Financial Freedom 101

The United States federal bank led by “Junk Bond Jerome” is pumping cash into the stock market, bailing out banks and airlines who are being hurt by the COVID-19. Personally, I think this is ridiculous and not fair for the average American. Although I am a stock market investor, I feel this is not right by the fed. Last week the US airline industry requested $50 billion in grants!! Caused by the pandemic. Many companies during the long bull market saved up cash on the side for economically depressed days like were going through today, but airlines did not. Instead, airlines used there leftover money and threw it into buying back stock in late 2019. Now they are paying for there greed.

Delta airlines are parking 50% of its entire fleet. United Airlines reports passenger bookings are down 75%, and 80% of their international flights are being canceled. Another airline company Virgin Atlantic is making employees go on an 8-week unpaid leave, and Australian airlines have suspended all flights. When this pandemic mess is over with we are going to see many airline companies vanish off the market.

Cashflow

Companies like Microsoft, Facebook, and Berkshire Hathaway have been criticized for holding back cash, but clearly, it was a smart move for them. Few businesses burn through money like airlines do. One reason is that a new jet cost up to 100 million dollars. Add to that thing like labor, fuel, insurance, and Maintenence cost all add up. What I think lawmakers should do is First, airlines must offer fares that cover the cost of capital. Secondly, airlines must retain a percentage of their earnings as liquidity to guard against high operating costs, economic downturns, and the likes of a pandemic. Extra cash can be put to work by scooping up other companies at low prices for a company or even the individual investor, so having money on the side is always an advantage in the market. Apple has also been criticized for holding too much cash. It had $39.7 billion in cash, plus $67.4 billion in “marketable securities” as of Dec. 28. The extra money will serve the company well during a massive decline in sales. Companies use free cash flow to repurchase shares for many reasons. If the number of shares is reduced and a company does a buyback, it boosts earnings and makes the company look like its doing better then it is. A company may also buy back shares because its executives cannot think of any better use for the money (such as expansion, equipment replacement, new product or service development, etc.) Many believe that buybacks are a return of capital to shareholders, but when a depression like this happens, shareholders get killed, the company gets killed, and the workers suffer.

These 6 airlines as a group have spent 96% of their free cash flow on stock buybacks from 2009-2019. In my opinion, the fact these greedy companies want stock buybacks is unbelievable, it baffles me that all over the internet people are saying to buy airline stocks in all sorts of different investment groups. The airline industry is not going to recover for a very long time, and investors are gonna get burned by this greedy industry once again. I would stay away from investing in airline industries at all costs; there are much better stocks to find with real VALUE then airlines.