Packaged bankruptcy: Airlines Edition
Why stop at Chapter 11? Read all of them to be the true erudite
2-min read
Mindless Twitter Rantings
Recently, I got into a bit of a tiff with one of my favorite authors and essayists, none other than Taleb.
Explain to me why we should spent taxpayer money to bailout companies (airlines) who spent their cash buying their own stock so the CEO gets optionality, instead of having a crisis buffer.
We should bail out individuals based on needs, not corporations.
#Moralhazard
By tiff, I mean I disagreed with a certain statement he made and retweet quoted him:
I initially sided with you, but *more* research shifted my opinion:
1) buybacks also benefit the numerous PPFs that hold it, not just c-level
2) management compensation is based off stock performance metrics; they're paid in stock; they will 'look out' for the shareholder *
1/n
Nassim Nicholas Taleb @nntaleb
Armed with my tech-trash persona of being ‘fiscally conservative but socially liberal’, I went on a 12-tweet rant to demystify the consequences of a bankruptcy for the airline industry and why I thought it was in everyone’s benefit to rescue them:
* As long as shareholder’s desired investing time horizons align with the manager’s career timeline horizon..
You might act like they're gaming it for only themselves but they're gaming it for EVERYONE involved. Socialism at its finest. Maybe not so much employees and ESOPs
2/n
3) Not ready for Chapter 11s in this industry, too big to fail et all
"Since 2000, 51 U.S. passenger and cargo airlines have filed for bankruptcy -- of which 13 were in 2008 alone." - Office of Inspector General on Aviation Industry Performance 2008-2011
3/n
4) M&A (well mostly only mergers) assisted in assuaging "previously competing flights" and reducing "redundant hub operations as well as consolidating operations."
optimization and a massive overhaul is required, and this is where the government can step in
5) socio-economic, political landscape won't allow indictments and punishment for mismanagement/ gross disregard by upper levels, there is too much at stake. Thousands of defense contracts could potentially be null and void.. also who else is there to fill the space
6) airlines are a utility, not a service, and without domestic air travel:
a) employment rate drops. ATC jobs take a min 3 yrs to fill -
See PATCO v. Raegan: FAA initially claimed staffing levels would be restored in 2 years, took closer to 10 before returning to 'normal'
5/n
Some figures from ICAO..
b) North America accounted for 37% of global employment in the aviation industry in 2004
c) Aviation boasts high occupancy rates of 65-70% – which is more than double those of road and rail transportation. See CASM/ RASM figures and compare
6/n
d) Solely from Houston Airport System, US$ 24.2B economic impact in terms of sales, supporting 151,000 jobs in the local economy.
Key benefit being it operates as a network, pinning my argument of optimization and overhaul, not complete shutdown
7/n
g) economic stimulus is affected and transport + logistic industry falls flat, domino effect
h) all benefits of air travel - time, convenience, cost - are wiped out while also causing undue stress on the National Highway System in US.
8/n
You can ignore everything up to this point --
i) Fundamental pillar of our global society - Air transport is a SIGNIFICANT tax payer
"In the United States, taxes levied on aviation exceeded US$14B in 2004, corresponding to 25% of airfares."
9/n
"In Europe, for example, governmental aid to the rail sector
represents close to US$ 50 billion per year."
Hm.
6) Worst-case scenario ATSB was created for a reason- they're authorized to give a loan, not just 'taxpayer' bailouts. The $ will most likely come back...
10/n
There is absolutely nothing wrong with financialization and self-rewarding yourself, I do that every single day
Fuel hedging messed them up anyway. 2020 is rough
It has been a long year with events completely out of their control - the very definition of black swan
11/n
All I'm saying is $UAL, $AAC, $DAL, and $BA are severely discounted and over the next few months it would be a good idea to benefit from the fire sale.
cc @EpsilonTheory
12/end
Prof. Taleb went on to add more tweets to his original idea:
3) Airlines/Boeing are lobbying for bailouts, which they will get.
How about the small corner restaurant? The independent tour guide? The personal trainer? The prostitute? The barber? The hotdog vendor living from tourists near the Met Museum?
Last time (2008) they were ignored.
@nntaleb Economic impact from the prostitution doesn’t compare to the aviation industry but I guess I’ll lobby for intimacy.
— and he ended up retweeting the person who replied to me:
4) The shareholder should not never end up being rewarded for lack of hedging/insurance. He/she should go first.
nikola @nikola_sock
I ended up self-isolating after this debacle. He continues with his socialistic tendencies below:
5) CEOs of bailed out companies must disburse PAST bonuses.
Facing the GBRT (Generalized Bob Rubin Trade) where someone has a free option.
6) Saying "it is nobody's fault" hence let's help corps is vicious: risk management=cash to face eventualities WITHOUT knowing what they WILL BE: we have 2 kidneys SO we don't have to predict how they one will be harmed.
Except that a pandemic is NOT a Black Swan.
(INCERTO)
Addendum
My extended conversation with @nikola:
3) Airlines/Boeing are lobbying for bailouts, which they will get.
How about the small corner restaurant? The independent tour guide? The personal trainer? The prostitute? The barber? The hotdog vendor living from tourists near the Met Museum?
Last time (2008) they were ignored.
@nntaleb Economic impact from the prostitution doesn’t compare to the aviation industry but I guess I’ll lobby for intimacy.
@VirenMohindra @nntaleb I don't think that prof Taleb is against helping Boeing or airlines, but least they could do is wipe out common share. Next time, shareholders will ask for more accountability from management.
@nikola_sock @nntaleb No issue asking for more accountability - very foundation of of a democracy. But you can’t have your cake and eat it too. Shareholders have benefited from the spike in stock prices from buybacks also.
@VirenMohindra @nntaleb Sure. But, i don't see what is the problem with wiping common share now. These companies are example of badly run business.