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  • Doug Chia

Tying Strings

Bail me out, please

There has been a lot of talk about “bailouts” of certain industries that are particularly hard hit by the Covid-19 pandemic and the resulting lockdowns on human movement around the world. The industry most have focused on is the airline industry, which is no wonder, since it has flat-out asked the federal government for what would effectively be a handout in excess of $50 billion.


Cue the strings

A big part of the debate is over whether there should be “strings attached” to the taxpayers’ money that would be handed over to prop up those large airline corporations, and if so, what. As anyone would have predicted, suggestions for conditions on bailout funds came in quickly. Here is just a sampling from various news articles over the last two days:


  • Wipe out the shareholders

  • Ban stock buybacks

  • Restrict dividend payments

  • Cap executive compensation

  • Add employee-chosen directors to the board

  • Obtain shareholder approval for all political expenditures

  • Restrict common ownership among large institutional investors

  • Ban mergers and acquisitions

  • Keeping workers on the payroll with current pay and benefits

  • Provide a minimum wage

  • Keep current collective bargaining agreements in place

  • Cap flight change and baggage fees

  • Don’t allow passenger seats to get any smaller

  • Don’t outsource jobs

  • Move supply chains back to America

  • Expand employee benefits

  • Guarantee relief for flight attendants, pilots, and airport workers

  • Require carbon offsets

  • Give special consideration for smaller, regional carriers not represented by the major trade associations

  • Provide incentives to retire less fuel-efficient aircraft used on marginal routes

  • Ban lobbying and limit public relations spending

  • Give workers direct payroll subsidies

  • Require job-sharing programs in lieu of layoffs


Some of the groups proposing these conditions go into more detail. For example, with regards to executive compensation, the Institute for Policy Studies advocates restricting each CEO’s total compensation to no more than 50 times median worker pay and capping total compensation at a fixed amount. Dean Baker at the Center for Economic Policy and Research has a suggestion for that fixed amount: $2 million in total compensation, including insurance policies, health care, pensions, etc., enforced with jail time for board members if they approve pay that exceeds that.


Hey, hey! Ho, ho! Stock buybacks have got to go!

Quite a number of critics of the bailouts insist that airline company stock buybacks should stop for a period of years, with some saying buybacks should be banned forever. Why the focus on stock buybacks? Well, there’s the fact that the five largest US airlines spent 96% of their free cash flow over the past decade on buybacks, according to Bloomberg. To quantify this, the four largest collectively bought back $39 billion worth of stock and paid out $6 billion in dividends from 2015 to 2019, according to data from Capital IQ.


I’ve been a pretty big critic of stock buybacks, particularly during my years at The Conference Board. After all, what does it say about the board and CEO’s shared long-term vision and strategy if they cannot think of anything else to do with huge piles of cash except just wire it all to their shareholders who will jump for joy when they see it hit their accounts? Surely, they should be able to use it for things on their wish list, like acquiring companies with high-potential innovative technologies (like artificial intelligence and robotics); investing in more research and development (like for ticketing and passenger verification systems); spending to upgrade facilities and replace equipment (like old aircraft); training workers to retool their skills as the industry moves more and more into automation; improving the customer experience (like feeding people on coast-to-coast flights instead of making us to run to CIBO Express before boarding and not nickel-and-diming us on things like choosing our own seats); and paying employees more and providing them with better benefits as recruiting and retention tools. Oh, and SAFETY! Yes, SAFETY!


However, I understand that sometimes having a lot of cash sitting there and earning almost no interest doesn’t make a lot of economic sense, especially when there are activist shareholders who are looking for the next cash grab and will use scorched-earth tactics in waging a proxy fight to force the board to approve large buyback programs and declare rich dividend increases.


So, where are the shareholders who received those billions in buybacks and dividends now? A lot of them are currently hanging onto shares of airline stocks severely diminished in value. But, what about the ones who got their payouts and took off shortly thereafter? They cheered the buyback announcements, especially the investors who were part of the mob demanding them. Should we now ask those investors to inject some of their investment income back into the companies they encouraged to "return" those free cash flows to them?


