By Scott Hamilton
March 18, 2020, © Leeham News: The Federal government is preparing a bailout, said to be more than $1 trillion, to pump into the US economy.
Airlines want $50bn. Boeing wants $60bn for the aerospace industry. It’s unclear how much is for Boeing and how much is for industry.
Opposition for the airlines and Boeing was quick to emerge. The objection: how much each spent in recent years on shareholder buybacks.
The bailout package goes across the US economy and includes direct cash grants to individuals. In keeping with LNA’s business, I focus in the column only on aviation.
In principle, I don’t have an issue with the theory of the Boeing request. The threat to Boeing from what’s happening to the airlines is real. We’ve written several stories about this in the last 10 days. What’s a threat to Boeing is a threat to suppliers across the country and a threat to the economy.
I certainly get the objections based on billions of dollars spent on stock buybacks and dividends paid to shareholders. I’m not a big fan of overdoing either. I believe investing in the company and its employees should get its fair share. I don’t believe it has. People can go back and point to this and complain, but you can’t un-ring that bell. That was then and this is now.
What I do object to in the here and now is Boeing borrowing billions of dollars and using proceeds to pay dividends in the name of shareholder value. I object to CEO David Calhoun taking a salary in the crisis that was Boeing’s own making (the MAX).
I tweeted this week:
This is unconscionable that Boeing seeks a government bailout while shareholders get dividends and CEO keeps salary. Workers will lose jobs, pay, but God forbid the shareholders lose dividends or Calhoun sacrifices.
Executives make millions. These can all afford to cut salaries they will be asking rank and file, middle management to sacrifice while seeking taxpayer largess.
So it’s my view that any government assistance should be conditioned on Calhoun zeroing out his salary. Other top execs with multi-million dollar paychecks should see dramatic reductions. And the Board of Directors, who get paid about $345,000/yr (if I remember this number right) in compensation zero out as well. Half the Board (including Calhoun) was there at the creation of the MAX. Most of the rest approved policies that contributed to the MAX crisis, especially with respect to shareholder value. None of these should continue to be rewarded at taxpayer expense.
The same principle applies to bailing out airlines. LNA analyzed the cash/days left position of the US carriers publishing financials. As I noted above, people can go back and point to shareholder buybacks and complain, but you can’t un-ring that bell. That was then and this is now.
Those who object to bailing out Boeing (and the aerospace industry) or the airlines take an incredibly myopic position. The hundreds of thousands of jobs at risk of doing nothing is catastrophic. For every direct job at Boeing, there are three or four indirect jobs in Washington State alone that are at risk.
Airlines for America reports that there are 750,000 employed by US airlines, including cargo carriers, across the globe. A4A claims there are 10 million US jobs supported by the airline industry. A4A details how here.
Airlines here and across the globe either suspended service entirely or dramatically reduced it. Over last weekend, word leaked out the Administration was considering grounding US airlines. There was no information about the duration, but hints of 2-4 weeks leaked out.
So far, this hasn’t happened. But word is that the idea is not off the table.
I was around in 2001 when the 9/11 terror attacks happened. The Federal government ordered every flight grounded even as the attacks unfolded. The air transportation system remained ground for two or three more days.
Passenger demand thereafter was depressed for the next two years.
Today’s events surpass 9/11 in scope and impact. This argues for support for Boeing, the aerospace industry and the airlines.
The government provided direct financial aid to the airlines after 9/11. The Air Transportation Stabilization Board (ATSB) was created to disperse or guarantee up to $10bn. This is described here.
In the end, the ATSB only dispersed $2bn. It effectively chose airlines to survive and airlines that weren’t worthy of survival. There were a lot more airlines then than there are now. Industry consolidation means fewer choices.
Terms and conditions of the ATSB included but were not limited to the government getting stock or warrants. This should be a part of any package today. Interest was charged on loans.
Any dividends that might be paid should go to the government (taxpayers), not the common shareholders, until the tax dollars are repaid.
Forget the rich compensation packages Boards award executives until the companies recover. The CEOs of Alaska, Delta and United airlines already zeroed out their salaries. (David Calhoun, take note.) The CEO of Southwest took a 10% pay cut. Other executives earning more than $1m and receiving millions in stock grants certainly can afford a pay cut.
Board compensation should be trimmed to zero.
Protections for employees should be included.
Coronavirus is a crisis of unprecedented proportions. Millions of jobs and entire industries are at stake. Did I mention that people can go back and point to shareholder buybacks and complain, but you can’t un-ring that bell? That was then and this is now.