U.S. airlines have spent almost 100% of their free cash flow buying back shares over the last decade, but now they could be in need of a government bailout. It’s no secret that the coronavirus pandemic may be one of the worst crises to impact the travel industry. However, airlines could be sitting on a lot more cash to deal with the crisis if they hadn’t been focused on juicing their stock prices for the last 10 years.
Airlines spent 96% of free cash flow on repurchases
Bloomberg reports that the largest airlines in the U.S. spent 96% of their free cash flow between 2010 and 2019 on share repurchases. American Airlines spent the most. The airline spent so much of its free cash flow on buybacks that it was negative cumulative free cash flow over the decade. American bought back over $12.5 billion worth of its shares.
United Airlines spent 80% of its free cash flow on share repurchases. For comparison, all of the companies in the S&P 500 Index cumulatively spent about half of their free cash flow on share buybacks over the last decade.
Delta, United, Southwest and American collectively spent approximately $39 billion repurchasing shares just in the last five years alone, according to CNBC, which cited data from S&P Dow Jones Indices. Boeing is also seeking a government bailout, and it spent over $35 billion on share repurchases over the last five years. It should also be noted that Boeing many safety issues which lead to at least two crashes and 346 lives lost. According to Bloomberg, Boeing outsourced key software development to $9 an hour IT workers in India.
Airlines calling for bailouts
After spending all that cash on buybacks, U.S. airlines are now seeking over $50 billion in government bailouts as most planes have been grounded due to the coronavirus pandemic. According to CNBC, $25 billion of the requested $50 billion in aid is a request for direct grants. That's five times what airlines received after the 9/11 attacks in 2001.
According to CNN, less than a week ago, executives from the industry told investors at a conference that they weren't expecting to receive government help. However, since they made that statement, President Trump has closed U.S. borders from most of Europe, the U.K. and Ireland. Domestic air travel has also declined sharply.
Congress has begin discussing a third emergency funding bill for the coronavirus pandemic. That bill is expected to include some form of assistance for airlines, although it's unclear if a full bailout will be part of it. Labor unions say airlines shouldn't get a blank check and that the bailout should come with strings attached like continuing to pay and provide benefits for all workers. Taxpayer money shouldn't be used to provide bonuses for CEOs or conduct additional share repurchases. Contracts shouldn't be allowed to be broken through bankruptcy either, Association of Flight Attendants President Sara Nelson told CNBC.
Global airline industry teetering on the edge of bankruptcy
Sydney-based CAPA Centre for Aviation warned on Monday that most of the world's airlines will be bankrupt by the end of May without government bailouts. The consultancy said airlines have been quickly depleting their cash reserves because many have grounded their planes. The planes that are flying are over half empty, it added.
The three largest airline alliances in the world, Star Alliance, SkyTeam and oneworld, are urging governments to "evaluate all possible means" to support the industry, according to CNN. More than 58 of the top carriers are represented by one of these three alliances.
Most of the largest airlines in the world have announced significant cutbacks to service and are idling hundreds of planes. Some employees are being asked to voluntarily take unpaid leave, and senior executives are taking pay cuts.
According to CNN, American Airlines cut back its international capacity by 75% between March 16 and May 6. United slashed its capacity in half for April and May, and Delta cut its capacity back by 40% for the coming months.