Comments (89)

Mar 17, 2020
Mar 17, 2020

Not shocked they are. They survived after 9/11. They can survive after this.

Mar 17, 2020

Chapter 11

Would call it reincarnation not survive

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Mar 18, 2020

As far as the airlines business is concerned this is way worse than 9/11, almost not even comparable.

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Mar 17, 2020

I have mixed feelings about this one. If they used the money for buy backs, they do not deserve a bailout but at the same time, I would put the airline industry in the too important to fail category.

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Mar 17, 2020

If any company gets a bailout, Buybacks should be forbidden until 3 years after paying back the bailout. Has to be part of the terms. That's part of the problem from 08. Cheap money and debt lead to buybacks instead of trying to grow businesses.

Mar 19, 2020

No one would invest in airlines if they didn't do buybacks.

It's a shitty business that's normally prices at marginal costs with high fixed costs. It's not the industries fault they constantly go bankrupt. It's due to the nature of the industry.

Few barriers to entry, marginal costs price, risks that the industry over expands constantly and kills pricing power, high fixed costs.

I owned airlines going into this because they offered very high rates of return of capital. Airlines are obviously an industry that must exists. If airlines didn't return a ton of capital to investors no one would touch them. Luckily found a good place to puke for a 33% loss.

Bailout would mostly go to paying employees. Government can take their pick of giving airlines money to pay workers they don't need or paying unemployed workers.

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Mar 24, 2020

Of course its their fault - the nature of the business model you outlined required limited debt and maximum equity given its boom/bust nature. The capital allocation policies of management is what set them up for failure, not the model itself.

*edit - after seeing several more of your posts below you seem to think that the only way to build equity value is via buybacks. Cash flow generation could have been used to repay debt, which by default shifts value to equity. Mgmt and investor were playing a levered game in an industry that doesn't warrant it and that's is in large part why they are where they are today.

Funniest
Mar 17, 2020

No fucking way should we be bailing these assholes out. Maybe don't try to stealth LBO your company when you're in a industry with long-term profits of zero you absolute morons.

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  • Intern in IB - Gen
Mar 17, 2020

Without these companies the US wouldn't have major airlines which would be a complete disaster, get real man. I don't like bailouts either, but its not THEIR fault the government is shutting their business down, its not like they weren't structured properly and failed, its the government putting in place laws that prevent them from making money- wow you are fucking ignorant and quite honestly stupid for writing that

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Mar 17, 2020

Dude, I agree it would be a disaster to let the airlines fail but if you are going to call someone stupid, you should own it by using your own username.

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Mar 17, 2020

Keep them afloat until this is over but you have to do some sort of managed bankruptcy after. We need to send a message to these strategically important industries that they have to play defense. Only way to do that is to fuck them a little bit on the back end. We did that to a certain extent with the banks post-crisis (should have done more IMO). If we stroke them a check and then continue on with business as usual with no penalty paid, then we further cement the massive moral hazards we established under late Bush / early Obama.

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Mar 17, 2020

Mr. Anon, you realize some airlines published (1-4 weeks ago) that current bookings dropped 50-60% and new, future bookings after some monitoring were down negatively which means more people were cancelling than booked (even for trips 5 months out, etc.) This was at a time of 0 restrictions and completely voluntary actions. You are wrong and your language is annoying have some respect for other people.

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Most Helpful
Mar 18, 2020

Yes, it is their fault. They run a precarious and structurally bad business. Every 8-9 years or so since deregulation's, something has happened to bankrupt the whole group. Still, they continue to overcompete and empire-build by leveling up and buying new planes to grow on top of each other. There's a reason that they trade for mid single digit p/e before the virus. Because investors are skeptical that the businesses can survive through a cycle. CEOs that bought back stock made a bad investment and that's their fault. CEOs that grew in excess of demand made a bad investment and that's their fault. The value that has been destroyed is more than the equity value so equityholders should get $0. We can't start having equities be a game of betting on government backstopping. The whole point of of equities is exposure to the upside, at the cost of higher risk. You can't just erase the risk when it goes bad. The world has gone mad and it seems this party has to end soon now that rates are 0%.

