With the current COVID-19 outbreak, airlines have taken massive losses and have requested government aid. The last major event to shake the airline industry this hard was the September 11th terrorist attacks. Many people online have pointed blame at the Airlines’ spending habits as justification to refuse this aid. So, the questions remains, should the government bail out the airlines in America?

Travelers wearing mask has become more common during the COVID-19 outbreak

It Was The Best of Times…

At the beginning of 2020, the airlines in the US were doing really well. The COVID-19 outbreak in China was starting to gain international attention but had yet to cause any type of disruption in travel. The stock prices of the nation’s largest airlines (United, Delta, American, and Southwest) were all up compared to the previous 5 years (with the exception of American). Most of the airlines have been investing heavily in updating their fleets and placing orders for newer aircraft. All have also been using capital to update the facilities at their respective airport hub (e.g. United’s Terminal C updates at Houston-IAH). Most have also been working to add new routes to the ever-expanding web of air travel.

Immigration Queue at Montréal-Pierre Elliott Trudeau International Airport

On top of these items, the major airlines also spent large amounts of their free cash (the money it made) on stock buy-backs. This fact has been heavily circulated lately as proof of wastefulness and a reason we should not use government funding to bail out the private airline industry.

It Was The Worst of Times…

Things began to go down hill in late January this year. The stone began rolling when the US announced a travel ban on China due to the worsening COVID-19 outbreak in that country. Due to this, demand for the Asia market began to drop and most of the major airlines began reducing service to that region. As the outbreak spread globally, travel demand began to decrease more and more. The WHO soon declared the COVID-19 virus a global pandemic, and the rolling stone had become an avalanche.

During the COVID-19 outbreak, air travel demand has come crashing down

More and more travel bans were issued, countries began imposing quarantines, and many countries started ordering public places such as parks, restaurants, and bars to shut down. This led to a complete fallout in the demand for travel. Airlines began offering free transfers in an attempt to stave profit losses, but the demand for their services is still extremely low. This has led to a reduction in service, such as United reducing domestic travel (including flights to Canada) and international flights by 42% and 85% respectively.

Many of the airline executives recently announced that they would be taking pay cuts, or forgoing their salaries altogether, over the next few months. Currently, the airlines are using all options in an attempt to survive the outbreak.

Bailout Request

Recently, the airlines requested a government bailout in order to offset the massive losses that are being incurred due to the pandemic. The total requested bailout amounts to approximately $60B. This is the value that you will see circulating in media reports. Most reports won’t dive into specific details, nor will I, but I will attempt to explain the situation to provide a little more clarity.

Requested Funds

Yes, the airline industry requested approximately $60B in government assistance to help with the current market collapse. That request was made by “Airlines for America” (A4A) which represents the entire US Airline Industry. The request, which can be found here, does not just ask for $60B, and it is not just for the major airlines discussed above. It represents an investment in all US carriers, and some of the key features are shown below:

Request immediate assistance in the form of a $25B grant for the passenger airline industry.

Request immediate assistance in the form of a $4B grant for the cargo airline industry.

Request extended assistance in the form of a $25B loan (unsecured and zero interest) for the passenger airline industry.

Request extended assistance in the form of a $4B loan (unsecured and zero interest) for the cargo airline industry.

Also request tax relief for the entire industry.

US airlines have requested a cash injection from the US government

So assuming that the world can contain the pandemic in a reasonable time frame, and the travel markets rebound relatively quickly, the passenger airlines would repay the government half of the money that is used in the bailout. I mention this to stop any misconception that the major airlines are simply requesting massive amounts of free tax payer money.

Stock Buy Backs

The previous stock buy-backs that were performed by the major airlines have been heavily circulated by the media amidst the bailout request. The 96% of free-cash used by the combined industry has been featured in most of the articles I have read, but American Airlines’ massive buy-back program over the past 10 years has weighted this value.

Airlines have spent free cash on purchasing their own stock

A buy-back chart of the airlines we are focusing on (United, Delta, Southwest, and American) can be found here. You will notice that American Airlines isn’t included by itself because they had negative free cash flow (all was spent), but were included in the combined total. The combined average of the other three major airlines is a more reasonable 66% (led by United using 80% of free cash to buy back stocks). Stock buy backs are not uncommon and this is only 14% higher than the average of the S&P 500 companies during the same time period.

I wont go into details on why companies perform stock buy backs, but details can be found here. I will mention that there are several reasons companies do this (especially those who already dominate their respective markets, like the US airlines) such as to decrease expenses such as stock dividends, or to make the company look more financially appealing to creditors.

Nationalize Airlines

This has been mentioned, see The American Prospect article here, and will probably gain traction as the bailout moves forward. Nationalizing “airlines” isn’t really a thing. To create a national carrier, similar to other flag carriers around the globe, the government would select one airline to be the national carrier, or combine several into one. Pan American (Pan-Am) was for many years the defacto national carrier for the US, gaining preferential treatment over other airlines.

Some current examples of government owned national airlines are Aeroflot, Singapore Airlines, and Emirates. Some past examples of national airlines are Lufthansa, British Airways, and Air France. All of these have since been privatized, but remain the flag carrier of their respective country. A national carrier, or flag carrier, is a certain company that gains preferential treatment from the government. National airlines are often owned, or controlled, by the government of it’s respective country, but flag carriers can also be private companies. These carriers will often enjoy preferential treatment when it comes to domestic and international travel.

Aeroflot is a government owned airline

The US split from the airline world in 1978 when it decided to deregulate the airline industry. This came in the form of the Airline Deregulation Act. This brought the US airline industry into a free market, releasing government control over things such as route access and fares. Many, such as the author of The American Prospect story I linked earlier will suggest deregulation has failed. While deregulation has led to airlines putting more people onto planes, and hence reducing the leg room of each passenger, it has also produced a lot of good. Over all it has led to decreased fares, as competition on routes push the airlines to be competitive price wise. Majorly, it enabled the introduction of low cost carriers such as Southwest (and then later on Spirit and Frontier) to rise up and compete with the mainline airlines.

Lufthansa is an example of a private company that is a flag carrier airline

Prior to deregulation, certain airlines could maintain control over certain routes. Since they had control of the route they could increase the prices at will due to a lack of competition. After deregulation, when these routes were opened up in a free market, all the airlines could then compete over this route. This led to the drop in prices.

Keep in mind, we have a democratic government with laws controlled by congressional representatives. So, in a regulated system all one airline would need to do in order to gain control over a certain route is lobby politicians to have certain measures passed. Control of fare prices no longer lies with the traveler, it lies with congress. You would no longer be able to fare shop as we are accustomed to. This is why nationalizing airlines, or regulating airlines, is a very bad idea.

Bouncing Back

So, should we bailout the airlines? Absolutely! Should we “nationalize” our airlines? Never! Air travel is extremely volatile industry (hence the situation we are in), and governments typically do not want this responsibility. This is why many of the government owned airlines were privatized over the years. There are many things that can be improved in the US airline industry, and many reasonable stipulations that could be associated with a bailout. However, the system overall is reasonably effective and hopefully it will bounce back quicker than we all expect.

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