The 2008 financial meltdown was a slow-motion train wreck compared to how rapidly the COVID-19 pandemic has cratered aviation, especially the airlines. Load factors have fallen off a cliff—as much as 50 percent—and revenues have taken a similarly steep dive.
The bottom has dropped out of airline stocks: American plunged from a recent high of $31.36 to $12.10; Delta $23.49 from $60; United $21.38 from $93.05. And Boeing? Boeing already needed a life ring and it got tossed an anvil instead. Just a year ago, Boeing was at $440.62. It closed Wednesday at $104.45.
The industry now wants help from the government to stanch the red ink. Airlines For America has approached the administration with a $54 billion request: $29 billion in grants and $25 billion in unsecured loans. Of the grants, $25 billion would go to passenger carriers, $4 billion to cargo airlines.
There is precedence for this, of course. I’ll ignore the bank bailout of 2008 and focus on a more apt example: the auto industry rescue of 2008/2009. How could you forget the roasting the CEOs of the Big Three automakers got for flying to Washington in their corporate jets to ask the government for rescue money? (Ford’s Alan Mulally made the trip, but only to say, “Actually, we’re good. Don’t need the money.”)
At the time, the bailout package—which eventually totaled $81 billion in loans and stock buys—was widely decried as corporate welfare. But it was not that. It was genuine socialism because the government owned controlling shares in GM and Chrysler. Both companies had brought bankruptcy on themselves through sclerotic management that failed to rapidly transition to smaller and more fuel-efficient vehicles as fuel prices rose. GM and Chrysler had started the process, but Ford was ahead of them and had also negotiated its own credit line ahead of the crash. Ford wanted no government money, but access if it needed it. It didn’t.
As a condition of the bailout, the administration kicked out GM’s CEO, forced Chrysler to merge with Fiat to improve its short-term cash position and required both companies to accelerate development of fuel-efficient cars to be more competitive on the world market. The program ended in 2014, by which time it had cost taxpayers about $10 billion after the government-owned shares were sold off. You can decide for yourself whether that brief foray onto socialism was worth the investment. It did save the two companies and a quarter of a million jobs. I liked the results, but not the terms.
From some quarters, Airlines for America’s request will be seen as breathtaking hubris. I’m in that quarter myself. Bloomberg reports that over the past decade, the airlines have spent 96 percent of their free cash on stock buybacks. Some of that cash came from a corporate tax break. The average buyback budget for industry overall is about 50 percent. What do stock buybacks do? One thing they do is drive the stock price in favor of the “shareholder value” that propels contemporary American business. Buybacks soak up capital that would otherwise be used to develop new products and services, service debt, build cash reserves and, yes, pay employees. Perversely, some companies even borrow cheap money to buy their own stock. (Full disclosure: I have investments that may include airlines.)
And while we’re on the subject of cheap money, right now, it’s about as cheap as it can get. The Fed knocked the interest rate to zero and the discount rate is 0.25 percent. If I were king, I’d let the airlines exhaust the cash reserves they should have, seek commercial loans first, then maybe federal loan guarantees if they’re desperate. But grants? I’m not on board.
If an assistance package comes together, it should and probably will have some strings attached on employee and consumer protection.
“That includes requiring employers across aviation to maintain pay and benefits for every worker. No taxpayer money for CEO bonuses, stock buybacks or dividends. No breaking contracts through bankruptcy,” said Sara Nelson, president of the Association of Flight Attendants.
Just to throw in some sparks from my personal axe grinding, I’d insert this: You can charge whatever fares you want, but those change fees have to go. It wouldn’t be inappropriate to require the companies, at least for the period of the loans, to require a pandemic planning program with reserves. Sort of like the bank requiring insurance as a condition of your mortgage. And people who say this was unforeseen have a point, but also a narrow view. Serious pandemics are a realistic risk of having 8 billion people on our little blue orb. The dry run for COVID-19 was the SARS epidemic of 2002 and later the H1N1 outbreak of 2009/1010. We promptly forgot the lesson. Business planners who are surprised need to expand their reading list.
While I’m sympathetic to the view that, as a matter of principle, publicly owned businesses don’t deserve bailouts, the airlines are the core of an aviation economy that’s 5 percent of GDP at more than $1.6 trillion, according to the FAA. It employs about 11 million people. (That’s 2016 data.) GA, right down to your local FBO, is part of that economy.
It makes no sense to flush that down the drain just on principle because reconstituting it from the ashes of bankruptcy would just extend whatever recession is coming and bring on a liquidity crisis we now don’t have. So I’m holding my nose while the treasury writes the check.
Judging the Risk
As pilots, we all make risk decisions based on known data. That means checking the weather, doing the fuel calcs, weight and balance, performance and so forth. We’re comfortable with that. Trying to apply that methodology to the COVID-19 personal and collective risk falls apart because the data is so vague. Testing for the virus in the U.S. is still far behind albeit catching up, so that people who say the whole thing is overblown can be just as right as those who say the pandemic is out of control. But the math favors the latter.
So, let’s fall back on some theory. A supremely talented YouTuber named Grant Sanderson recently published this brilliant video about how an epidemic undergoes exponential growth, why it eventually abates and how to predict and know when that happens. These assessments are only as good as the data fed into them, so take that for what it’s worth. But it’s helpful to understand the potential and how individual and group actions can impact the arc of propagation. The curve is highly sensitive to individual factors driven by individual actions. The math is simple; you can do the calculations yourself. Then decide for yourself.
As we struggle through this most difficult of times, all of us have to make these risk decisions individually and collectively. I’ve got an airline trip coming up that’s certainly going to cancel and some local business travel that’s likely to go the same way. And please, please don’t do what a poster on my Facebook page did. He calculated his risk by dividing the number of U.S. deaths by the population and concluded his chance of dying was one in two million.
As I said in last week’s blog, the pandemic will get worse—for aviation and for everyone—before it gets better. But it will get better. Sanderson’s math shows how the curve peaks and then recedes. The math is inevitable.