Surprise, surprise – US airlines are coming to the government less than 13 years after their last handout in search of yet another handout, despite years of making billions in annual profit during most of those years.
- $25 billion grant for commercial airlines
- $25 billion “liquidity facility program” (unsecured loan) for commercial airlines
- $4 billion for cargo airlines
- Refund of federal excise tax for January 1 – March 31, 2020
- Suspension of federal excise tax until December 31, 2021
IS THIS THE RAINY DAY THAT YOU HAVEN’T SAVED FOR?
Interestingly, The New York Times published an opinion piece yesterday by Tim Wu in which he argues that we should make demands of airlines about how they treat their customers and employees before providing them any sort of assistance.
I found the NYT article intriguing as Wu highlights airlines have spent the past several years making billions of dollars through a series of mergers and customer unfriendly policies. He uses American Airlines as an example:
- In 2015 the company reported $7.6 billion in profits, and it has earned billions per year in profits ever since
- American CEO Doug Parker even bragged in 2017 about how he didn’t think the company was ever going to lose money again
- Between 2014 and 2020, American Airlines has blown through most cash reserves through stock buybacks, which have amounted to more than $15 billion
- The company has heavily financed new planes, meaning American has more than $30 billion in debt (which is 5x the company’s current market value)
- They’ve done that in lieu of building up cash reserves, in lieu of settling labor disputes with employees, and in lieu of investing in a better product (which has resulted in them, literally, being the WORST AIRLINE)
In fact, the US airlines spent 96% of their free cash flow over the last decade on buying back their own shares. In other words, they’re greedy.
AIRLINES TOO BIG TO FAIL?
Delta has been called “too big to fail”, due to its intrinsic link with American Express, which buys $4 billion dollars worth of miles from the airline each year and lucrative deals between United and Chase or American Airlines and Barclays or Citi aren’t far behind.
DO BAILOUTS SOLVE THE PROBLEM?
Don’t get me wrong, I think that commercial airlines are vital in their contributions to a vital economy, but guess who gets to pay at least $25 billion of the aforementioned assistance. Hint: if you pay federal taxes in the United States — that’s you.
Financial “losses” are a problem for airline management and shareholders, not for the government and taxpayers. There’s no systemic risk to the economy from an airline failure so this isn’t something the federal government should be considering at all. Airline investors should lose money, as the investment is worth less than it was.
Additionally, many other industries will be hurt just as much and receive nothing. People won’t be going to restaurants and food halls, concerts, movie theaters, hair stylists and barber shops, bowling alleys, car dealership showrooms, etc. Each of those businesses will be hurting, and many will be laying off workers.
If you’re concerned about workers, there’s nothing special about those workers being in the airline industry, and workers in any other industry. Airlines workers shouldn’t get more assistance than other workers displaced due to the coronavirus. Moreover, many airline employees will likely be furloughed regardless of assistance to their employers.
Yesterday, the US administration said it would “back the Airlines 100%” in a press conference but I think the government should wait to see what develops in bankruptcy. The decision to provide assistance could be for naught and a never-ending cycle given we just bailed the airlines out a decade ago and they’re asking for more money now.
WHAT I THINK SHOULD HAPPEN?
Wu suggests a great idea in making requests of the airlines. If I could make a request, I would ask for EC261 styled consumer protections, like we see in Europe.
If you’re not familiar with EC261, it is a European Court ruling which deems airlines must provide many essential services when flights are delayed or canceled due to controllable circumstances, by any unreasonable amount of time. For an international flight, it’s four hours, for shorter flights, it’s two hours.
If and when those things happen, they are legally obligated to do a wide variety of things for you, unlike US based airlines.
For example, let’s take a flight from London to New York that lands 5 hours late because of an avoidable issue (i.e. not weather).
The airline must pay you 600 Euros (~$650). If the flight is cancelled overnight, but other airlines are flying, the airline must put you on any available flight, regardless if they’re partners, or offer you a refund if you no longer wish to fly. Not a voucher – A REFUND! Wouldn’t this be fantastic in the US?
And interestingly, there were many successful airlines operating in Europe, despite being legally obligated to take care of passengers when they screw up.
Because of EC261, airlines must work rigorously to maintain service standards and operate on time, otherwise they face extraordinary bills in passenger compensation or overnight hotels. Meals and round trip transportation to the hotel are legally obliged during any overnight delay.
In contrast, US Airlines get to enjoy the boom times when everything is good but everyone has at least one story of when they weren’t taken care of when the tides changed, or when they really needed to get somewhere and were stranded.
Introducing simple safeguards which airlines are obligated to follow in the USA when things are their fault would make me feel a lot better about using tax payer dollars to give them yet another shot. It’s a small price to pay, if you invest in your airline.
Just remember the next time a customer service representative tells you that he or she CAN NOT honor your request without a fee that they were the same airline that had a banner on their homepage that said you can “book with confidence” because we age “waiving the change and cancelation fees.” Don’t forget, these are also the same airlines that have raised bags fees in the last 60 days UNITED, JETBLUE, and AMERICAN now charges for a second bag international flights. Gee, thanks!
To take a it a bit further, Warren Buffett’s Berkshire Hathaway owns about 10% each of United, Southwest, Delta, and American. Should taxpayers really be softening the blow to Berkshire’s bottom line?
Additionally, these are the same airlines that rallied against subsidies from governments when it involved the middle eastern airlines saying they should be banned from flying to the US but now they need subsidies??
Agree? Disagree? What do you think?