Written By: Arnie J. Olsen
The promises being made by airline CEO’s to not use funds to buy stock, to limit executive compensation and to not pay out dividends to shareholders is a nice start, but let’s get real…the executives of these companies are using employees as hostages in an attempt to save their own ass, and here is why…
With the economic fallout, everyone knows the airlines are struggling. Nearly all international routes have been cancelled, and domestic travel is down significantly, and the stock prices of the major airlines have all dropped by 60% or more in many cases. The world’s largest airline, in terms of revenue ($47 billion in 2019), asset value, and market cap is Delta Airlines (DAL). Their stock price has dropped from their 52-week high of $63.44 per share to a close on Friday of $21.35 per share, for example. American is the largest airline in the world in terms of fleet size and number of passengers, as well as revenue per passenger mile. American share price has dropped from a 52-week high of $35.24 per share to $10.01 per share at close on Friday, March 20th.
Now, I am not specifically picking on airlines, as there are a wide range of industries looking for Federal intervention of one kind or another, and there is a lot of talk about how that should be done, or even if it should be done. Specifically, with airlines the dollar amounts have ranged from $80 billion as the largest amount I have heard discussed in the past week or so, and yesterday, the CEO’s of 10 largest U.S. based passenger and cargo airlines submitted a joint letter to Congress saying they needed a minimum of $29 billion combined. Also, important to note in this letter is that they have presented their request in the form of loans or at a minimum loan guarantees, so their request is not a straight cash grab.
Most individuals have a issue wit corporate bailouts for one reason or another, and this time is no different. Of course, there are valid reasons for doing it as well, depending on the situation. More specifically, in this situation, the talking points you hear most frequently are that corporations should not be allowed to use financial assistance for stock buy backs and executive compensation/bonuses.
The stock buy back issue is certainly a valid concern given the Bloomberg report claiming that U.S. airlines, following the aid package they received after the 9/11 attacks, have spent 96% of all “free cash” to purchase their own stock. To get an idea of just how much free cash that is, for the past 4 years, Delta Airlines has reported the following Net Income (after all taxes and accounting adjustments like depreciation) for recent years:
- 2016 – $4.373 Billion
- 2017 – $3.577 Billion
- 2018 – $3.935 Billion
- 2019 – $4.767 Billion
4 Year Total: $16.652 Billion
In their financial statements, between $2 and $3 billion of each year’s profit is reported as “free cash”, so for the past four years, we would be looking at somewhere between $8 and $12 billion in free cash, and applying the 96% average reported by Bloomberg, they have spent between $7.68 and $11.52 billion on stock buy backs.
What that means, in my mind, is that while the Covid-19 virus is not the fault of the airlines, they seem to have failed to protect the company from future crises to the extent that they could have. In fact, if the total ask by the 10 largest airlines is $29 billion, the free cash from the past four years would have certainly covered Delta’s portion of that $29 billion need.
Executive compensation is another issue, as are shareholder dividends. We all know how the executives of large corporations are compensated in terms of inflated salaries, so I am not going to take a deep dive into exactly what different executives are paid, but I am going to educate you a bit on how they are paid.
For most people in America, a paycheck is received every 2 weeks or so, and then they receive a W2 at the end of the year reflecting their total income and total withholdings for things like income tax and FICA. Corporate executives are no different when it comes to their salaries, albeit with much larger numbers than most people will see in their lifetimes. The part that people do not see is their other benefits, specifically stock options and dividends.
With Delta Airlines, “corporate insiders” actually own 50.04% of 646.74 million shares of Delta stock outstanding. So, 323.63 million shares of Delta are owned by these insiders. The four largest insider shareholders include their four top executives:
- Chief Financial Officer – 471,478 shares
- Chief Executive Officer – 406,060 shares
- President – 316,348 shares
- Chief Operating Officer – 122,583 shares
This group of four people is ultimately responsible for every decision the company makes, and they clearly have some pretty significant skin in the game to provide an incentive to make good decisions that benefit the company.
Right off the bat, during the past 12 months, dividends have been paid out four times. In total, those have amounted to $1.5575 per share for the year, so for each of those officers, they have received the following:
- Chief Financial Officer – 471,478 shares / $734,326.98 in dividends
- Chief Executive Officer – 406,060 shares / $632,438.45 in dividends
- President – 316,348 shares / $498,712.01 in dividends
- Chief Operating Officer – 122,583 shares / $190,923.02 in dividends
Total dividends paid to these four executives over the past 12 months are $2,056,400.
The other thing to note with regard to these shares held by the officers of the company is that they were mostly granted to the individuals by the corporation, meaning they were a part of their compensation package, and not something that these people used their earnings to purchase. The difference is that by granting them to the officers, they decrease the assets of the company, whereas, if the officers purchased these shares with wages they earned, it would have increased the assets in the company, because not only is the company transferring the shares (and their value) to the individual officers, they first had to buy them back from the open market. These shares are not just created and handed out.
