[Pierre Lemieux recently did a very good post on the airlines. But since I’d already been planning one myself, I’ll post it anyway.]
Since 2000, dozens of airlines have gone bankrupt, including US Airways, United Airlines, Northwest Airlines, Delta Air Lines and American Airlines. Typically, airlines continue to fly even as they go through bankruptcy proceedings.
The coronavirus epidemic will dramatically reduce the number of flights for an indeterminate period of time. But that will be true regardless of whether we bail out the airlines or not. The demand is simply not there. The same is true of airline employment, which is likely to fall sharply in either case.
Some argue for bailouts on the grounds that the airlines are suffering from economic shocks that are beyond their control. But there have always been companies that fail because the market turns away from their product for a variety of reasons.
It’s possible that there are a tiny number of essential industries where government subsidies are necessary. But for the most part the government should refrain from bailing out failing businesses. Instead, any fiscal stimulus we decide to do would be more useful if aimed at the unemployed, including those who currently don’t qualify for unemployment insurance (such as the self-employed.)
The best way to promote a fast recovery is through NGDP level targeting. Once consumers begin spending again, firms will supply the goods and services being demanded. The big Boeing and Airbus jets won’t fall apart in the next 12 months, and the pilots will still be capable of flying.
The actual problem we will face after the coronavirus crisis is over is not a business sector that’s lost its ability to produce goods and services; it’s a lack of nominal spending.
READER COMMENTS
Shyam Vasudevan
Mar 24 2020 at 7:17pm
Won’t there be significant friction caused by every major airline restructuring in bankruptcy at the same time?
nobody.really
Mar 25 2020 at 12:13am
I dunno.
Remember, bankruptcy doesn’t mean discontinuing service. In California, Pacific Gas & Electric has filed bankruptcy, but the lights haven’t gone out. While some firms dissolve through a bankruptcy proceeding, most simply emerge with former debtors owning more of the stock.
bill
Mar 25 2020 at 6:06pm
Check out this list. It’s so long, you might actually laugh.
https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_in_the_United_States
The next time we update our bankruptcy laws, we should include a provision that airlines can’t use debt anymore. They fail so often, I’m surprised they don’t keep some bankruptcy lawyers in-house just to keep their Chapter 11 documents up to date and ready to go at a moment’s notice.
Mark Z
Mar 24 2020 at 7:47pm
If airline companies go out of business, you may be right that the ‘real’ process of restarting not being too burdensome, but I worry about the ‘paperwork’ side of things. How long would it take for someone to start a new airline company and get it operational? I could imagine the red tape being substantial, and the cost could make preserving an existing company seem worth it. Of course maybe we should eliminate the red tape and other barriers to entry, so that it is easier to replace defunct firms, but as long as those barriers exist, the costs they impose are worth considering.
I guess one possible remedy that the market has is, once airline companies start to go under, the surviving companies might see their chance of survival improve as investors and creditors would expect them to have a larger market share – and increased profits – once things return to normal. So maybe an airline company doesn’t need to outrun the bear (pun intended; the ‘bear market’ that is), just its competitors, to see its long run viability improve.
Scott Sumner
Mar 24 2020 at 7:53pm
These airlines go bankrupt quite often, and start up again under the same name, same management, same workers, etc. It won’t be easy, but it can be done.
Trevor W Adcock
Mar 25 2020 at 2:35am
Bankruptcy doesn’t mean a firm is going to dissolve. Fixed costs impede entry and exit from a market. The owners of equity and debtors will take losses, but it’s the variable costs and revenues that determine if a business will continue to run or shutdown.
Market Fiscalist
Mar 24 2020 at 9:50pm
Excellent post making an excellent point.
But it does raise a couple of questions in my mind. Assume an NGDPT regime is in place and works perfectly making all problems supply side.
– Suppose Covid-19 restrictions cause many businesses to go bankrupt. Long term, no big deal – the market process sorts everything out. Short-term many otherwise viable businesses shutdown causing the supply-side situation to worsen during a moment of national crisis. I suspect this would be happening right now if it were not for recent Fed actions enabling lines of credit for businesses experiencing liquidity issues. Do you think Fed actions are ever justified to address supply-side issues ?
– Assume an extreme situation that causes many large businesses in the US to go bankrupt because of Covid-19 regulations. Long term this is no problem as new companies will emerge to buy up all their capital and probably do a better job of delivering the goods and services . But what will this do to people’s 401(k)’s and company pension funds if the much of existing company stock is wiped out and replaced by new companies emerging from the ashes? BTW: I’m hoping this is a stupid question but as it caused me to wake up in a cold sweat last night I’m asking it anyway!
Scott Sumner
Mar 25 2020 at 12:57pm
Whenever a disaster reduces real output, wealth will decline as well. Bailouts don’t prevent that.
nobody.really
Mar 25 2020 at 12:04am
I vaguely recall some investor commenting on how much money he’d lost on airlines, saying something like “If I’d have been at Kitty Hawk with the Wright Brothers, I’d have shot that damn plane out of the sky.” But I can’t find a source. Anyone?
bill
Mar 25 2020 at 6:08pm
I think that was Warren Buffet.
MarkW
Mar 25 2020 at 8:05am
Yes, airlines do often go bankrupt, and I’m open to the argument that the least bad option is to let them all go into bankruptcy again. My concern with Pierre Lemieux’s post had to do with the attitude that this would show that the airlines had been badly run, deserved their fate and that it’s only right (perhaps even a good thing) that they should be dismantled and parted out and that the assets taken over by better managers. If we take a no-bailout approach, a whole lot of enterprises (not just airlines) are going to go under — not because they were all badly run but merely because they had the misfortune of being in non-essential industries and were not structured to survive a long period of zero revenue — as few enterprises are. The last thing we want libertarians to do is come off sounding like Andrew Mellon (“liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system.”)
