In March, the coronavirus—the name used at the time—wreaked financial havoc on the airline industry. Health experts and government officials strongly advised people to avoid nonessential travel due to the risks of catching or spreading the disease. Fear over the fast-moving virus among passengers on cruise ships terrified potential air travelers. Cognizant of the dangers associated with being confined in tight quarters with people who may have the virus (plus a required quarantine period), air travel came to a halt. It was the worst economic conditions for the airline sector since Sept. 11.
Gary Kelly, the CEO of Southwest Airlines, announced at that time that he would voluntarily take a 10% pay cut, in response to the dramatic drop in air travel. “The velocity and the severity of the decline is breathtaking,” Kelly said. He somberly added, “There is no question this is a severe recession for our industry and for us, and it’s a financial crisis.”
Seven months later, the airlines are still reeling. Last Tuesday, stocks sold off sharply when President Donald Trump told Speaker of the House Nancy Pelosi that he’s walking away from her trillion-dollar stimulus package proposal. Trump said, “Nancy Pelosi is asking for $2.4 trillion dollars to bailout,” and responded that he vehemently disagreed with some of the recipients of the funds. He continued, “I am rejecting their request, and looking to the future of our country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win.”
By now, everyone should be aware of Trump’s theatrical negotiating tactics. The pretend walk away was reversed with a counteroffer. Trump tweeted that he has money in reserves to make a one-time $1,200 payment to Americans and he’d also bailout the airlines.
Trump said, “Congress should quickly extend $25 billion in new payroll assistance to U.S. passenger airlines furloughing thousands of workers as air travel remains down sharply amid the coronavirus pandemic.” It’s been reported that over 35,000 airline workers would lose their jobs in October if aid is not extended.
The backstory is that the airlines have collectively already received roughly $25 billion from the federal government’s stimulus initiative—the Payroll Protection Plan. There was a stipulation along with the funds—airlines had to retain employees up until the end of September. Starting Oct. 1, they could commence massive layoffs, predicted in the range of 30,000 to 40,000 workers. The airlines have asked for another round of $25 billion dollars to keep their companies solvent and save jobs.
Southwest’s chief executive has taken a different approach—compared to the other major airlines—by not laying off workers. In the spirit of retaining employees, he asked the airline’s unions to accept salary cuts and concessions to avoid layoffs—if a government rescue is not on the horizon. Kelly said, “It pains me that through no fault of any of you, we have to take these next steps,” and promised that he’d forsake his base salary through 2021. He also said, “Managers and the board of directors will also take pay cuts.”
The Wall Street Journal reported that Southwest’s pilot union “agreed to hold discussions with the company,” but also “criticized the company’s actions so far and expressed skepticism that concessions would provide much boost to the bottom line.” In a letter from the union, it was said, “Agreeing to discussions is very different than agreeing to concessions. We should not be in any rush to make shortsighted moves when we lack the clarity we need to make informed decisions.”
It should be noted that, according to the Dallas News, Kelly “received a $1 million boost in his total compensation in 2019.” The most recent data on Salary.com shows that Kelly earned a total financial package of $7,653,743—of which $750,000 was in salary and the rest was due to stock awards, bonuses and “other” types of compensation. The declination of salary isn’t insignificant, but no one will hold a fundraiser, as he’ll likely recoup the loss with his large bonuses and other forms of remuneration.
It’s not just Kelly. American Airlines chairman and CEO Doug Parker made $11,571,714 in total compensation for 2019. The company’s C-suite executives, including the president, CFO, CIO and EVP, collectively earned about $20 million. According to popular financial writer Ben Hunt at Epsilon Theory, “From 2014 through 2019, Doug Parker pocketed more than $150 million in cash through his sale of 3.6 million shares in American Airlines. That’s in addition to the $50 million in stock he still owns. The $100+ million in cash salary and cash bonuses and deferred comp and stock options and incredible perks that Doug has received.”
In January 2020, Delta Air Lines CEO Ed Bastian announced that he was paying his employees a record-setting $1.6 billion on Valentine’s Day. In this bonus bonanza, Delta demonstrated its deep appreciation for the company’s 90,000 employees. The airline rationalized that it performed financially well and realized six consecutive years of solid profits.
However, the company—similar to American Airlines—engaged in stock buybacks. Bastian made $17,291,985 in total compensation for 2019. This amount doesn’t include stock holdings. Delta, in hindsight, was overly generous and too optimistic. The money spent on bonuses, large compensation packages and stock buybacks could have come in handy during the pandemic.
United Airlines lavished its executives with lush compensation packages. United’s CEO Oscar Munoz earned roughly $12,643,005 for 2019 and President J. Scott Kirby was awarded $16,779,485 for 2019. Other top executives, such as the CFO, COO and CAO, earned millions too. A portion of this largesse could have been reallocated to save a lot of jobs.
There are doubts that the second round of bailouts makes financial and business sense. Airlines have a history of boom and bust. It’s a hard business to run and most airliners fail. Here is an eye-opening list of an overwhelming amount of now-defunct airlines.
By rescuing the airlines, all we’re doing is supporting zombie companies. NYU Professor Scott Galloway wrote on his pull-no-punches No Mercy / No Malice blog, “Since 2000, U.S. airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards/CEOs of the six largest airlines have spent 96% of their free cash flow on share buybacks, bolstering the share price and compensation of management.”
The International Air Transport Association warned last week that the “industry will burn $77 billion in cash in the second half of this year” and suffer from “continued bleeding of around $5 billion to $6 billion each month in 2021 due to a slow recovery.” By all reports, we’re not going to have a vaccine until late next year. There’s a lack of certainty concerning how long after that it would take to mass produce, deliver and administer the vaccine. There’s no sign on the horizon that business or personal traffic will pick up anytime soon. Without a significant increase in passengers, it’s reasonable to conclude that the airliners will blow through $25 billion in about five months. Then, we will be asked for yet another round of bailouts. Surely, there are other industries that need the funds as badly as airlines, but have a better chance of getting back on their feet again.
It seems rational and logical that we’d be better off if a few airliners fail, try to reorganize through Chapter 11 bankruptcy, find a private equity investor or merge. It’s especially insulting that the airlines who are demanding taxpayer money have enriched themselves through massive stock buybacks, lucrative executive compensation programs and large dividend payouts. Why should the American people bailout mismanaged companies that treat their customers shabbily, especially when they’re hurting too?
Another question raised by many people is why wouldn’t we clawback a certain amount of money the CEOs and top executives sucked out of their companies over the years? The funds could be deployed to their unemployed workers. If we are giving $50 billion to companies that weren’t prudent stewards of financial resources, wouldn’t it be reasonable for the U.S. to receive equity commensurate with the investment?
It’s clear that the airlines, similar to a number of other companies that filed for bankruptcy protection, didn’t have an adequate plan for a black swan event. Now, bereft of cash and customers, they need to go hat in hand to the government for more money to remain solvent.
The top executives made millions of dollars and won’t have to worry too much about their futures. Their employees, however, are not as fortunate. They’ll be tossed out into the worst job market since the Great Depression.