[jgacook]

What on earth incentivizes them to not repeat this pattern of behaviour if they can rely on a no-strings-attached cash infusion?

Middle class Americans are expected to have enough cash reserves to survive 2-3 months in case of an emergency. Why is this expectation not in effect for an airline that makes vastly more profit per capita than the average household?

Airlines spent well over 96% of their free cash flow on stock buybacks, enriching their boards of directors, executives, and shareholders. Do you think it's fair that they can make those decisions and still be entitled to favourable loan agreements when their mismanagement comes back to bite them?

Why do we not let the airlines have an asset selloff of their "super expensive machines" in an attempt to bridge the coronavirus gap before giving them public funding? Could they not declare bankruptcy and restructure themselves to survive until shelter in place is over and business returns to normal?

Why does the government bailout not have the cash infusions come in the form of an equity buyout, thus bringing actual consequences to the mismanaged airlines and bringing a more stable guarantee of investment return to the taxpayers who have funded this bailout? Shouldn't having access to socialized coffers come with the caveat that your company must become, in part, socialized?

The system only works if companies feel the pain of their mismanagement. Any whisper of bailing out the airlines without considering the above is disgusting and un-American. You don't get to privatize profits and socialize losses. History has shown that companies do not learn lessons unless they are allowed to fail.

[tathougies]

> The system only works if companies feel the pain of their mismanagement.

This is nuts. Not prepping for a pandemic that causes governments to eradicate your business model is not due to mismanagement.

[throwaway2048]

Bad situations happen, they have happened before, and they will happen again.

All bailing out companies does in the long run is ensure they run things as close to the line of collapse as possible, because if there is any disruption, the government will bail them out.

It creates titanic systematic risk, and greatly rewards poorly managed companies vs well managed companies.

Any company weathering this storm well might as well have never bothered saving money and making long term wise decisions that may have limited short term upside, when you get a guaranteed bailout when things start going south when you have made decisions that lead to having no reserve capital (see American Airlines 12 billion dollar stock buyback, the airline industry wants a 50 billion dollar bailout, having spent 45b on stock buybacks in the last years, why would they save money when the government will swoop in and pay)

Don't think the individuals running these companies don't see the pattern here.

Its akin to betting red on a roulette wheel every time, and getting more free money when it comes out black instead.

[tathougies]

No business should prepare for their business to become illegal. Air demand is down only partly due to consumer behavior. The majority of the demand is down due to government action. Your argument is like arguing alcohol producers should have prepared for Prohibition.

No the best recourse when your business becomes illegal is to grant a large dividend to shareholders before your creditors liquidate the company. Preparing for your business to become illegal is a waste of money

[triceratops]

> The majority of the demand is down due to government action.

If government action didn't kill demand, the ensuing death toll from letting the virus spread unchecked would eventually do it anyway.

"Travel is illegal" is only the proximate cause of the woes of the airline industry. The root cause is a lack of preparation.

[tathougies]

> If government action didn't kill demand, the ensuing death toll from letting the virus spread unchecked would eventually do it anyway.

2 million people dying in the United States isn't really that much. Given that COVID mostly affects people already more likely to die, the death toll had COVID gone unchecked would likely not be that much greater than the 2.8 million Americans that already die each year. Assuming a 30% overlap, we'd see deaths go from 2.8million to 4.2 million in one year, followed by herd immunity (according to the models). We'd then see subsequent years with a lower death rate (since there'd be fewer people with pre-existing conditions). It is unlikely that this would be as economically devastating as argued. It is incredibly unlikely it would have reduced air demand to the levels we're seeing now.

Air demand would still be around for flights to see family, etc. Most of it is gone due to government regulation. Necessary regulation for sure, but still regulation.

[matthewdgreen]

The Wimbledon organizers paid substantial premiums for pandemic insurance. They recently received a large payout.

[mrkstu]

In this environment, if all the affected business had done the same, the insurance companies would have all gone broke and we'd be at square one.

[coredog64]

> Why do we not let the airlines have an asset selloff of their "super expensive machines" in an attempt to bridge the coronavirus gap before giving them public funding?

Because airlines don’t typically own those airplanes, they lease them from finance companies like GE Capital. Anything they do own is likely to be at/near EoL and generally worth $0 in a market where nobody can make any use of it.

Unless you’re suggesting that the Fed just take ownership of the aircraft and print money to make lease payments to GE Capital. I’m sure the Democrats in the House will jump right on that.

[salawat]

>Do you think it's fair that they can make those decisions and still be entitled to favourable loan agreements when their mismanagement comes back to bite them?

Ex-shareholders technically. Remember, stock buybacks only generate value when you exit the stock. Technically, if you've been holding, you're up shit creek.

>Why do we not let the airlines have an asset selloff of their "super expensive machines" in an attempt to bridge the coronavirus gap before giving them public funding? Could they not declare bankruptcy and restructure themselves to survive until shelter in place is over and business returns to normal?

Who the hell would buy them at this point? Wealth is so consolidated right now it'd be right back in the hands of the same people who were incentivizing the behavior in the first place.

The rest of your post is 100% spot on though in my estimation though.

[kortilla]

> Why is this expectation not in effect for an airline that makes vastly more profit per capita than the average household?

Wtf does profit per capita than an average household even mean?

