TURBULENT SKIES AHEAD (CONTINUED)
Poor Long-Term Financial Stability of the Airlines
Airlines have a poor record when it comes to long-term financial stability. Since 2000, there have been 66 airline bankruptcies in the U.S. Over the past 40 years, 79 major carriers such as Eastern, U.S. Air, Aloha, ATA Airlines, Continental, Braniff International, Republic, and Northwest have folded and filed bankruptcy. TWA, once an international giant, controlled by corporate raider Carl Icahn, filed bankruptcy twice and flew its last flight in December 2001.
International carriers have not performed any better. Since 2017, 21 international airlines have collapsed. Virgin Australia, Norwegian Air, Latam and Avianca Holdings, the second largest carrier in South America are some of the latest casualties.
No Rainy Day Funds: C Suite Executives Squander Cash and Credit for Black-Magic Share Buybacks
Through much of aviation history, airline manufacturers and carriers, instead of self-reliance, have relied on taxpayer bailouts and subsidies to keep the industry going. Preparing for a rainy day by setting aside prudent cash reserves in the airline industry is for the most part, non-existent.
Today, despite the historic and ongoing fragility of the airline industry sector, the airline industry, like much of corporate America, has wasted precious cash, profits and even taken on additional billions of debt to buy back shares to enrich executive insiders.
Share buybacks are a form of stock manipulation that uses corporate cash, profits and additional debt to purchase shares outstanding. By purchasing and reducing shares outstanding, share prices frequently levitate upward, sometimes abruptly. This practice enriches inside executives, and gives CEOs and others multimillion-dollar annual paydays. Share buy buybacks are a common practice throughout corporate America, and the airline industry.
To the downside, massive share buybacks weaken corporate balance sheets, foment increased income inequality, employment instability, and anemic productivity gains and makes the airline industry highly vulnerable in economic downturns. For almost five decades, share buybacks were illegal and considered a form of stock manipulation under the Securities Exchange Act of 1934. However, in 1982 buybacks became legal under the Reagan administration with passage of Rule 10b-18.
From 2010 to 2020, according to William Lazonick PhD, a professor of economics at the University of Massachusetts and a world known expert on share buybacks, U.S. corporations squandered $5.3 trillion in share buybacks.
What makes share buyback financial engineering nefarious is that often shares are frequently purchased with billions of additional debt ladled on to corporate balance sheets. This additional debt weakens the company. According to JPMorgan Chase, and the International Monetary Fund, in 2016 and 2017, the proportion of stock buybacks funded with additional corporate bond debt climbed to about 30% of all buybacks.
Airlines Waste Free Cash Flow on Buybacks
In March 2020, the Financial Times reported the four major airlines spent an astronomical 115% of free cash flow on buybacks since 2014 (and that is aside from regular dividends). NYU Professor Scott Galloway found corporate boards and CEOs of the major airlines have spent an astounding 96% of their free cash flow on share buybacks over the past decade.
Instead of re-investing profits back into the business for new technologies or services, or creating a prudent reserve for the inevitable choppy skies, airline CEO and boards have spent valuable cash to buyback shares. When business interruptions come about, and they inevitably do (e.g. fuel crisis, terrorist attack, etc.) airlines have little flexibility to weather economic storms. While this financial share buyback sorcery benefits inside executives, it harms pilots and the airlines and puts their financial futures at risk.
Airline executive compensation soared through share buyback financial engineering. According to the Financial Times, since 2014 the Big Four US airline chief executives gobbled up $430 million in stock based compensation.
To boost C-suite executive compensation and manipulate share returns, the airline industry, over the past decade ending in 2020, spent $90 billion in buy-backs, according to Bloomberg. Boeing spent the lion’s share of $43 billion on buybacks. Southwest Airlines, Alaska Air, Delta Airlines, United Airlines, American Airlines, and JetBlue spent an additional $47 billion in combined share buybacks.
Examples illustrate. (Source: SEC filings).
In 2019, CEO Robin Hayes made total compensation of $3.9 million. Hayes has made $13.8 million overall since 2016. Over past decade, JetBlue spent $1.77 billion in share buybacks.
In 2019, CEO Bradley D. Tilden made total compensation of $4.17 million. Tilden has made $17.54 million overall since 2016. Over past decade, Alaska Air spent $1.59 billion in buybacks.
In 2019, CEO Oscar Munoz earned $12,643,005. President J. Scott Kirby made $16,779,485. Over the past decade, United Airlines spent $8.8 billion in buybacks.
In 2019, CEO Gary Kelly total financial package totaled $7,653,743. Over past decade, Southwest has spent $10.6 billion in share buy-backs.
In 2019, CEO Ed Bastion made $17,291,985 in total compensation. Since 2016, Bastion has vacuumed out $127 million in stock based compensation from Delta. Over past decade, Delta has spent $11.4 billion in buy-backs.
In 2019, CEO & Chairman Doug Parker made $11,571,714 in total compensation. Parker’s CFO, CIO and EVP made $20 million collectively in 2019. Ben Hunt, a financial writer at Epsilon Theory found that between 2014 and 2019, Parker pocketed $150 million in compensation through stock sales on the millions of shares awarded to him. Over the past decade, American Airlines spent $12.95 billion in share buy-backs.
The Boeing Company
W. James McNerney, Jr., the former 3M CEO and General Electric executive joined Boeing in 2005. McNerney was CEO of Boeing until 2015, and remained chairman of Boeing until 2016. In 2014, McNerney froze the nonunion pension benefits for 68,000 employees and replaced it with a 401(k) that guaranteed nothing. In 2014, McNerney’s total compensation was $23.5 million (where $17.2 million was in cash). On top of that, at age 62, McNerney received an annual gold plated $3.18 million target-benefit straight life private pension annuity worth about $43 million.
McNerney’s successor, Dennis Muilenburg, who was fired by Boeing in December 2019, became extreme wealthy with stock based compensation. In 2018, Muilenburg siphoned out $30 million in compensation from exercising stock options that year. During Muilenburg’s tenure, in 2017, rather than contributing cash into the company’s pension, the company transferred $3.5 billion worth of Boeing shares into the pension, much of it already purchased in previous buybacks. Since 2019, Boeing shares have lost 52% of their value.
Between 2013 and 2019, Boeing spent $43 billion on share buybacks.
Corporate America and the Airline Industry Becomes Economic Zombies
Zombie companies are companies that are not making enough revenue to even make interest payments on their debt. American companies, once corporate titans, in 2020 were struggling with a $1.36 trillion aggregate mountain of debt. Much of this debt was taken on to buy back shares that boosted executive compensation.
This borrowing boom, excessive debt and the Covid 19 pandemic has turned corporate American and airline companies into economic zombies. The consequences of this excessive debt orgy are profound and could lead the United States into the Greatest Depression.
Bloomberg analysis found that in 2020, nearly 20% (600) of the top 3,000 publicly traded companies in the United States have turned into economic zombies. In 2020, zombie companies, loaded with excessive debt included Boeing, Carnival Cruise Lines, Delta Airlines, Macy’s and Exxon Mobil.
Even with $42 billion in combined taxpayer bailouts to major airlines in 2020 and 2021, airline companies have turned into economic zombies swimming in debt. As of 2020, the top four major airlines are swamped with a combined $128 billion in corporate debt, according to Bloomberg.
At the Prosperous Pilot, we believe these facts are a major reason for aviators to become more self-reliant and efficient financially in the years to come.