(Bloomberg Opinion) — One year into the Covid-19 pandemic and a few months into the vaccine rollout, demand for air travel remains anemic. Globally, passenger traffic was down 72% in January compared with the same period in 2019, the International Air Transport Association said this week. While that’s an improvement from the declines of more than 90% in the early months of the pandemic, it’s worse than during the recent holidays as new variants sparked fresh concerns and led to renewed travel restrictions. IATA warned last month that airlines as a group might burn through as much as $95 billion in cash this year, about double its previous forecast. The outlook remains so dire that U.S. carriers are set to receive a $14 billion extension of federal payroll support in the $1.9 trillion stimulus package currently before Congress. But that resurrects the question of why this industry continues to receive special dispensation while so many others — from hotels to restaurants to bus operators — struggling as well.
With so much uncertainty and emotions running high, knee-jerk prognostications abound and long-term perspective is often missing from the conversation. Who better to provide that view than two titans of the industry? Here are some thoughts from Gordon Bethune, former CEO of Continental Airlines and a former Boeing Co. manager, and Robert Crandall, the former chairman and chief executive officer of American Airlines.
One of the misconceptions driving the ire over government support for airlines is that the dollars involved are some kind of bailout or corporate welfare. While Congress did appropriate $25 billion for government loans to support passenger airlines’ operations in the initial pandemic stimulus last spring, that assistance is dwarfed by the money earmarked exclusively for payroll protection, which now amounts to more than $50 billion, assuming this latest aid package passes. The payroll funds also come with strings attached, including limitations on share buybacks and executive compensation but also the continuation of minimum service levels on routes airlines were flying before the pandemic. The result is that there are both more planes in the air and more flight attendants, pilots and ground staff collecting salaries than currently justified by demand. But it also means those airplanes and workers will be ready when a recovery eventually occurs.
It’s not the most cost-effective use of government funds, but it’s a necessary one. “Once you tear a system down like the air transportation system in our country, it’s very difficult to get it back up,” Bethune, who served as Continental CEO from 1994 to 2004, said in a phone interview. “There’s a huge lag from when you see the spark of a recovery and the ability of the industry to react to that quickly.” That matters because a functioning air transport system is essential in a way that other industries hard hit by the pandemic, such as hotels and restaurants, simply aren’t. Planes don’t ferry only passengers; they also carry large amounts of cargo and are particularly integral in supplying hard-to-reach places. One look at elevated air-freight costs hints at the long-term consequences of a crippled airline industry. Still, when large amounts of government aid are in play, it’s inevitable to see multiple industries arguing for their share, and the process is “going to be fraught with me-tooism,” Bethune said. “I’m on the Park Hotels board, a spinoff from Hilton. I understand how difficult it is to be in the hotel business. But hotels aren’t driving the world economy. Air transportation is.”
Crandall, speaking in a separate phone interview, concurred: “The U.S. has only one intercity transportation system, and it’s the airlines. We’re not going to replace it with trains. The country’s too big, and it’s too late in the day for that. You can’t drive when you have to fly. The reality is we have to preserve the airline industry. The U.S. needs a vibrant air transportation system. Given the nature of the business, the government is always going to have to be the investor of last resort.” Because of that dynamic, though, the government should be empowered to impose more regulations on the industry, he said. He suggested rules governing maximum seating density on airplanes and minimum service requirements for smaller airports as a good place to start. Crandall served in leadership roles at American Airlines for much of the 1980s and 1990s.
On Climate Change
An early version of stimulus proposed by House Democrats last March included requirements that airlines reduce their greenhouse gas emissions and disclose the carbon footprint of each flight to customers. That bill also proposed $1 billion for a glorified “cash for clunkers” — a financial crisis-era program meant to incentivize car owners to trade in their older cars for newer, more fuel-efficient ones — but for aircraft instead. Crandall said it’s a little too early to be talking about tacking on climate strings to support for the airlines because game-changing engine technology isn’t available yet. “There’s nothing more important than climate change, unless maybe it’s income inequality,” he said. “But there’s not much that the airline industry can do at this point about limiting its carbon footprint. Different fuel — in due course — will make a huge difference.”
On Share Buybacks
Another frequent source of consternation over airline aid is the billions those companies spent on buybacks in the years leading up to the coronavirus pandemic. A Bloomberg News analysis found that the largest U.S. carriers spent 96% of their free cash flow on stock repurchases in the last decade. American Airlines Group Inc., which had negative cumulative cash flow during that period, spent $12.5 billion on buybacks. The argument that rank-and-file employees and national infrastructure should be punished for airline executives’ poor decision-making is not a great one, however. There’s also no reason to think that airlines with sturdier balance sheets going into the pandemic would have decided to sacrifice shareholder returns and keep a surplus of employees on the payroll. If job preservation is the goal, government intervention was always going to be necessary during the pandemic, regardless of airlines’ past buyback habits.
That being said, both Crandall and Bethune said one of the lessons the airline industry should learn from this crisis is that large-scale share buybacks are ill-advised. It’s a cash-intensive business, and there’s always the risk of some kind of unexpected crisis, Bethune said. Crandall went a step further and said buybacks should be prohibited at all companies, in every industry. “It’s a popular tactic because it makes the executives rich,” he said. “Airlines absolutely should be prohibited from buying back stock. They should be at the top of the list. We know that airlines always have a liquidity problem and are always turning to the government.”
On Boeing’s 737 Max
Boeing’s 737 Max jet is flying again after two fatal accidents prompted a 20-month long grounding in the U.S. When asked if they would feel comfortable boarding the jet (coronavirus concerns aside), neither former airline CEO hesitated in his response. “Good god, yes; it’s much more dangerous to take a shower than it is to fly,” Crandall said. As for Bethune, he said he would “absolutely” board a Max. “It’s a great airplane.” Bethune added that United Airlines Holdings Inc. was smart to boost its overall order for the Max this week by 25 jets and to accelerate a chunk of deliveries to next year. “I hope they got a good deal,” Bethune said. “They should have.”
On The Future of Travel
It’s unlikely that business travel will fully recover from the pandemic, Bethune said. “Zoom will take a chunk out of that,” he said, referring to the video-conferencing powerhouse. That’s a contrast to some current airline executives, including Delta Air Lines Inc. CEO Ed Bastian, who has bristled at the suggestion that corporate demand may be permanently impaired. “I don’t think we should be worried or ringing alarm bells relative to the future of corporate travel,” Bastian said on Delta’s January earnings call. But the airlines aren’t in a position to dictate what future demand looks like, Bethune said. “You react to passenger demand, and if that shifts, you shift,” he said. Airlines already have been slashing flights at traditional business hubs such as New York, London, Frankfurt or Tokyo and boosting capacity for warm-weather destinations in Florida, Mexico and Hawaii that have been a relative bright spot during the pandemic slump. If that trend holds and the business customers with their premium fares don’t return, “all you got to do is charge more” for the passengers you do have, Crandall said. Someone will be willing to pick up the tab. People “want to go more places and they want to go more often,” Crandall said. “Before the coronavirus stuck everyone down in the ground like a stake, lots of places in the world decided they were getting too many tourists.” He cited Venice, which took a variety of steps before the pandemic to try to curb the influx of tourists into the city. “The reality is travel is very compelling,” he said.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.