[dougweltman]

1) Where will the money come from to buy the aircraft? Are you saying this with any sense of how long it will take to start a new airline like AA or Delta or whatever? Agency costs under a liquidation are absolutely massive.

2) Nobody is suggesting that protecting shareholders be a policy consideration, and that was true in '08 as well when the banks effectively went bankrupt (well, 90% of the way at least). The shareholders got wiped out when banks had to hand over 90% of their shares to the government in return for equity. When before you might have owned 10%, you then own 1%. That's the point of being a shareholder: you're last in line and take on that risk.

3. Instead, the concern is over the broader economic disruption of airlines suddenly no longer operating when other businesses rely on travellers: hotels, restaurants, stores, etc.

4. I get your point that it might be better to wipe the slate clean: iirc, some airlines are running software that's 40+ years old. Under normal circumstances, if that's a real problem, those airlines will have a disadvantage against newcomers, of which there are many. The difference here is when these businesses are failing not to an operational shortcoming, but something much larger.

You're talking about Chapter 11 liquidation as if it's nothing. There are massive agency costs there and assets stop operating until they can be sold. Chapter 9 is less disruptive (owners get wiped out, creditors own the business and the business finds new creditors to put in some money), and if there's a risk of wide-scale economic disruption, better still is something a little short of Ch. 9: a "bailout" where the government basically wipes out most of the equity and can put in some capital in return.

[roenxi]

(1) Hold an auction. If the only person who turns up is a homeless bum with a dollar then the aircraft now costs a dollar and we have a homeless industrialist on our hands.

Ditto (4) for the software; it doesn't get deleted because the ownership changes.

(2) A sibling comment to yours suggested exactly that. We aren't protecting the business (nobody wants to fly at the moment, that is why they are about to go broke). So we can't be protecting consumers; the capital itself can't catch COVID-19 so isn't under much threat so logically a bailout is either protecting shareholders or workers.

And my position, radical as the free marketer that I am, is we should protect the workers during the process, but sack the shareholders and provide crisis support to the vulnerable insofar as they used to be shareholders.

(3) Yeah; but bailing out the airlines doesn't actually help that when you inspect it. Nobody is using the airlines; they need to be mothballed ASAP and maintained on a skeleton crew for 6 months.

A bailout of the airlines under these conditions isn't the worst idea; the bank bailouts in '08 were substantially worse because they went to the people who caused the crisis. But it is much more dangerous than it seems making decisions in a crisis, from outside the company, saying 'it can't possibly be their fault; lets give hem a boost!'. The view from the outside might be misleading and we might be rewarding reckless behavior. We have this company concept precisely because it contains the damage to a sacrificial legal entity that we can kill off.

[dougweltman]

On 2 & 4, we seem to disagree on the central claim that new airlines can be spun up quickly in time for their liquidation not to jeopardize the travel sector in the future once this outbreak abates.

This requires two conditions, neither of which hold: a) properly functioning capital markets to launch these assets and build the operations around them (not the case -- asset prices are falling across the board and there's tons of forced selling), and b) the ability to spin up an airline quickly from a cold start.

And if we apply the thinking you've offered around (1), it might be just a tad more to the public benefit to have the government step in and buy on the cheap a majority of the business (massively diluting existing shareholders), keep the engine warm, and not have to deal with a cold start in 6, 9, 12 months. Then, just as with the banks, they'll unload the stock as the price recovers and the crisis has passed. Those gains go straight back to the treasury, as they did following the recaps in 2010.

What would less reckless behavior look like? How much money should the airlines hold on their balance sheets in order to cover catastrophic losses due to a pandemic (derided as "hoarding money" in some circles). Many businesses are a few bad weeks away from bankruptcy, and the airline industry, while indispensable, is famously brutal.