Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers.
When executive compensation is tied to operating profit or market capitalization, there is an incentive to reduce the product quality (the air traveler experience, in this case) to the minimum competitive level and boost the share price. A buyback boosts the share price in two inter-related ways. First, it reduces the amount of shares available in the secondary market (the "float"), which distributes the market cap across a smaller number of shares. Second, it provides artificial demand for the stock, impacting the price upward by buying shares.
Warren Buffett has stated that he likes investing in equities in part because companies reinvest their profits in their business. A buyback doesn't do that because when you spend $5B on your own stock, you're not spending it on providing a better experience to your customers, and you're not spending it on R&D. You're just spending it on concentrating shareholder ownership and driving up the stock price.
Guess who often gets paid in shares? Executives. It's common for a CEO to get a small portion of his compensation as salary and a large portion as shares and options.
The point is that these companies could have reinvested that money in their business, but instead they aimed to boost share price and financial optics.
That's not to say the airlines don't care about the little guy. Some shareholders are regular folks. Plus, at least Delta paid out a bonus to employees a few months ago. But there is indeed a reason to dislike large buybacks.
In fact if airlines had actually reinvested that money, they would be even more fucked up than they are now. At least now they have free cash flow to make a temporary drop in revenue hurt less. Reinvesting money in the corporate world often involves converting cash flow into debt, which they’re probably going to have to do now to meet their existing financial obligations. Much better than if they were midway through financing some large fleet expansion and had less FCF on hand to weather the travel slowdown
And generally speaking better leg room, amenities, and services dont sell more tickets. Your competitor will be gaining on you via even lower price. As shown by all the budget Airline. It was the customer than decides the more expensive plane ticket wasn't worth it.
I am not sure I have a solution to this problem.
> Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers.
And bailouts are a form of wealth redistribution from people of modest means to wealthy executives and investors who, it turns out, are actually not willing to shoulder the risk associated with passive profits.
> That's not to say the airlines don't care about the little guy.
They actually like the little guy, you can fit more of them on a plane.
This would make buybacks worse than dividends for everyone who isn't a shareholder.
Point 1 is not super important because of the existence of qualified dividends.
Point 2 is like this: let's say I'm a company with 1000 outstanding shares valued at $100 each and want to pay a yearly dividend (for simplicity) of $5/share. All market movements notwithstanding and absent any changes, that means I'm basically giving investors a 5% yearly ROI. But, let's say I instead bought back my shares with all my earnings. The first year, I buy back 5% of the outstanding shares. Now there are 950 outstanding shares and total earnings are still $5000/year. Next year each remaining shareholder gets an extra 5% of earnings per share (this compounds). And rather than pay tax each year on dividends, shareholders defer all their taxes until they exit their position.
One argument is that dividends aren't really worse in this case because investors could still choose to spend the cash on purchasing more shares, accomplishing the same thing. But the deferred taxes change the math.
Buybacks are an accident of tax law and ought to be taxed the same way as dividends.
It's better as a shareholder in many cases to be able to control when you recognize the gain from the return to investors.
The problem is it's really the other way around -- reinvested dividends should be taxed like buybacks, i.e. taxed when the purchased shares are sold.
By contrast, taxing buybacks like current dividends would create a really grisly incentive for corporations to hoard a giant pile of money, since that would be the remaining way to defer the tax. This is already what international corporations do with offshore profits because of a similar incentive to defer corporate income tax, and it's a huge problem.
We have a policy of allowing people to avoid tax on investment gains until the investments are cashed out -- this is what a 401k is all about. We might as well make it consistent across the board so it stops creating all of these perverse incentives. (That would reduce the amount of tax collected, but it would also remove most of the justification for taxing capital gains at a lower rate than earned income, so changing both at once would about balance out.)
If you own a restaurant and a sports stadium opens next door which causes the value of the land to double overnight, you'd suddenly owe $50,000 in capital gains tax, but what if you don't have $50,000 in cash? You'd have to sell your restaurant to pay the tax on it.
If you write some software for your small business and start to license it to people for $50 each, how much is your corporation which owns the copyright now worth? Ten thousand dollars? Ten billion dollars? It depends how many copies you expect to sell. But the government would have to appraise it. What do you do if they appraise it as worth tens of millions of dollars? You'd immediately owe more than a million dollars in capital gains tax, but it's on the appraised value of an asset that may not turn into that much revenue for years -- or at all. And with no guarantee you could even find anyone willing to pay you that much for the business.
There are good reasons not to collect the tax until the investment is converted to cash.
Too bad, I guess anyone thinking outside the box and pointing out that our herd is going off a cliff is problematic...