Thursday, 9 Jul 2020

The Moral Debate Over a Government Bailout for the Airlines

A moral debate has erupted over the beleaguered domestic airlines as two sides ponder the fate of the industry.

On one side, proponents of a bailout – which include President Trump, apparently – believe that such a vital part of the economy and an entrenched part of our everyday lives needs to be saved following the devastating repercussions of the global pandemic of the coronavirus.

Trump said on Monday he is “100%” behind the industry.

“We’re going to back the airlines 100% − it’s not their fault,” he said, according to CNBC. “We’ll be backstopping the airlines and helping them very much.”

There were no specifics given by the administration but Airlines For America (A4A), the umbrella lobby group for the industry, is seeking $50 billion – $25 billion in grants and $25 billion in low- or zero-interest loans.

“The rapid spread of COVID-19, along with the government and business-imposed restrictions on air travel, are having an unprecedented and debilitating impact on U.S. airlines. Carriers have seen a dramatic decline in demand, which is getting worse by the day,” A4A President and CEO Nicholas E. Calio said in a statement, noting that flight cancelations are outpacing new bookings. “U.S. carriers are in need of immediate assistance as the current economic environment is simply not sustainable. This is compounded by the fact that the crisis does not appear to have an end in sight. In order to combat this unprecedented economic downfall, A4A is recommending the following combination of programs to provide immediate and medium to long-term assistance to the U.S. airline industry and protect their employees: 1) grants; 2) loans; and 3) tax relief.”

The industry provides 750,000 people directly employed by the airlines and another 10 million jobs supported by the industry, A4A said.

“This is a today problem, not a tomorrow problem. It requires urgent action,” Calio said.

Indeed, according to the aviation consultancy CAPA Centre for Aviation, virtually every global airline will be bankrupt by the end of May.

“Coordinated government and industry action is needed — now — if catastrophe is to be avoided,” the firm said in a report published Monday. “Cash reserves are running down quickly as fleets are grounded, and what flights there are operate much less than half full.”

A bailout is not unprecedented, of course. But the scale of the proposed bailout is.

In 2001, the government packaged a deal in the wake of the 9/11 attacks that included $5 billion in direct support and $10 billion in loan guarantees.

Less than a generation later the airlines are seeking more than three times that in what has turned out to be a moral test of wills.

On the other side of the argument is the opponents of a bailout – or, at least, if not outright opponents then certainly a group that believes any bailout should come with caveats for the airlines. That includes financial caveats and a fundamental change in business practices, like the reviled ancillary charges for such things as luggage and seat changes.

Airlines have had an amazing decade-long run financially, as noted by Slate, that has coincided with the 11 years of the bull market. For instance, Delta’s yearly profits for each of the past five years has never been less than $3.1 billion and have been as high as $4.8 billion. Due to mergers, four U.S. airlines (Delta, United, American, and Southwest) control almost 80 percent of the U.S. market. American Airlines CEO Doug Parker famously noted a few years ago, “I don’t think we’re ever going to lose money again.”

So why does the industry need a bailout?

Because the money’s gone.

Instead of bolstering its cash reserves, U.S. airlines used that 10-year run between 2000 and 2019 to buy back a cumulative 96 percent of its own stocks to enhance the pockets of its shareholders and its executives, many of whom have stock holdings as part of their contracts.

Any bailout should come with the proviso that airlines bankroll its profits, much as the automakers did after their own bailout from the 2008 mortgage-induced financial crisis. Ford Motor Co., for instance, has $37 billion in cash reserves according to Slate.

That’s one caveat of a potential government intervention.

Another is just the general structure by which airlines operate.

There’s no question the airline industry is part of the economic infrastructure for the U.S. It’s not just an entity that gets you from one place to another. The industry is basically irreplaceable.

But as Tim Wu pointed out, the airlines cannot use federal assistance, whether labeled a bailout or not, to weather the coronavirus crisis and then return to business as usual.

“Before providing any loan relief, tax breaks or cash transfers, we must demand that the airlines change how they treat their customers and employees and make basic changes in industry ownership structure,” said Wu, a Columbia University professor, in an op-ed piece for the New York Times entitled ‘Don’t Feel Sorry For The Airlines.’

Wu said change fees should be capped at $50 – they currently range from $200 to $750 – and baggage fees tied to some ratio of costs. The change fees don’t just irritate, he wrote, they are also a drag on the broader economy, making the transport system less flexible and discouraging what would otherwise be efficient changes to travel plans.

He also believes airlines should stop trying to shrink the size of seats in order to squish another two or three rows of seats on planes. Not only are smaller seats uncomfortable and even physically harmful, he wrote, but also foster in-flight rage and make the job of flight attendants unbearable.

“The airlines will argue that their ownership structure, cramped seats, high fees and other forms of customer suffering are necessary to keep prices lower. But after the last decade’s mergers, no one should take that argument seriously,” Wu said. “As any economist will tell you, in a market with reduced competition, and common ownership, there is limited pressure to reduce prices. Instead, as we’ve seen, the major airlines charge what they can get away with and spend the profit on stock buybacks and other self-serving enterprises.”

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