Mar 27, 2020
Bailout USA Airline Industry
Most of the USA areas are shut down, stock markets are tumbling, industries are shutting down and unemployment is rising, the US government is set to pass the most expensive bailout in US history in attempts to save the US economy. USA Government is talking about the bailout in an attempt to save the US economy. Govt. is spending trillion dollars and sending cheques to people. Also helping small businesses to continue to make payroll.
So, what does bailout means?
The bailout is all about the future but not for the past. When any government is bailing out it means it’s protecting the economy from significant damage. Govt. would get the stock ownership in distressed companies and when the economy will recover it’ll sell off its stake. This way the company will get funds to manage their working capital.
Airline Industry is first in the line because of its vital role in the travel economy. Currently, the airline has been piled up with a $113mn loss. Government will provide grant $29 billion in “payroll protection” and $29 billion in loans and loan guarantees. The program allocates $25 billion to passenger carriers and $3 billion to airline contractors providing ground staff such as caterers, while cargo haulers would see $4 billion.
But is it worth it to provide financial aid to the Airline industry?
2 years before the government enacted a tax cut rate even though GDP was going in deficit. It reduced the tax paid by companies. This way the company was able to save millions of money, instead of saving it money was distributed among shareholders. American Airlines Group Inc. — which is not shown in the chart has repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. It could have stored up its cash reserves for a future crisis, knowing that airline is a cyclical business.
Struggling U.S. airlines would be eligible to receive federal loans and direct cash assistance if they are willing to give an option for an ownership stake to the government. Also, there should be an end of buyback of shares and dividend payments for a longer period of time.
We hope going forward the airline industry manages their free cash flow more efficiently and keeps enough reserve for rainy days.
