Hello, US airlines!
We, the American people, thank you for your recent bailout request.
We understand that you would like us to provide you with at least $54 billion so that you can avoid bankruptcy.
We value your service to us. We also value the Americans you employ, and the salaries and benefits you compensate them with. You and your employees spend money on other products and services other American companies and workers provide. We want to help your employees, so we will help you. Please see our terms below.
Before we begin, let us say that we sympathize with the bad luck you are experiencing. The coronavirus pandemic has been a terrible blow for all of us. We understand that it has been particularly hard on you.
Your request
You estimate that you will burn through $23 billion to $53 billion of cash by the end of the year, and that, without assistance, you may soon go bankrupt, perhaps as early as May or June.
You are therefore requesting a $54+ billion bailout, structured as follows:
- $29 billion of “grants”
- $25 billion of loans
- Forgiveness of taxes on tickets, cargo, and fuel for two years
Our terms
First, some context. Please understand that times are tough for us, too. Lots of us are getting hammered as well.
Also, two years ago, our government enacted a corporate tax cut that saved you and other US companies hundreds of billions of dollars. This tax cut benefited you and your shareholders, but it also ballooned our annual government deficit to more than $1 trillion a year.
With the coronavirus now plunging our economy into recession, our tax revenue will tank, and our deficit will skyrocket even more, perhaps to $2 trillion or $3 trillion per year. So we’re not as flush as we should have been.
Second, over the past decade, you raked in tens of billions of dollars of profit and, instead of saving it, gave it to your shareholders.
As you know well — and as you point out in your financial filings — your business is cyclical. So cyclical, in fact, that many of you have already gone bankrupt in the past. So you could have saved this cash for a rainy day. But you didn’t.
Instead, according to Bloomberg, you used a startling 96% of your cash flow to buy back your own stock. The buybacks of one of your members alone, American Airlines, totaled more than $15 billion in the past six years. ($15 billion! American, if you had just kept that cash, you might not need a bailout!)
[More detailed analysis on airline stock buybacks HERE]
Third, although the coronavirus pandemic is bad luck, it was not unforeseeable. In fact, at least one of your members, 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!
But, despite this and roughly 45 other explicit risks to its business described in its financial filings, American Airlines STILL chose to spend over $15 billion of precious cash on stock buybacks.
So, while we sympathize with your plight, please understand that we’re not going to just “grant” you the money. The philosophy of our economic system is not “shareholders and executives take the gains and taxpayers take the losses.”
You and your shareholders and lenders knew the risks you were taking, and, for more than a decade, you enjoyed the rewards.
Also, you aren’t the only ones who need our help. Just ask the cruise lines, hotel companies, and restaurants, bars, gyms, and other establishments in so many of our American communities that have been forced to close altogether —as well as the millions of Americans who will soon be laid off.
So, your $54+ billion bailout will be structured as follows:
- A senior, secured credit line that will allow you to borrow the money you need to operate and pay your taxes while you figure out how to survive.
This credit line will pay interest at a rate that compensates taxpayers for the use of our money and the risks we are taking. The use of this credit line will also require you to issue equity to taxpayers to allow us to share in your recoveries, if any. Yes, this equity issuance will dilute your shareholders and cause your stock prices to drop. But not as much as they will if you go bust.
Our credit line, moreover, will be senior to all of your other debt and secured by your airplanes and other assets. If, despite our help, you fail, we will sell your airplanes and recoup 100 cents on our dollars before any of your other lenders get a penny.
To be clear, we are not in the investment business. We are the “lender of last resort.” We do not think all or even most of you will survive this crisis, and we do not expect to make money on this transaction. We are angry that you did not conserve your cash for this rainy day, and if we did not have an economy to save and millions of Americans to help, we would just let you fail.
If you think you can get better terms from another investor, we encourage you to get them. We are offering you this lifeline because we benefit from having an airline industry and the jobs and services it provides. In this time of national crisis, we also do not think it is in our interests to let all of you go bankrupt at once.
Thank you again for your request. We look forward to working with you.
Sincerely,
The American people
