Defining challenges for airlines and stock buybacks

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.

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).

Source: Bloomberg

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

Baggage fees by airlines for domestic flights in the US

I came across this piece of news from Skift

JetBlue Airways is raising fees for checking bags again by $5 — to $35 for the first one and $40 for the second — on flights within the United States.

Baggage fees in the US have become a significant source of revenue for airlines in the US. In 2018, baggage fees brought more than $4.5 billion in revenue for major airlines in the US, compared to $1.1 billion in 2008. Throughout the first three quarters of 2019, the figures are well on their way to surpass the 2018 ones. Though I understand the monetary perspective through which many look at this issue, I find it annoying that airlines seemingly take advantage of customers this way. We often travel with luggage and for some certain routes, there are very few options as only one or two carriers operate on the routes. Customers have little freedom to choose.

I compiled the baggage policy of major US airlines below, as well as some information on their baggage revenue and how much of the total revenue it makes up.

Source: Bureau of Transportation and official airlines’ websites

“Low price” airlines such as Frontier and Spirit have a significant portion of their revenue from baggage fees. The low prices are often misleading as we rarely travel without a carry on. Only an addition of carry-on fees will reveal the whole cost of a flight ticket with the low price airlines. Among the bigger carriers, as far as I know, only United Airlines (not shocked at all) charges customers for carry-on in certain cases.