False arguments and bailouts .. all over again.

It’s 2008 all over again. 

The Trump administration is going to announce massive bailouts to large enterprises that are ‘hurting’. They claim these companies were not at fault as they were hit by the Covid crisis. Prime examples are airlines, who went from record revenues and profits to near 0 revenues immediately due to the virus.

This argument seems logical, at first.

However, what they fail to take into account is the bad financial practices at the airlines all this while. Businesses are supposed to manage risk and plan for rainy days. 

Some may argue that this was completely unexpected. 


No, it wasn’t. 


Anyone with any knowledge of global risks would list a pandemic as a virtual certainty and near the top of global risks. Why did airlines not take this risk into account? After all, they are the original global business and literally connect the world. They would be expected to be the most impacted by a global event more than anyone. 

There are all types of insurance available out there for all kinds of unexpected events. Why were there no provisions?  

Even if we discount the massive and immediate impact of the pandemic as unexpected, it’s not like the airlines had their houses in order to begin with, or were prepared to deal with even a garden variety crisis. 

None of the airlines have more than 1 month of operating income in their reserves. Ordinary people are told to keep a minimum of 6 months of expenses in reserve as common sense. Yet, these companies, with highly compensated leadership couldn't follow basic advice? They do run one of the most cash-intensive and low margin businesses anywhere. Who should be more conservative with cash reserves than airlines?

It’s not like they didn’t have money. In the last decade, American Airlines combined spent a whopping $45B buying back shares. That constitutes an eye-watering 96% of their free cash flow from this period. 

96% of all free cash flow generated. 

More was spent paying dividends to keep the share prices propped up. If this isn’t deliberate financial mismanagement to keep executive compensation inflated, what is?

Apple has $120B in cash. They have a much less cash-intensive business and their margins are infinitely better. They don’t need this much cash but they’ve been prudent. Today, with all global stores closed and manufacturing facilities shuttered, Apple doesn’t need a bailout. Should they be punished for good business practices? 

Should we incentivize business leaders to learn the lesson that bad financial management is good business practice and good for executive compensation? After all, the government will eventually bail you out. 

We’ve been here before with the banks. 

The airlines have massive debt which they’ve not bothered to pay down. United has $20B in debt that’s been growing and yet, they were buying back shares.

This is pure greed and gaming of the system. Nothing else. 

Why manage a business properly when you can make a pleading case and show the threat of massive layoffs to force the government to bail you out? 

This is capitalism. There should be rewards for sound business practices and penalties for poor ones. 

Finally, regarding those layoffs. The demand for aviation will not go away. 

These badly run companies will cease to exist and other, better run companies will replace them. 

Those companies will need people. It’s a normal business cycle. For the time between the layoffs and the new hiring, we have a safety net. Strengthen it by all means. But stop selling these false stories of innocent companies caught in an unexpected, uncontrollable events.