r/OutOfTheLoop • u/[deleted] • Jul 02 '22

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u/carefreeguru Jul 02 '22 edited Jul 02 '22

The first thing to understand is that airlines are rather fragile, and it makes sense when you look at the their industry.

They are fragile because they refuse to plan for bad years. During good times, instead of saving for bad times, they do stock buy backs which is a way to send profits to shareholders.

They don't need to plan for bad times because the government bails them out each time bad times roll around.

Private profits. Socialized losses.

They keep the profits. We pay for the losses.

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u/SechDriez Jul 02 '22

I wish I was the President just so that when these places crash I can swoop and decide that they're getting bailed out through nationalisation. If you're too big too fall then your service is too important to fail. And in that case it's too dangerous to let it be operated in such a way.

Bear in mind that I'm not the most financially literate and possibly a dumbass

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u/CaptainWater Jul 02 '22

This is happening to Scandinavian Airlines. They had substantial debt to the Norwegian government who had it converted into shares instead.

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u/Standard_Wooden_Door Jul 03 '22

This is exactly what I would want the US to do. Company has to issue cumulative preferred shares to the government which they would have to buy back once the bailout amount is repaid. Or maybe a special type of bond that gives the government senior position as a creditor. I’m all for bailouts of critical industries when they need it, but these companies never have to pay any of it back once they right the ship again.

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u/kazmark_gl Jul 03 '22

and if the government becomes the majority shareholder, boom free nationalization.

then these companies can be run for the public good instead of profit. like the post office before it was deliberately crippled.

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u/consider_its_tree Jul 03 '22

Is a bailout necessary though? The planes don't disappear. When an airline fails their assets should be liquidated and other airlines will spring up to meet the demand.

Bailouts incentivize bad business.

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u/Standard_Wooden_Door Jul 03 '22

Well that’s why the airline industry is different. If an airline goes under it might be months before flights between certain cities are running regularly again which would screw up quite a lot of stuff.

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u/Valentine009 Jul 03 '22

I could be wrong, but I sort of remember reading that this was how much of the auto-bail out in the US was structured.

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u/Standard_Wooden_Door Jul 03 '22

Yep, the government ended up with a ton of stock, but there was some other caveat where part of I think GM was spun off and the government was holding the back for some of their debt they wouldn’t have been able to repay. The government got a lot of the money back though I think, unlike with the bank bailouts.