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Mar 18, 2020

There is nothing wrong (not illegal or unethical) with share buybacks. This was an unforeseen event for all businesses, but the airline industry is structurally important for any developed nation. Not to mention they supply thousands of decent paying jobs for the economy. Other major companies rely on the airliners for material revenue--> Boeing (which is asking for a bailout of its own)--> GE, a major vendor to Boeing.

I agree that equity holders should be wiped out. They were in it for the upside as another poster said, so they should stick around for the downside as well.

But I'm sure many average/ordinary people have common stock of airlines that would get burned. Why don't the FEDS consider investing billions of dollars in preferred stock or becoming a super-senior lender? Literally everyone wins: taxpayers, existing stockholders (institutional/retail), current lenders, customers, etc.

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Mar 20, 2020

im long airlines stfu

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Mar 17, 2020

government can't let them fail. the major airlines have agreed that they can be nationalized in an emergency (WW3). letting them fail would be a national security risk we aren't willing to take, especially with Russia acting up

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Mar 17, 2020

I read somewhere about that, and Putin is a genius (for using this Coronavirus to stop protests against his election/ power) and writing in his terms for another 10-15 years or something. I think I agree though that some assistance will come their way because of how central this kind of transportation is to business.

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Mar 17, 2020

Source?

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Mar 17, 2020

look up civil reserve air fleet (CRAF). I was in the military for 6 years and had no idea it existed until it was discussed in a logistics course I took. It was used in Iraq and it's actually seriously relied upon in the event of a major conflict.

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Mar 17, 2020

I mean as long as they pay back the loans I don't see a problem with a bailout. I think what an above poster said about buyback restrictions after a bailout would be beneficial as well

I'm a fun guy. Obviously I love the game of basketball. I mean there's more questions you have to ask me in order for me to tell you about myself. I'm not just gonna give you a whole spill... I mean, I don't even know where you're sitting at

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Mar 17, 2020

I think that blocking share buybacks doesn't solve the issue in the long run. What would happen once they paid back the loans that will have bailed them out, is that they will just stack cash for the number of restricted years before just doing a massive buyback plan. I think that putting in place capital requirement similar to what FIG firms have to do would make more sense - ie holding 6months of operational costs in cash at any given time, but again why doing for airlines but not other industries? That is the true question imo.

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Mar 18, 2020

You're right, that's a much better solution

I'm a fun guy. Obviously I love the game of basketball. I mean there's more questions you have to ask me in order for me to tell you about myself. I'm not just gonna give you a whole spill... I mean, I don't even know where you're sitting at

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Mar 20, 2020

Whose going to fund them having 6 months of operational costs. That would just kill any investment thesis in airlines.

Aal had a market cap of 13 billion pre crisis. 6 months operations costs would be 23 billion. So you would pair their current business that's worth 13 billion with having a low interest 26 billion savings account. People who want to own savings accounts would never own an airline - people who were interested in airline stocks a month ago wanted it for the huge divididend/buybacks and wouldn't want their return to equity cut in 1/3.

To de-risks airlines you would have to regulate the market and cause prices to increase significantly. Turn them into utilities. That sounds great and safe but then ticket prices would be 20% higher. Probably more since a regulate industry won't compete with each other etc. basically if we change how airlines are financed expect tickets 50% higher.

I think this whole thread people are neglecting that airline financials went a certain direction for a reason.

The current model in a crisis like this does require a bail-out. The other option is to nationalize. It's a simple business so maybe nationalize is ok. A nationalized air industry at least would be profitable since its would be a monopolists.

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Mar 18, 2020

As far as i am concerned, a large portion of the bailout will be grants as they are already short of cash and piled with debts(hence the bailout). I might be wrong but they will have trouble paying back in a while since they are not making profits.

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Mar 18, 2020

The necessity of a bailout comes from private markets deeming the risk/reward unattractive. If the government gives airlines a 0% interest loan, it still represents a cash distribution of the forgone interest. When these structurally important businesses lever up and over-grow or buy back shares despite having challenged business dynamics and history that should lend themselves to conservatism it creates moral hazard when they know they must be bailed out. When you stop flying for a quarter, value is destroyed. You can't get around the fact that the forgone profits simply did not materialize. That has to come from SOMEWHERE. With equityholders being the junior most capital providers, naturally it should come from them for starters.

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Mar 17, 2020

I'm just sad because I can't invest on 80% of this shit without jumping into a fund

#Big 4 consulting problems

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Mar 17, 2020

This isn't 2008. Airline behavior didn't cause the airline insolvency.

