Is an aerospace industry bailout the most critical need right now?
We love to hate business jargon, words like “synergy” and phrases like “circle back,” but a new bit of lingo has entered the vernacular recently: “a highly dynamic situation.” It’s being used by CEOs and government leaders as a civilized stand-in for “shit is moving FAST!” When things are moving so quickly, it’s easy to misjudge, to misunderstand, and in turn, to make a bad move. The phrase “life comes at you fast” on the internet is used largely to describe the folly of a past position or belief that has quickly changed or been proven incorrect:
So when life is literally coming at you fast, or developing dynamically as hell, should you cut a really big check? That’s the question that the U.S. Government is asking themselves right now. The reported details of a supposed government bailout are changing by the hour, but the airlines are hoping to be a major beneficiary. And folks are pointing out that this is not a great idea.
Most of the ire has fallen on the stock repurchases, or buybacks, that airlines engaged in over the past decade. (Stock repurchase programs allow a company to use their free cash flow to buy back shares of their own stock, and they were hella trendy in the 2010s. Here’s a great explainer.) Over the past five years, the top six airlines in the U.S. spent a combined $41 billion on share repurchases. Now that group of companies is asking for close to $60 billion in government assistance. Man, emergency funds ain’t what they used to be.
To be fair, the market really doesn’t like when companies stockpile cash, so it’s understandable why these firms employed their cash in a way that was viewed as beneficial to shareholders. It’s also important to point out that Delta, American, and Southwest have profit sharing plans in place, although Delta’s is the best of the bunch. These are clearly profitable businesses, despite the current evaporation of demand, and it’s likely they’ll return to profitability once that demand returns. Furthermore, the wider economy is not reliant on airlines in the way it relied on financial institutions in 2008. These guys aren’t Too Big To Fail.
The doomsday headline is that the airlines will be bankrupt by May*, but many of them have already gone through bankruptcy and emerged stronger: United Airlines (chapter 11 filed December 9, 2002; exited February 2, 2006,) Delta Airlines (chapter 11 filed September 14, 2005; exited April 30, 2007,) and American Airlines (chapter 11 filed November 29, 2011; exited December 8, 2013.) If anything, the sector has shown that Chapter 11 remains an effective tool for companies that need to restructure their debt while maintaining operations. Is this really an industry that needs to be bailed out? (Have we really veered this far off course from the basic principles of the free market?!)
And don’t forget about that highly dynamic situation. Hospital systems are now clamoring for a federal bailout, and with the U.S. fighting a pandemic, that industry probably takes priority over the airlines and the cruise ships and the hotels. The big flashing exception to this is, begrudgingly, Boeing, which tacked itself onto the airline bailout (“let’s call it the aerospace bailout, guys”) like a sleezebag at a bad party. But as a critical defense supplier of the U.S. government, they demonstrate a stronger case for help than the airlines. (Read more about Boeing’s woes in the Ticker section, below.) Regardless of what happens, those in positions of power need to be mindful not only of optics and public opinions, but of what could come next. In a situation like this one, their next move could be the most important one they make.
*European headline, but sentiment is universal.
Heard on the Street
The UK had to shift its coronavirus strategy earlier this week upon realizing that some shaky math and a bad understanding of “herd immunity” had led them to embrace a plan that would “likely result in hundreds of thousands of deaths.”
Target was caught flat footed when customers asked why the chain had N95 masks for sale rather than donating them to under-supplied hospitals.
GM, Ford, and Fiat Chrysler announced plans to shut down their North American factories this week, but might reopen to help build ventilators.
Grocery stores are facing unprecedented demand, but supply chains are keeping shelves stocked.
XPO Logistics scraps its plan to sell its business units amidst the current pandemic.
Was Disney’s hasty succession announcement made because Bob Iger saw a coronavirus downturn coming?
$BA - Boeing Co.
Things keep going from bad to worse for Boeing. Never mind that the coronavirus is ravaging its hometown of Seattle, or that its own employees are among the affected. That’s terrible enough. Last week, the company raised eyebrows when it drew down a $13.8B loan it had only just secured a month ago. Its airline customers have idled their fleets, delaying order deliveries — and revenue recognition — indefinitely. Now it’s mounting its case for a government bailout.
Boeing execs eyeing the Department of Treasury
This is a tough move, even in the best of circumstances: asking for taxpayer money invites tons of public criticism. And that’s when you aren’t already responsible for the deaths of 346 airline passengers.
But add to the mix a dash of board infighting, and even Boeing’s bailout request is starting to look like a blunder. Board member Nikki Haley, former UN Ambassador and South Carolina Governor, resigned Friday in protest against the decision to ask for taxpayer funds to tide the company over:
“As we encounter the Covid-19 crisis, Boeing, along with many other companies, face another major set of challenges. I want to be part of helping the company as it pushes through it. However, the board and executive team are going in a direction I cannot support.
"While I know cash is tight, that is equally true for numerous other industries and for millions of small businesses. I cannot support a move to lean on the federal government for a stimulus or bailout that prioritizes our company over others and relies on taxpayers to guarantee our financial position. I have long held strong convictions that this is not the role of government.”
— Nikki Haley’s Letter of Resignation
Boeing continues to fails at the critical task of inspiring even an ounce of confidence in their board, management, or strategy.
Earworm
When it comes to podcasts, we’re partial to deeply researched, tightly reported episodes that leave you feeling smarter after a half hour or less. In that vein, high praise goes to the “Spectacular Failures” podcast and its energetic and engaging host, Lauren Ober. Its ten episodes highlight everything from quality control nightmares to insane corporate governance structures, and how these seemingly small mistakes led to colossal failures. The show takes a hard look at what led these companies to the woodchipper without sounding like a techbro glorifying failure.
She Said It Best
“It’s perfectly possible to be smarter than everyone else and still be polite and even deferential — women have been doing it for centuries.
— from Jennifer Wright’s “Get Well Soon: History’s Worst Plagues and the Heroes Who Fought Them,” a book that we cannot recommend enough in these days of global pandemic and social distancing. Its focus is how societies responded to plagues and pandemics of the past, offering a dozen tiny silver linings for this current moment. Plus, its a highly enjoyable read.
That’s it for this week. Keep calm. Carry on. This too, shall pass.