But, it wasn’t their fault!

Clearly, a pandemic of a new coronavirus strain that came out of the rear end of a bat isn’t anyone’s fault (not even the bat's). Well, maybe numerous government officials could have put in measures to prevent the spread, but certainly not airline executives. Unlike with the 2008 financial crisis, corporations did not create the Covid-19 crisis by knowingly taking on excessive risk, using predatory practices, and other reckless behavior in search of profits. There was no moral hazard here. Say what you want about repurchasing the company's own stock as a capital allocation strategy, but I don’t put it in the category of reckless behavior.


Some argue that the boards of these airlines should have not been so zealous with the buybacks and saved a least a decent portion of that money for a “rainy day” or a catastrophic event, like the Covid-19 pandemic. But is that really fair? Airlines buy insurance for business interruption due to catastrophic events. Covid-19 is force majeure. Does any company set aside a reserve for the Apocalypse? Do you stockpile toilet paper in good times just in case disaster strikes and Costco runs out? Covid-19 is the kind of event on a scale not seen since Babe Ruth was a pitcher for the Red Sox. It was un-fore-see-able. It was the Black Swan if there ever was one.


Or was it? Their public disclosures show that this kind of event was definitely on the airlines' radar, but either they blew off the risk, or they shifted it to their investors. It was in the Risk Factors section, which they should have read before buying the stock, so they assumed the risk when they bought it. Former Merrill Lynch tech sector research analyst Henry Blodget wrote in the Business Insider, "American Airlines... explicitly foresaw it. In recent financial filings, American cited ‘outbreaks of diseases that affect travel behavior’ as a major risk to its business. American went on to say the following:


In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers' travel behavior.


American sure got that right!"


Back to the strings

Let’s get back to that list of proposed conditions on the bailout of the industry. I intentionally put the eight corporate governance related conditions at the top because, IMHO, some of them have nothing to do with the situation at hand. These are remedies that have been proposed for years to prevent or cure all kind of ills, including the financial crisis, the opioid epidemic, and massive oil spills. Some view a number of these ideas as “solutions in search of problems.”


Having a shareholder vote to pre-approve an airline’s political spending budget each year may be something to address corporate money in politics and mitigate what you don’t like about the Citizens United US Supreme Court decision, but I don’t see how it relates to how an airline prepares itself for or navigates through a global public health crisis. Same with limits on lobbying and PR. What kind of PR are you talking about? Commercials encouraging us to “fly the friendly skies” and mailers inviting people to join frequent flyer miles programs? And unlike executive compensation, common ownership is a debate that hasn’t gotten much acknowledgment as a real issue in the broad corporate governance community. Will placing restrictions on how much stock of each airline BlackRock, State Street and Vanguard can manage on behalf of their fund customers (most of which they manage through index funds) ensure that airline employees receive fair wages and benefits and customers won’t be treated like cattle?


This is the classic case of everyone not wanting to "let a good crisis go to waste" -- a golden opportunity to push through what you proposed, but ended up not getting, during the last crisis, regardless of whether your proposal relates to the current crisis. (Corporations are just as guilty, if not more.) And, some folks aren't even being subtle about it. The headline of a piece in Esquire by author Charles P. Pierce about tying strings to airline bailouts reads, “The Current Crisis May Be the Last Great Chance to Crack the Encroaching Oligarchy.” Senator Elizabeth Warren calls her set of eight conditions a “Progressive Litmus Test.” So, now this is about taking down billionaires and rating your political leanings on a scale of 1 to 8? Save that for the elections.


This is why I hate bailouts. It inevitably leads to getting us sidetracked to curing all kinds of unrelated ills. Let's focus on curing Covid-19 and helping those most directly and indirectly impacted today, and save curing the ills of corporate governance for later.