Sure — what are your other options if you have lots of cash?

1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage.

2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk.

3. Buy back your own stock, which gives back to shareholders.

I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency.

I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.

4. Increase pay/benefits to your rank and file employees for helping you get so much cash

5. Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund

6. Focus on improving world impact through starting philanthropic activities

> Increase pay/benefits to your rank and file employees for helping you get so much cash

The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.

> Invest back in the business at reasonable levels so as to keep enough cash for an emergency fund

What if you feel like any further investment yields negative return? Berkshire Hathaway has been sitting on cash for years because they felt that they couldn't put their money into any constituent businesses and generate the right return. Why purposefully throw money into a black hole?

> The auto industry did this through high wages and very large pension plans, and got absolutely destroyed in '08 and also demonized by taxpayers for creating an undeserving "welfare class" of autoworkers that was too expensive to maintain.

I'm not sure I'd be making long term business decisions based on how reactionary people are to things after a crisis. I also don't think you're going to hear the argument that the reason the auto industry failed was because they were paying their rank and file workers too much...

No one said use it all either, this is a balancing act, just as using up most of your free cash to buy stock back probably isn't a good long term idea either.

> What if you feel like any further investment yields negative return? Why purposefully throw money into a black hole?

First, yielding negative return and throwing into a black hole are two very different things. A negative return can either create more jobs for people, perform a social good, or help in some other way beyond raw return. Businesses of the scale of having billions in cash siting around are not going to run out of ways to improve their business efficiency.

Option 4 is clearly a good one, more companies should pay dividends to employees in addition to (or instead of) shareholders. Employees have a stake in the company and the usual way of doing this (by giving employees stock so that they get the same benefits as shareholders do) doesn't align risks well. These are called bonuses, and yeah, big companies should pay more bonuses when they are performing well. I'm all for any company that does that and any policy that incentivizes it.

But I'm a lot less convinced by your other two points.

I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.

And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.

The (flawed, but not entirely) idea of buybacks and dividends is that they also achieve the function of getting cash out of the hands of big corporation managers. When that cash ends up just sitting in another bank account of a rich person (or in a yacht) that is a shame, but it is its own problem for which there should be different solutions, but when that cash ends up flowing into other investments, that is much better than it sitting in the bank account of an already-huge corporation or being funneled into doomed business lines outside that company's area of expertise.

> I'm sure the airlines did keep enough cash for an emergency fund, but every emergency fund comes with a model of what an emergency looks like, and for airlines what makes sense to cover is things like oil price increases or a recession that impacts demand for travel by a few percent, not an event like this that results in a 95% decline in demand due to government mandates; we don't want every large corporation hoarding a hundred billion dollars in cash, we want that cash available to invest elsewhere.

I would agree that an emergency fund likely would have still run out in this scenario, but I don't think that invalidates the idea of investing back in the business does it? It's just more that the caveat is debatable / easier said than done.

> And I don't really want corporations to be major leaders of philanthropic activities. Why them? Who are they accountable to? Why should I expect them to support good causes? I would rather see that money in the pockets of individuals who can decide what philanthropy to support, or in the pockets of a government whose philanthropy is accountable to voters.

Honestly fair point, I agree generally with who is allocating. I guess the question is how do you execute getting it in the hands of individuals or government for philanthropic purposes though? I wouldn't actually mind seeing a system for that where you can pay into a government controlled philanthropy fund that voters help allocate on ballots during voting but that type of system doesn't exist now, and getting it to individuals is typically limited to your employees which then just turns this into option 4 but with the likelihood that they money goes into other businesses instead of the original intended purpose.

This whole thing could just be a poll on the website or a matching campaign that customers engage with where they choose from a wide variety of sources. That's a major philanthropic activity by the business but then not allocated by the business itself, assuming the options are sufficiently ranging.

I was using "philanthropy" in a broad sense. A large portion of what the government does is akin to philanthropy. So I just meant taxation.

And yes, I think it just boils down to option 4: more money to individuals through employee bonuses. I trust the individuals more to support good causes than a corporation with its own agenda.

