The airlines knowingly placed themselves between a rock and a hard place when they decided to gorge on cheap debt for the purpose of funding share buyback plans designed to boost executive compensation. The lack of financial wiggle room is of their own doing. It’s time for the airlines to restructure, to shrink capacity to a level that reflects current demand (passenger volume is off approximately 70% year-over-year). Central Bankers are engendering moral hazard within the airline industry and the U.S. economy in general by pumping liquidity into the system where it can only inflate asset prices but do nothing to increase productivity.
COVID-19 did not put the airlines in the financial hardship position they find themselves in today. Airline senior management teams chose to gorge on cheap debt to fund share buyback programs designed to boost executive compensation. COVID is simply the event that exposed management teams’ lack of Balance Sheet strategy and heavy net debt positions.
Who is to say that an effective vaccine (wishful thinking) will return airline passenger volume back to pre-COVID levels? It seems most professionals are now comfortable using Zoom, Google Meet, Microsoft Teams and other online communication tools that many of us have used for the past 10 years or more. I see companies tightening travel budgets going forward (at least at the employee level), even in the out years.
Further, it’s disingenuous for Minn. Fed President Neel Kashkari to state that these corporate bailouts don’t create moral hazard. The 2008 and 2020 bailouts created an enormous moral hazard problem. It will prove near impossible to put this genie back in the bottle.