Also, profit is irrelevant if we’re talking about a super capital intensive business that can’t scale back its expenses when the revenue goes away (which is the case for all of these airlines leasing planes and paying employees).

[jacques_chester]

> Middle class Americans are expected to have enough cash reserves to survive 2-3 months in case of an emergency. Why is this expectation not in effect for an airline that makes vastly more profit per capita than the average household?

Individuals and households have tremendously higher risk variability than companies, because most of the time there are only one or two major sources of income. When one or two of those incomes are interrupted it blows a giant hole in household cashflow.

A large company, however, is not dependent on individual relationships with sources of income. Each customer is a source of income, there are potentially millions of them. Losing 1 or 10 or even a thousand customers doesn't blow a giant hole in cashflow. There are correlations in those flows, but it's never 1.0.

Until now.

But let's assume we go ahead with the idea that every major company should hold 3 months of cash. For starters, that's 3 months of at least revenues, which is going to be one and sometimes two orders of magnitude larger than profits. Assuming that your profit is something like 10%, you're now holding something close to three years of profit on-hand, earning approximately bugger-all. Your shareholders will lynch you.

But suppose they don't lynch you. Is that the best use for your cash? Is it the use that genuinely reduces your overall risks? Almost certainly not. You could use that cash to pay for more R&D, more equipment, more and better-paid staff, improvement programs, to buy promising technologies, invest in other companies, pay down loans on larger, more modern and more-efficient factories ... the list goes on and on. By choosing to hold that cash against a catastrophic event, you greatly increase the much more mundane, but still fatal to the company, risk that you will be out-engineered, out-manfuactured, out-marketed, out-sold by competitors.

But suppose that everyone does it anyway. Now another COVID-19 style risk hits everyone simultaneously. What happens? The first thing that happens is that spending on anything that's not immediate ceases. So the money that we held back and didn't spend on investing in the future becomes joined by cancellation of all similar spending out of the rest of our income. So no net gain there.

The rest of the money gets spent on keeping the lights on. If there's a crisis big enough to halt the economy for 3 months, then it's not really going to halt the crisis for 3 months. It will be much longer than that. So everyone decides to hoard their cash and begins cutting everything, everywhere they can, to stretch it out. So the cash doesn't get spent over 3 months, it gets spent over 12 months.

But suppose everyone decides to spend at the 3-month rate anyhow. What happens next is that everyone's bank is suddenly facing a massive simultaneous drawdown in capital. They will almost immediately exceed their capital limits and now, they have to suspend lending. A whole bunch of otherwise companies get killed by the loss of credit liquidity.

But suppose we didn't put all of it in cash-at-bank? Well, we're still boned. If everyone begins to sell their bonds, shares, gold coins and stamp collections at once, prices crater. 3 months of reserves is now worth 2 weeks on the open market.

You've probably guessed that the only way out of this is to pool risks. Normally insurers do this, but insurers know that they cannot withstand correlated risks like pandemics, so they simply don't insure them (with rare and very expensive exceptions).

What we're seeing now is that fiscal and monetary policy is being used as "insurer of last resort". It's never been done on this scale before. It might never again.

All of which is to say that there's a lot to criticise about modern finance and managerial economics, but the idea that it's identical to household finances is very misleading.

[jkhdigital]

Everything you've said is spot on, especially the last sentence--there is a lot to criticize.

The issue here is not really about the actual economic impact of the virus. No amount of money printing or loan issuance can recover the real economic output that has been lost. There is real destruction of capital and wealth because humans and their toys require continuous consumption to maintain homeostasis but production has fallen off a cliff.

What makes everything so insanely complicated is that the real economy is intimately tied up in a financial economy that compounds the distress. Missing debt payments has massive repercussions for both individuals and companies which can far exceed the value of the missed payment. We have built a legal and financial framework around our economy (under the banner of "risk management") that binds us to mutual destruction when things go badly. This is why the popping of the mortgage bubble in 2008 nearly annihilated the global banking system rather than just bankrupting a bunch of risky mortgage underwriters and maybe taking down a bank or two.

Our solution appears to be just making sure no one misses a payment by handing out cash like Santa Claus on a bender. I guess it does the job, but the level of moral hazard this invites is troubling (to put it lightly).

[DarmokJalad1701]

> For starters, that's 3 months of at least revenues

Why would they need to hold 3 months of revenue? Why not 3 months of operating expenses and suspend capex?

> more R&D, more equipment, more and better-paid staff, improvement programs, to buy promising technologies, invest in other companies, pay down loans on larger, more modern and more-efficient factories ... the list goes on and on

Does that list include stock buybacks?

[jacques_chester]

> Does that list include stock buybacks?

The omission is deliberate.

When money is being returned to shareholders I greatly prefer dividends. It puts pressure on management to manage for sustainable long-term cashflow and removes the temptation to pump up the stock for a quick personal profit. Unfortunately the tax treatment in the US is very unfavourable. By contrast, Australia gives franking credits for dividends and more companies there pay shareholders with dividends instead.

[djannzjkzxn]

It depends on the prospects of the company and how good investment opportunity are. For a company in a fast-growing market it’s probably better to invest and expand the empire. For a more mature company it’s probably better to return the cash to shareholders so they can invest somewhere else.

[A4ET8a8uTh0]

You forgot to mention that households do not have the same level of representation as various industries or even individual companies.