But note that I also think dividends are a good thing too, for the same reason I think bonuses are a good thing. I think it is generally better for most corporations to pass their cash onto other stakeholders. I wish it was more balanced toward employees rather than shareholders, but I think both are usually better than the corporation holding onto it themselves.

There's also option 4:

- Increase worker pay and benefits

And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...

You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.

Traditionally you also have dividends as well. Stock buybacks are basically tax avoidance.

Yeah what I keep not being sure of with this whole debate is: are people mad about companies using buybacks instead of dividends because of the tax avoidance angle, or are they mad at the entire idea of companies giving back money to shareholders either way? It seems like buybacks are the boogeyman, but that an argument like "if they had kept their $45B over the past few years, they wouldn't need $50B now" applies just as well to dividends.

People can be mad about or rationally opposed to more than one thing at a time.

Sure, maybe it's both. What I'm saying is that it seems muddled to me in these articles, I can't quite tell which thing is actually the problem, or whether it is both.

Many companies still pay dividends as well. But, yes, functionally both dividends and stock buybacks return money to shareholders, i.e. the owners of the company. However, as you say, in the US the tax code tends to favor capital gains over dividends.

And as has been said on other threads about this topic - were the individual airlines to have saved that money (taking the hit on interest rates before deploying it now), the amounts we're talking about would barely cover a few months of total operations per airline.

Am not an apologist by any stretch, but the narrative is "they should have created a black swan fund instead of share buybacks". But they'd have been skewered for years by the trade press for keeping billions of dollars in sub-optimal immediate cash form in order to buy a little extra time.

How about being prepared so that you don't need to be bailed out by the federal government?

How about spending that money to provide better service?

It's not a revisionist history that virtually everyone complains about the declining level of service and increased fees.

You could also look at it the other way (the correct way):

Service hasn't declined in airlines. If you spend the same on a ticket today as you would have had to in the 1970s to fly, you receive better service. That's because you'd have to be flying first class.

We just decided over time that we were only willing to pay at most $200 to fly across the country round trip, yet still romanticized the idea of having a great experience while doing so.

Keep in mind that of the $200 ticket price, about 30% usually goes to fees and taxes; not airlines. You should be grateful a system so robust exists. One that can take you across the country for such an incredibly low price, given that your only alternative is to drive across the country or take a train; both taking an order of magnitude more time and cost an order of magnitude more.

Both the declining level of service and increased fees are a byproduct of consumer preference: namely they choose flights based on sticker price.

4. Dividends

"Keep it in cash" isn't looking like such a bad idea right now.

Sure, but that still wasn't the best option.

1. We had the sharpest market drop in history. Models could predict this, but while this drop is say a 1 in 30 year event across all industries, this drop for certain sectors (like airlines) is more of a 1 in 100 year event. If companies all planned all the time for once in a century events, global growth would be much slower.

2. Most companies in most industries are still better for having done share buybacks. We're only back at 2017 stock levels. They've been buying back since 2010. The best return most companies got for their cash was doing this, and I'm not sure that's changed with this downturn. Most companies will be back to normal pricing in a year's time from now anyway, and their share buybacks will still have been as brilliant of a decision as ever.

United went bankrupt in 2002. Air Canada, 2003. US Airways, 2004. Northwest and Delta in 2005. American in 2011. This pandemic may be a once-in-a-century event, but "we're out of money" is not, especially for airlines.

Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.

Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time:

* Government regulation impacts

* Union strikes

* Aircraft groundings due to faulty (or less-long-lived than anticipated) parts

* Ticket search companies undercutting their profits

* Oil (and thus fuel, one of their main costs) price surges

* Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world.

* Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust.

* Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc)

* Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)

If that is the lesson that businesses learn from this, the recession after this will last a lot longer than it needs to, as companies hoard more emergency cash than they need, instead of it flowing through the rest of the economy. A better solution is to cover higher likelihood emergencies and for governments to step in (as they are doing) for very rare emergencies like this one.

> 3. Buy back your own stock, which gives back to shareholders.

You mean props up the share price so board members can hoard more wealth?

4. Pay a dividend

For the line of thought in articles like these, there's no difference if airlines had spend $45B on dividend payouts in the past four years rather than on buybacks.