Even if they didn't buyback shares they'd still need a bailout... every functioning government is (effectively) banning flights for the foreseeable future. This is absolutely an appropriate bailout.

Now, obviously it will come with strings attached, one of which will be no share buybacks for X years or whatever.

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Mar 18, 2020

Yes I 100% agree. People are upset about the buybacks, but why not return money to shareholders if you can? What else could they have done with the cash? Maybe they were overcapitalized and should've paid down some debt instead, but no one could have seen this coming. This is worse than any worst-case scenario for airlines.

Don't @ me

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Mar 19, 2020

Explain to me why anyone would invest in an airline if they don't do buybacks? That's literally the only reason to own and invest in the industry.

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Mar 19, 2020

I mean if they keep the excess cash on their balance sheet that would create more value than buying back shares at the top of the cycle

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Mar 17, 2020

I'm not an airline expert, but I did stay at a Holiday Inn Express last night. My buddy is an airline analyst and from what I understand from him the U.S. airline industry is so overregulated that it has created a situation of minimal competition, unlike what we see in Europe (ironically) where there are all kinds of small airlines with relatively inexpensive flights. For example, flight sharing has been effectively banned in the U.S. due to industry-requested regulation. The U.S. gov't is basically in bed with the U.S. airline industry, which has created a too-big-to-fail situation, let alone a situation of poor service and high prices.

You have to bail out the airlines because policy has ensured that they are too big to fail, but then you've got to completely reform the industry after that, ensuring replete competition.

Mar 18, 2020

The main problem with the airline industry is over-competition. Really hard to argue that overregulation is stifling competition when the companies can't even stay afloat through a cycle. Ticket prices have been a straight March down and volumes up since deregulation. The only way this industry can stand on its own is further consolidation and something resembling soft collusion. When fuel falls the low cost guys grow fast and siphon leisure traffic from form the legacy airlines which is needed to support the hub and spoke model and business travel. So the legacy airlines have to add loss making flights on top of the low cost carriers just to make them stop growing. Rinse and repeat, then the legacy carriers start raiding each other's hubs and discounting below cost to discourage that. Then fuel rises and everyone loses money. Or demand falls and everyone loses money. Sometimes (often) both happen at once and they all fold.

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Mar 18, 2020

I honestly can't believe what I'm reading. There are only 4 major US carriers, all have terrible service, and domestic flights are insanely expensive relative to Europe. The US airline industry is an oligopoly that is lazy and complacent. The industry is in bed with federal/state/local government to make it as hard as possible for small players to enter the business. The reason you can't access a charter flight at a reasonable price is because of industry-demanded regulation. The terminals and airports are essentially run by the oligopoly. If you had any more consolidation it would cost $800 to fly to Atlanta from D.C.

Mar 19, 2020

I actually thought airline economics got reasonably attractive to the point they were investable. Still a tough industry but you were compensated for that by getting 6 P/E ratios. Which also compensated you for the risks that we all knew would eventually happen that an event would occur that would bankrupt the industry. Low pe plus high cash payouts to shareholders made the industry investable.

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Mar 18, 2020

Well, this thing scares me a liitle

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Mar 18, 2020

What does this mean for shareholders? Pardon my ignorance, but I have not invested in any company before that has been part of a government bailout. Obviously the markets don't like it, the entire industry is taking a beating.

Don't @ me

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Mar 18, 2020

If you are a common equity holder - assume 0. You will most probably be wiped out. Then it follows similar to restructurings - negotiating with debt holders, re-capitalizing, etc. I'd say this is most likely - loans are not going to save them, they will have no ability to pay them back.. borrowing to fund borrowing. They are going to have to capitalize and support them - which no matter what leads you down that road.

If you aren't wiped out, and it's some combination of grants, loans, capital injections + 'protected' capital injections (i.e. Hey uncle Warren - inject a ton of money into delta and we'll backstop you), etc. then at a minimum you will be heavily diluted, dividends will be non-existent for awhile and buybacks will be similarly suspended. In other words - unless you are day trading equity and simply betting on movement... get the hell out at the first opportunity.

