By Chris Lang
At the end of March 2020, Donald Trump signed the US government’s US$2.2 trillion bailout into law, after it was unanimously passed in the Senate. Otherwise known as the Coronavirus Aid, Relief and Economy Security Act (“CARES Act”) the bailout includes generous grants and loans to the aviation industry.
The Washington Post reports that the bailout “includes $25 billion in grants for the passenger airlines; $25 billion in loans for passenger airlines; $17 billion for companies deemed critical to national security”.
The US$17 billion for national security companies, “was written largely to benefit the aerospace manufacturer Boeing” the Post adds.
In mid-March 2020, US president Donald Trump announced that, “We’re going to back the airlines 100%”.
The bailout is pretty much exactly what the aviation trade and lobbying organisation Airlines for America asked for.
The bailout includes some money for individuals, but it’s basically a massive corporate slush fund. The money paid to individuals is paid as a cheque. The banks can then siphon off as much of the money as they want, to pay off individuals’ outstanding debts.
Stock buybacks: Cash stripped out of the economy
Journalist Matt Taibbi points out that,
When Covid-19 hit, corporate America could with sincerity claim it needed immediate aid to keep doors open and financial markets afloat.
But the scope of the rescue is as massive as it is in significant part because private-sector cash that might otherwise have buffered the damage had already been stripped out of the economy.
The airline corporations provide one of the best examples of how to strip cash out of the economy. Over the past decade, the biggest US airlines spent 96% of their free cash flow on stock buybacks.
What are stock buybacks? Here’s Taibbi again, to explain:
Basically the company takes some of its available capital and some of its resources typically it’s the board will vote, let’s do some stock buybacks, let’s spend $10, $20 million and go out into the market, we’ll buy up a bunch of our stock. And then typically what they do, essentially it gets liquidated or they convert them into treasury shares, or something like that, which essentially takes those shares out of circulation which increases the valuation of the existing stock.
So, why does that matter? If you have executives who are paid in stock as part of their compensation package, the value of their shares goes up as you pull shares out of circulation.
So it’s just a way of looting your own company. The airlines spent a fortune doing this, for instance.
While executives and shareholders profit for stock buybacks, money is taken away from research and development, or increasing salaries for workers.
Before legal changes in 1982, under President Ronald Reagan, buybacks were illegal, as a form of stock manipulation. “If you know you’re going to do this,” Matt Taibbi says, “you know you’re raising the value of the stock.”
Over on Naked Capitalism, Yves Smith writes that,
It’s bad enough that airlines went whole hog into propping up stock prices so as to goose executive pay. It’s even worse because airlines are a high fixed cost, cyclical business. They more than just about any business ought to keep cash around for a rainy day and they didn’t.
Bailout conditions on airlines are “pathetic”
The conditions imposed on the airlines are “pathetic”, as Smith notes. There are no conditions relating to greenhouse gas emissions from the aviation sector. Here’s how the Financial Times reports the conditions:
The aid packages prevent airlines from furloughing staff or cutting employee pay until September 30, ban share repurchases and dividends until September 2021, and limit executive compensation until March 2022.
The airline companies also get a tax break, which even applies to private jets.
Economist Mark Blyth explains what’s wrong with bailing out the airline industry:
Part of the problem here is what capitalism is meant to be. We have a bankruptcy code for a reason. So let’s think about airlines. Let’s say United Airlines’ stock or American Airlines’ stock goes down to zero. At that point in time, if and when things go back to normal, there will be planes, there will be pilots, there will be staff, there will be hubs, there will be airports. Those are expensive and valuable assets and people will want to travel again.
So someone else can come along and pick these things up and get it going. If you were doing wage guarantees fully you could effectively let those assets go to zero and pick it up afterwards, let the shareholders be the ones that bear the cost. After all that’s why they get the upside on the equity.
That’s a hard argument to make when the people who control those assets are some of the most powerful people in your society. And that’s where the political economy of this comes in.
In a slightly livelier interview with Jimmy Dore, Blyth says,
The whole point of capitalism and equity markets is that when bad things happen, you either have savings, or the equity holder gets hit. They get wiped out and then when the crisis is over, people with cash on the sidelines come in and go “Hey, do you want to buy an airline?” That’s how this happens.
But no, we’ve decided to circumvent that. We’ve guaranteed equity prices. This is insane. Right? What you are basically doing when you fund these companies is guaranteeing the floor for their equity. You’re stopping bankruptcy, so you have capitalism without bankruptcy and you have socialism for the rich, and capitalism for the poor because you’re on your own and you’re lucky if you can get unemployment.
Aviation and climate change
Given the airlines’ contribution to climate change, it would be nice (but completely delusional) to think that the the rich executives sitting at the top of these companies would invest as much as they possibly could into finding ways of reducing emissions from flying. Electric planes, for example.
Meanwhile, International Civilian Aviation Organisation, the UN body responsible for addressing the aviation sector’s contribution to the climate crisis, has managed to dream up a way of allowing an unlimited increase in emissions from aviation: the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Yet again, carbon offsets come to the rescue of a polluting industry wanting to continue business as usual.