Motives and Conflict
Now, these four officers, as well as other insiders, own over 50% of all Delta Airlines shares, and as you can see by the dividend payouts to them, owning these share is quite lucrative. Even without factoring in their salaries ad other benefits, dividends alone put them in the top 5% of all earners in America, and their salaries, put them in the top 1%, but that is not where the real money is at.
On July 24, 2019, Delta stock hit their 52 week high of $63.44. As recently as January 24, 2020 it was still over $60, ad it was at $58.99 exactly one month ago on February 20, 2020. As of the close on Friday, March 20th, that share price had fallen $42.09 from its 52 week high to $21.35.
Additionally, you can see the same type of data for insiders of the four largest U.S. airlines in the chart below:
With that, you can see that the insiders of the four largest airlines have lost combined $18+ billion in personal wealth as a result of the market downturn related to the Covid-19 pandemic. There are two ways to look at this:
- The same people that are requesting $29 billion in loans or loan guarantees from the Federal government and are even promising not to use perform any stock buybacks, not to provide additional compensation to the executives of the various companies, and not pay out dividends to shareholders until the loans are paid back, assuming the point of the loans would be to ultimately return the stock values to their high water mark from where they are at now, these insiders will stand to increase their own personal wealth by over $18 billion in the process.
- The government does not benefit by “saving” these particular companies, because if they fail, others will scoop them up and continue flying when it is more profitable to do so, which would include the employees, so any relief offered is ultimately benefiting shareholders, and largely THESE shareholders and few others.
Now, the way things are supposed to work in business, particularly with well established, publicly traded companies is they have two primary ways of raising needed capital.
- They sell shares of stock in the company. Of course, just selling new shares would water down the value of outstanding shares, much like “printing more money” can do, but selling existing shares would directly raise needed cash, and amongst these insiders, even at current market rates, they could raise nearly $9 billion.
- They borrow against the assets and cash flow of the business. That’s how every small business in America would need to approach it, and there is a risk…a huge risk in fact. With smaller businesses, owners are universally required to sign personal guarantees that mean the owners are personally obligated to pay the obligations of the business, even if the business files for bankruptcy. In these situations, business owners face losing their homes, losing their retirement savings, and if the business fails and they have to go find a job elsewhere, working for someone else, they can expect to have those wages garnished.
My question is that if these individuals have this much of a vested interest in the success of the business, and keeping their jobs (over $18 billion in this case, on top of dividends, salaries, bonuses and other perks), why are they not willing to put their skin in the game? Hell, in the 1960’s, with Medicare negotiations when that legislation was passed, Republicans decided that Medicare should only cover 80% of the costs, instead of 100% as was originally proposed because they felt that senior citizens living on Social Security needed to “have some skin in the game”. So, “Mr. CEO”, let’s see some skin, if not pledging your own shares of stock as collateral to obtain commercial loans, then at a minimum, pledge the other assets of the company.
Why should taxpayers take on the financial responsibility for your recovery when you are the ones who stand to personally gain everything?
Airline CEO Threat
If you want to read the letter sent by these, plus 6 other CEO’s in the airline industry, you can see it here:
If you do not want to read the full letter, we can just sum it up with this one quote:
“If worker payroll protection grants are enacted, equaling at least $29 billion, participating passenger and cargo air carriers will not furlough employees or conduct reductions in force through August 31, 2020.”
In other words, pay up or we will punish our employees, and if you do pay up, we’ll promise not to lay them off, at least not before August 31st.
Guess what…it is an empty threat! If the airline fails, someone else will buy up the assets and it will keep flying. Executives will be fired, shareholders lose their investment if they declare bankruptcy. I know, because on September 11, 2001, I owned a small number of shares in United Airlines.
The employees do not lose, not in the long run. They are just pawns in a game of chicken being played by extremely wealthy people that may have their future income on the line, but no matter what, will never lose their wealth.
Look at it another way. The airline industry employs about 750,000 people in the United States. The Federal government COULD take that $29 billion being requested and pay out an average of more than $38,000 to each one of those employees, and I would think that would more than take care of them for the next several months as we ride out this health crisis, and when it is over, say 6 months from now, those planes will be flying once again, maybe with a different paint job…but in my mind, the paint job does not effect what a pilot, flight attendant, baggage handler or mechanic do each day, or take home at the end of the week. I mean, seriously, it’s not like Americans and international travelers are going to stop flying. It’s not like cargo is not going to still be needed all over the world.
No, make no mistake about it…this is about a small group of extremely wealthy people begging to be saved, and they are using 750,000 employees as hostages to do so.
This example is using the airlines to make a point, but rest assured, THIS could be applied to every single major corporation in America. Corporations and capitalism are not bad things, and are a hallmark of the American economy, but in this situation, given that it is all the little people whose life is literally on the line, maybe it’s time that OUR government take this opportunity to put all of us first…especially since the majority of Congress and the White House may have a lot of new occupants in about 10 months if they forget who signs THEIR checks.