If Airlines Won’t Accept Bailout Conditions, Let Them Go Bankrupt

I am a capitalist. I make money by investing in businesses and getting a share of the return when those businesses do well. I make (on average) much higher returns than people who invest in money market funds and the like, because I tend to invest in things that have some risk. In our financial markets, riskier investments tend to have higher returns in general.

This idea, that higher risk equals higher reward when things go well, is a foundational piece of the American economic system. Most Americans, even a lot of the roughly half that have no investments at all, agree that that is a good way for things to work. In order for people to willingly put their money at risk, they need more incentive to do so. Every investor, from billionaires to normal middle-class families saving for retirement, must balance their willingness to accept risk with their desire for a higher return on their investment. The same decision must be made by people running businesses, who have to balance risk and reward. That’s how our economy works. But it only works if there actually is any risk.

Right now, the US government is preparing to bail out the airline industry, despite that industry having spent a decade using almost all of its profits on stock buybacks. Airline executives took a risk to enrich themselves and their shareholders in the short term rather than saving in the event of an economic downturn like the one we’re facing now. And now they’re facing the consequences of their risky behavior.

At the time, their behavior made a lot of sense. When companies decide to take as much risk as possible — usually that works out for the best. The more risk you take, the higher your returns when things work out well. From the point of view of corporate executives, whatever they do, there is some chance of failure. That possibility can not be absolutely eliminated, so their logical strategy is to get the maximum returns when things work out well. That generally means to borrow as much as possible and generally to take as much risk as possible. If you are only interested in how much money you make this year, the last thing you want to do is make some investments in things that will only pay off in a future year.

With most businesses, that means that every once in a while a business fails. That’s capitalism. And that’s ok, because when a business closes, the legal entity may disappear, but the actual physical assets don’t fail. When a pizza shop goes out of business, someone else can buy those big pizza ovens and open another pizza shop. When a trucking company goes out of business, someone else can buy all of its trucks and keep them working. 

It’s the same with airlines. When an airline goes bankrupt some other investors can use those airplanes and airports and stuff to start a new airline. In fact, it happens all the time. 

Most major airlines have gone bankrupt over the years:

  • TWA 2001
  • US Air 2002
  • United 2002
  • Northwest 2005
  • Frontier 2008
  • American: 2011
  • Republic 2016

And many smaller ones over the years. In all of those cases either the airline as a whole or the assets were taken over by another airline.

And that can happen again now.

There is no reason for the government to give a free handout to the shareholders of the airlines. They took on the risk in the good times, they should deal with the consequences now. If they can survive without help, that’s great. But they shouldn’t be given the option to take billions of dollars from the government with no strings attached. The taxpayers who give the help should get at the very least a reasonable share of the future profits, and assurances that the money is not going to go to shareholders who have benefited from the last decade of risky actions. If those aren’t acceptable terms to their airlines, they’re welcome to go through the bankruptcy system and have the airplanes and employees protected, but not the shareholders who took all the profits out during the good years.

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