As Congress continues to debate solutions to the economic fallout from the novel coronavirus, a common sentiment is to recoil at the idea of “bailouts.” Some, such as Rep. Alexandria Ocasio-Cortez, have suggested that corporations should have done a better job creating rainy-day funds for situations such as this. In reality, however, it’s not reasonable to expect businesses to have prepared for a situation as unprecedented as this.
96% of airline profits over the last decade went to buying up their own stocks to juice the price – not raising wages or other investments.
If there is so much as a DIME of corporate bailout money in the next relief package, it should include a reinstated ban on stock buybacks.
— Alexandria Ocasio-Cortez (@AOC) March 17, 2020
It’s fair to hope that large businesses would maintain some flexibility to handle economic disruptions. Recessions, economic downturns, and even natural disasters can disrupt business operations and income as part of the normal flow of business. But a major pandemic that shuts down entire industries and keeps consumers shut in their homes is something else entirely.
Businesses usually can’t plan for the world economy going into hibernation. Consider some of the impacts businesses are facing: Bars and restaurants, for example, have been forced to shut down entirely or transition to delivery-only service in major cities such as New York City and San Francisco. Restaurateurs are expecting sales to drop by about a quarter nationwide. That’s catastrophic compared to how the industry was affected during the 2008 recession, when restaurant sales still grew, just at a slightly slower rate than the year before.
Another example of the drastic consequences even larger businesses are facing comes from the hotel industry. The industry reported that hotel occupancy rates dropped by nearly 25% to just over half-full in just a one-week period from March 8-14. All in all, the United States could lose as much as half of its hotel industry jobs, which translates to approximately 4 million layoffs.
The most controversial industry plea for help has come from the airline industry. Ocasio-Cortez’s aforementioned comments came in response to a report that 96% of airlines’ free cash flow went to stock buybacks over the last decade.
But the report is misleading. To begin with, Ocasio-Cortez mistakenly interprets this as 96% of profits, not free cash flow. There’s a big difference: Free cash flow is essentially profits minus capital investments. Ocasio-Cortez says that the data shows that airlines spent money on buybacks and “not raising wages or other investments,” but both increased wages and investments are not part of free cash flow. In other words, free cash flow refers to dollars left over after those expenses, meaning that any excess dollars airlines spent on them would only push the 96% number even higher.
But the other criticism that comes from this data is the idea that airlines should have saved up a rainy-day fund instead of spending on stock buybacks. Here again, however, it’s worth looking closer at the data. The “96%” figure is driven largely by an outlier: One airline, American Airlines, spent nearly $13 billion on buybacks despite being nearly $8 billion in the red. Take out that outlier, and the other five major airlines averaged about 60% of free cash flow spent on buybacks.
On top of this, stock buybacks are only a form of “corporate spending” in the technical sense. By buying back shares, corporations do raise their share prices, but they also buy themselves flexibility for the future. After all, shares bought back when a corporation has money to spare and no productive investments left to make means a greater ability to sell shares later on.
And even this ignores the inherent silliness of expecting airlines to have prepared for a situation in which thousands of flights needed to be canceled and those that do run are often nearly empty ghost flights. The unfortunate reality is that individuals and businesses alike are entering uncharted territory that few are prepared to handle.
How federal aid to affected industries takes shape remains to be seen, but it should be done in a smart manner to limit taxpayer cost and exposure. It should also be paired with a meaningful aid package to affected workers as well. However, it is unhelpful to blame businesses for not having prepared for a sudden pandemic that shuts down the global economy. There’s just not much they could have done to weather a storm like this.
Andrew Wilford (@PolicyWilford) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is an associate policy analyst at the National Taxpayers Union.
