The next few weeks or likely months will be rough for airlines. Major airlines in the US have announced major cuts to their flights, domestically and internationally.
- Delta Airlines cut capacity by 70%
- United Airlines cut around 40% of its domestic flights and 85% of its international flights
- American Airlines cancelled international flights by 75%
- Southwest dropped its capacity by 20%
- Alaska Airlines cut capacity up to 15%
Major airlines in the US already asked for assistance and bailouts from the government. When you are in a bind and employ thousands of folks, it’s understandable to request for help for the greater good, right? Or is it?
Bloomberg reported that in the last decade, biggest US airlines spend almost 90% of its free cash flow on stocks repurchases. In other words, instead of saving cash for a rainy day like what we are going through now or investing in back to the business more than what they already had or paying employees more, airlines repurchased their stocks to please shareholders and increase stock prices (likely).
Am I opposed completely stock buybacks? Absolutely not! Stock buybacks is definitely a legitimate use case of free cash flow at the disposal of executive teams whose fiduciary duty is to shareholders. If the folks who monitor the business on a daily basis decide that stock repurchase is the best course of action, who are we to argue?
However, the current pandemic and the criss that is engulfing airlines put things in perspective. The public has all the right in the world to question why airlines deserve a bailout after years of spending a boatload of money on stock repurchases. On an individual level, we are all advised to save up money for emergencies. Why should airlines receive a bailout? Especially when a recession was always a likely scenario after a decade of bull market.
Airlines have a lot to answer for after this crisis blows over. There should be some measures put in place to prevent this phenomenon from happening again. Nonetheless, I, by no means, advocate for a complete ban of stock buybacks. Truth be told, it’s a fairly complicated matter. But it’s how the government officials earn their paychecks. Mark Cuban already offers some sound advice