More importantly - you have to remember the history of airlines. They literally, until the last 10 years, went like this - open airline, survive for awhile, bankruptcy/consolidation, re-open, survive for awhile, bankrupt - you get the point. They are capital intensive, utility-like companies that are so highly regulated, scrutinized and commoditized it's a wonder they are even able to operate in first place. Aside from the physics of flight - I marvel at their ability to even exist and get people places.

I'll be transparent as well - i bought some of these thinking they'd rebound fast, oil would be a tailwind - without even considering that you need people to actually fly to make good on anything. Stupid, stupid and complacent - which, the only good news coming out of this, is you learn that complacency kills faster than anything (well - except leverage, but just open up your bloomberg to see what that does to you).

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Mar 19, 2020

Super super helpful - thanks very much for the explanation. I feel like a very basic trade I keep hearing about is "buy AA at an all-time low, and then the government will simply bail them out and the stock will rebound over the next five years". I put that in very basic laymen terms, but could it really be that simple if you have a long-term horizon?

Would you be able to dive into a little more detail on what would actually happen to the equity price in those scenarios? Scenario 2 sounds like you could survive and be in a position for the long-term. I also think this general scenario applies for a lot of these companies that are at risk of default so would be awesome to hear your take.

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Mar 18, 2020

"People who invest in aviation are the biggest suckers in the world."

David Neeleman, after raising a record $128 million to start New Air (the then working name for what became JetBlue Airways), quoted in Business Week magazine, 3 May 1999.

Neeleman recently raised $100m for a fifth new airline venture, a US low-cost-carrier.

Equity should be wiped out and we should end up with 3-4 US airlines, less flights and higher prices with more conservative capital allocation.

While business travel will come back, one had to think leisure flying in the Instagram economy might suffer some lingering wealth effect.

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Mar 18, 2020

How will this bailout affect their stock prices??

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Mar 18, 2020

wow did not see above comments

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Mar 18, 2020

They don't deserve the bail out based on that action. We need them though they are to important to fail. A classic case of Moral Hazard.

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Mar 18, 2020

Let them all go bankrupt, they won't go away.

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Mar 19, 2020

Nationalize them right now. Fire the CEOs. Encourage flying and make it more efficient. If govt owns fout biggest airlines they can achieve economy of scale as well and have reduced prices for the public.Then once they are profitable, IPO to recoup initial investment back. Why should the govt loan enough money instead of just buying these airlines for pennies on the dollar. Im well aware that the US govt is not a PE firm but by waiting they can save billions and continue to pay employees temporarily while keeping the airlines afloat.

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Mar 19, 2020

Maybe the U.S. Gov. will let one of them burn like Lehman?

I am imagining a roulette style wheel in the basement of the White House that determines which airline doesn't get a bailout. As the wheel spins, the following fates tick by... Jet Blue, South West, Delta, Frontier... suddenly the wheel slowly ticks to a dead stop... It lands on American Airlines.

Jerome Powell, Steven Mnuchin, and a handful of the white house's whitest interns begin to cheer! Donald Trump lets out deep wealthy white laugh! All of america relishes because the shittiest ariline in the world was just flushed down the toilet. To celebrate everyone uses their thousand dollar quarantine stimulus check to buy tickets on Alaska Airlines newly expanded routes to Ibiza.

Alaska becomes the worlds greatest airline in the history of mankind. They build a monopoly upon the corner stones of comfort and conveneince. Everyone lives happily ever after.

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Mar 19, 2020

If you help on industry do you help all?

Sadly, I think the answer is yes, primarily because it is required. If the US (Gov't) wants jobs exist and jobs for people to go back to, once this is over. Then yes, they will bail out the airline industry and every other major company. There will be some company's within the Industry that will not benefit in the form of a handout as well.

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Mar 20, 2020

This article came out early this morning about this exact topic (great timing) and provides insight to a lot of what is being discussed.

https://www.marketwatch.com/story/airlines-and-boe...
IMO, I think they should be bailed out but they need provisions if we are going to see another repeat of their actions and possibly end up here in the next big issue whenever (if) that may happen. They are necessary for travel and maybe the government needs some skin in the game to realize this and find a way to provide them the necessary funds while keeping them in check. Look at the share prices and how they have fared during this (one of the worst performing industries considering how large they are). The article highlights more about that.

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Mar 25, 2020
Comment
Mar 25, 2020
May 5, 2020