Scott Sumner
Mar 25 2020 at 12:07pm
Yes, I would separate the question of what firms “deserve” to have happen to them from the separate question of what sort of bankruptcy/bailout policy is appropriate.
Pierre Lemieux
Mar 25 2020 at 1:42pm
Good post, Scott! Let me just emphasize that I never used the word “deserve”: it’s MarkW’s interpretation. If one absolutely wants to find it in my post, it would be better found in the interpretation that the airlines that can’t continue serving consumers don’t deserve a bailout.
MarkW
Mar 26 2020 at 8:41am
No, you didn’t use the word ‘deserve’. But you suggested that bankruptcy would show that the airlines had been badly run (‘airline owners who can’t run airlines ‘) and that post-bankruptcy, their resources should be put to use by ‘more efficient entrepreneurs and operators’.
That strikes me as a perfectly reasonable view of corporate bankruptcy during ordinary times. But these are anything but ordinary times. Plenty of well-run enterprises are going to face insolvency, and in many cases the previous management team is likely to be the best choice for running the firm after emergence from chapter 11.
It seems to me that what we need now to defend a no-bailouts position is to explain why stock-holders (and not taxpayers) are the ones who should take the first losses even in a black swan event like this. Good or bad management preceding the pandemic seems mostly beside the point in the present situation.
nobody.really
Mar 26 2020 at 10:10am
Yeah — I think that horse left the barn long ago.
Sumner notes the long history of airlines going bankrupt. From that fact, a person might conclude that there are structural aspects to the airline business–high sunk capital costs, fluctuating demand–that render it a boom-and-bust kind of business. Instead, Sumner concludes that bankruptcies are the result of inefficient management.
As I have observed it, libertarians don’t believe in chance. They believe that they have earned everything they have, and if you don’t have, it’s because you have not earned. Now, if you ask a libertarian about this, they deny it–but they then default to this view in their next sentence.
I often favor libertarian-ish policies because they produce incentives for optimal social outcomes. But I temper these policies with Rawlsian social insurance policies that recognize that people’s circumstances–good and bad–also reflect chance.
As far as I can tell, current regulation has produced a pretty good supply of air transportation, so I am not yet persuaded that we need additional government subsidies. I expect investors to demand higher returns for investments that they perceive as relatively risky, and to accept the good and bad of their bets. We don’t need to tell fairy tales about “efficient management”–unless we’re libertarians.
bill
Mar 26 2020 at 11:00am
Great paragraph:
I often favor libertarian-ish policies because they produce incentives for optimal social outcomes. But I temper these policies with Rawlsian social insurance policies that recognize that people’s circumstances–good and bad–also reflect chance.
nobody.really
Mar 26 2020 at 2:21pm
Kind of you, bill, to quote my least pugnacious paragraph.
I think I write my best stuff when I’m on drugs–specifically, coffee. But upon reflection, coffee often inspires me to write needlessly aggressive things. Let me apologize for my pointlessly belligerent tone. A wide variety of people embrace the label “libertarian,” and I fail to give due credit to this diversity when I engage in such broad generalizations.
Thaomas
Mar 25 2020 at 8:44am
Ditto all the other Friends-of-Donald firms and sectors. Bankruptcy is a way, and not the only way, for firms and their creditors and suppliers to re-write contracts with the “bankrupt” firm.
Michael Sandifer
Mar 25 2020 at 12:31pm
Scott,
Yes, airlines often continue flying through bankruptcies, which is what keeps their creditors solvent. And in some cases, spare capacity is sold. But, what keeps their creditors solvent if airlines can’t fly for weeks, or even months? This is potentially a very different situation.
Does it make sense to support the jobs and provide just enough support to keep the industry in a dirt of state of suspended animation.
I hate bailouts and agree we should not have bailed out banks during the last crisis, and that we should abolish FDIC, too big to fail, and radically deregulate, but I’m far less certain now’s the time for that approach with the airline industry.
Michael Sandifer
Mar 25 2020 at 12:54pm
Scott,
Nevermind. Two of your Mercatus colleagues address my concerns in an excellent article on the topic:
https://www.mercatus.org/publications/covid-19-policy-brief-series/case-against-bailing-out-airline-industry?utm_source=twitter&utm_medium=organic_link&utm_name=government_spending
Sounds like at least letting them go bankrupt before intervening is a defensible idea, as is refusing to bail them out, even besides.
Nick
Mar 26 2020 at 5:16am
I think the key here is not to look at this event in isolation. For capitalism to work, it must be the case that those who profit well when everything is going fine (ie invest in risky airline bonds) DO lose when things are bad. Otherwise we are just subsidising businesses that run with very little capital and can’t absorb any losses and as such misallocating capital. Generally speaking, by bailing out the equity and debt of companies we are bailing out the richer people who took risks (to make a profit) that they should have been able to lose on.
I’m sympathetic to the idea that we shouldnt destroy the complete running of the firms, we should just let them be bought by others at lower prices where they are profitable. Bailout should be in the form of NGDP level as Scott says which lifts all boats, not the ones who have acted imprudently in the past.
nobody.really
Mar 26 2020 at 11:23am
Leaving aside the question of imprudence, I largely agree. Let me add one thought:
If government intervenes uniformly–in a manner that “lifts all [airline] boats,” as it were–it is unclear to me how much misallocation of resources results. Presumably competitive forces would simply drive down air fares, so the presumed “subsidy to the rich” would instead become a subsidy to the air-flying public. Admittedly, members of this group tends to be richer than the average person, but not quite as rich as the class of people who own most of the airline’s stocks and bonds.
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