned these companies to fail? The answer determines whether we're solving a problem or rewarding the people who created it.
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Comments
Claw it the F back. Make these whores (actually whores serve an important purpose and exchange tangible benefits for often dangerous work–maybe they’re just raccoons as you say) disgorge their ill gotten gains and sell the stock and let that go the company FIRST. Sure it may tank the share value but they sure as heck don’t deserve it. Muilenberg too. Rommetty too. You don’t get to keep it. Mr. McConnell, you up for that? Ha, didn’t think so.
Consider this. The US gov’t lost $11 billion on the GM bailout. No surprise, the company had $100 billion of losses in the decade leading up to the crisis. The US airlines industry has contributed over $64 million in political “contributions” split evenly between dems and repubs, since 1990. Who do you think the industry was seeking to gain an advantage over. The decision is already made. This explains the whimsical attitude toward risk.
Permission to share with my Delta pilot buddies on a private bulletin board?
What started in the housing industry, has spread throughout ‘institutional’ or large asset corporate America. And we’re suppose to be the leaders of the ‘free’ world. These trees of greed need shaken. And fruits of power redistributed. Clawing back stock based compensation, of say over $5m a year, is a start. Regardless, financial engineering has ‘de’-choiced Americans - mortgaging decisions (power), savings (capital) and stewardship (property) for a super elite ‘managerial class’. Enough. That thinking is worse than magical, it’s become predatory and dangerous. Do the right thing, indeed.
Permission granted!
My only caveat is that in the current regime, we will end up with Don Jr. and Eric as COB of two major airlines.
Could not download the pdf. Premium subscriber. No help desk.
So I’m admittedly a novice at all this, but isn’t there a remedy called bankruptcy? The airlines have done this repeatedly over the years (and dumped their pension obligations on the PBGC btw) and they kept flying and had few cancellations that I can remember. Shareholders wiped out as they should be. Creditors get company. New stock issued. Reset button hit. Other than the fact that it’ll never happen because the players that stand to lose under that scenario are too well connected, please tell me what’s wrong with that process in this situation?
There’s no PDF download capability on mobile OS, but should work on any non-mobile system. Please email info@epsilontheory.com if you continue to have problems and we’ll troubleshoot with you.
There’s an enormous amount of collateral damage if you go the BK route, and it throws everything into court, where anything can happen and everything happens slowly. All the same, I think that’s the right course for airlines that can’t raise new equity, like (I suspect) American.
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