No, because dividends don't benefit from compounding stock prices.

If you buy back your stock from 20 -> 80 a share vs. having paid out the same amount in dividends, the share buybacks yield a much greater income than dividends, which once paid no longer compound unless individual investors re-invest them.

Buy pandemic insurance to protect your company in case of downturn.

4. Invest it in your core biz.

5. Invest it in research

6. Buy other companies to extend your core biz.

6a. Buy a company to get into a new line of business (Comcast/NBC, Yammer/LinkedIn/GitHub), a transformational divestment followed by rebirth (IBM, Nokia)

6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.)

6c. Buy competitor and dismantle it to consolidate and reduce competition.

Executive compensation is tied to stock prices. By buying back stock, they are increasing demand and decreasing available supply of their stock. This results in the stock price rising, along with executive compensation going up as well.

By allowing stock buybacks, we are directly incentivizing this perverse behaviour.

The most convincing argument I've heard is centered around just how much cash flow and expenses goes through the airlines on a daily basis, meaning they'd need some extraordinary amount of cash in the bank to weather something unprecedented like this. If they _did_ have that much cash, it'd be bad for the economy since that capital is effectively "locked up". Instead, give the proceeds back to the shareholders that will likely do something else with it - invest in new businesses, buy more goods and services, etc. I don't have any links handy, but Ross Perot railed against companies hoarding cash for decades.

Holding cash does not lock it up. Banks make deposited funds available as capital for investment. This can lead to a liquidity problem during a crunch, but that's literally why we have a central bank.

There are plenty of companies that have large cash reserves.

Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.

Cash in a bank isn't "locked up." The bank uses it to make loans. In a sense, it expands the supply of money because a bank isn't required to have 100% cash reserves. So $50 billion in bank accounts generates more than $50 billion in loans.

Buybacks serve the same role as dividends. A company takes money they have no need for and instead of giving it to investors in the form of dividends (which is taxed) they buyback stock. As a shareholder you don't end up with cash but the value of the stock increases by the same amount but there is no tax.

I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money.

One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them.

I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.

Investors invest in companies because they expect to receive money back in the future. Therefore investment won't happen unless companies have ways to pay back investors.

When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it.

Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company.

Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion.

You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same.

The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.

Correct me if I'm wrong but isn't it also a bet on the future in the sense of "I think our stock is undervalued right now and that it will go up in the future, so I should buy it cheap right now and then I can reissue the stock and raise a significantly more amount of money"? At least that's how I've thought about it

The reason most people invest money in public companies is because they expect to get money back at some point. Otherwise, why invest at all?

There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.

I mostly agree. Although dividends arguably are a bit more reliable than stock appreciation because of buy backs. However, the basic point is entirely correct. If you think stock buy backs are evil then you must logically agree that dividends are also evil. Which doesn't really make any sense given that, under classic finance theory, the share price is the discounted present value of dividends.

Stock buybacks are touted as a tax efficient means of providing returns to shareholders as capital gains. The other option being a dividend. If you don't think dividends are evil then you shouldn't have too much problem with buybacks.

The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.

At a meta level i am shocked this is getting downvotes. It is a legitimate question that pokes around what could be considered generally accepted wisdom. It concerns me that HN is starting to frown upon this sort of thing.

It's the exact same thing as dividends, with slightly better tax implications (you can choose when to receive them, rather than be taxed whenever you do receive them).

It doesn't seem significantly different from issuing a dividend, both return money to investors. But a buyback allows investors to defer taxes.

Matt Levine has a good take from a few weeks ago. Basically he argues the buybacks were the only sensible play, if you were the airlines.

They have nothing better to do with that money.

It's how companies give profits back to their shareholders. It's just tax advantaged compared to dividends.

interest rates have been so low that biggest players have infinity money and nowhere to invest it ... which also explains venture capital activity of the last decade

Sure. When you combine hyper-competitive capitalism with a market that lacks regulation - taking steps that ensure you are privatizing profits and socializing losses is just good for business. Arguably, some of these corporations believe it is also necessary to stay in business.

Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.

Evil senior mgmt.

Evil CEOs?