Airlines are begging for a bailout, but they've used 96% of their cash flow on buybacks over the past 10 years. It highlights an ongoing controversy over how companies have been spending their money.
Some experts argue that these companies should have instead used those proceeds to build themselves a financial cushion or address labor issues. Tim Wu, a Columbia University professor, targeted American Airlines in a recent New York Times op-ed.
"It could have stored up its cash reserves for a future crisis, knowing that airlines regularly cycle through booms and busts," Wu wrote. "It might have tried to decisively settle its continuing contract disputes with pilots, flight attendants and mechanics."
He added: "It might have invested heavily in better service quality to try to repair its longstanding reputation as the worst of the major carriers."
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Going beyond academia, the prospect of an airline bailout also prompted a wave of criticism from prominent Democrats, such as Rep. Alexandria Ocasio-Cortez of New York.
"96% of airline profits over the last decade went to buying up their own stocks to juice the price - not raising wages or other investments," Ocasio-Cortez wrote on Twitter. "If there is so much as a DIME of corporate bailout money in the next relief package, it should include a reinstated ban on stock buybacks."
Even some Republicans came out against the idea of the government coming to the rescue of the battered airline industry.
"I do not believe in the bailouts for the companies, period ... They are smart people and will figure it out," Florida Sen. Rick Scott said.
A historical precedent for frustration
Disdain for buybacks — and companies' propensity to do them as much as possible — is hardly a new phenomenon. Following the GOP tax plan that went into effect in 2018, corporations across all industries came under fire for how they spent their proceeds.
Led by the tech and finance sectors, buybacks peaked to a record in 2018, according to a according to JPMorgan. For many, the takeaway was simple: These companies were electing to enrich shareholders, rather than invest in their businesses and labor forces.
The pending airline bailout will also likely remind many of the financial relief provided to major Wall Street banks in the wake of the Global Financial Crisis. Congress' $700 billion legislative package was known as the Troubled Assets Relief Program (TARP) and it set up a mechanism for the federal government to buy mortgage-backed securities that had gone bad.
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TARP invested around $426.4 billion and ultimately recouped $441.7 billion, making a profit for taxpayers. But critics of the program argued it came with no strings attached and rewarded Wall Street for its bad behavior.
Some current lawmakers are learning from the past and pushing for different bailout terms compared to a 12 years ago. Sen. Elizabeth Warren demanded tougher conditions on Tuesday, saying any bailout should require a company to maintain existing payrolls and refrain from buybacks, dividends, and executive bonuses for at least three years.
There's ultimately a crucial distinction to consider, according to Sara Nelson, president of the Association of Flight Attendants union.
"We won't let this to look like the bank bailout of 2008, nor can you compare the two," Nelson wrote 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."
https://markets.businessinsider.com/news/stocks/airline-bailout-coronavirus-share-buyback-debate-trump-economy-aoc-2020-3-1029006175
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