Bankruptcy, Not Bailouts
As the COVID-19 pandemic wreaks havoc on the global economy, Congress is preparing a $1 trillion bailout package. But will this solve the problem or simply fuel the next corporate crisis? This emergency aid package may seem necessary to stabilize industries in free fall. But it risks perpetuating the same systemic issues that led these corporations to financial instability in the first place.
Many of these companies, including domestic airlines, chose to enrich shareholders through stock buybacks. They prioritized this over safeguarding their financial health. This shortsighted approach left them vulnerable when the crisis hit. Now, they are looking to taxpayers for rescue.
Should taxpayers really be responsible for bailing out companies that prioritized short-term gains over long-term stability?
Instead of bailouts, there’s a better, time-tested alternative: bankruptcy.
The Case for Bankruptcy Over Bailouts: Addressing Moral Hazard in Government Bailouts
Bankruptcy, particularly Chapter 11, is designed to help companies reorganize their debts while continuing operations. It’s a process deeply embedded in American legal tradition, dating back to 1542 in England and later becoming part of the US Constitution. When properly applied, Chapter 11 allows businesses to restructure and emerge stronger. It protects jobs and creditors without creating a moral hazard.
Several types of bankruptcy exist, but the most appropriate in this situation is Chapter 11. In this process, a company is reorganized in exchange for debt relief. It’s used for businesses that want to keep operating but need to restructure so they can pay their debts. The Chapter 11 process shields companies from immediate lawsuits. During this time, they work out a plan to manage their debt, typically within an 18-month period.
Historical Precedent: Successful Airline Reorganizations
The history of the airline industry offers compelling examples of how Chapter 11 can help companies recover. It demonstrates how they can emerge healthier and more competitive after restructuring.
For instance, American Airlines declared bankruptcy in 2011 but continued operating throughout its reorganization. It flew normal schedules, honored reservations, maintained frequent flyer programs, and paid employees. The airline used this time to adjust its operations. It eliminated unsustainable pension liabilities and strengthened its balance sheet.
This wasn’t an isolated case. United (2002), Delta (2005), and Northwest (2005) all went through similar reorganizations. Each of these airlines faced significant financial challenges. In each case, they shed excessive debt and restructured their operations to remain competitive. Although these restructurings involved painful measures like freezing pensions, they ultimately enabled these companies to survive. In the end, they allowed the businesses to thrive.
In contrast to bailouts, Chapter 11 forces companies to confront the consequences of their financial decisions. This accountability is essential for maintaining long-term financial responsibility.
The Moral Hazard of Bailouts
Moral hazard in government bailouts creates a serious issue. It insulates companies from the consequences of their poor financial choices. When the government steps in to save management and shareholders from bad decisions, it sends a dangerous message to other companies. It implies that excessive risks can be taken without fear of repercussions because the government will cover their losses. This, in turn, undermines the foundation of a free-market economy. In such an economy, success and failure should be determined by performance, not by political connections.
We’ve seen this moral hazard play out in the airline industry. Since 2012, when the last major airline emerged from bankruptcy, domestic airlines have enjoyed record profits. But instead of strengthening their balance sheets, they spent $43.7 billion on share buybacks. This practice, which was once illegal, enriched shareholders. But it left the companies vulnerable to a downturn—such as the one brought on by the COVID-19 pandemic.
Now, these same airlines are asking for $50 billion in taxpayer-funded bailouts, nearly the same amount they spent on buybacks. Why should taxpayers foot the bill for decisions that enriched a few at the top while weakening the companies’ financial health?
What About Jobs?
Critics of bankruptcy argue that airlines would be forced to lay off massive numbers of employees. This could potentially plunge hundreds of thousands into joblessness. While it’s true that the COVID-19 pandemic has caused a collapse in demand for air travel, bankruptcy doesn’t mean liquidation or shutting down. It’s a reorganization. During this process, airlines can continue operations, just as they did in past bankruptcies.
American Airlines, for example, maintained employee wages and benefits throughout its Chapter 11 proceedings. The focus should be on helping these companies restructure so they can remain competitive. Propping them up with taxpayer dollars allows them to avoid the tough decisions necessary to survive in the long term.
Proposing More Detailed Solutions: Strings Attached
If a bailout is deemed inevitable by Congress, it should not be a blank check for airline executives. Any bailout package must come with stringent conditions to ensure accountability and prevent future moral hazards.
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Wipe out existing shareholders. Just as in bankruptcy, current shareholders must lose their stake before the company receives taxpayer money.
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Ban stock buybacks. As part of any bailout, airlines must be prohibited from engaging in stock buybacks for at least five years after returning to profitability. Instead, they should be required to reinvest in operational improvements, debt reduction, and employee compensation.
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Executive compensation caps. To prevent executives from profiting while companies are being rescued by taxpayer dollars, their compensation packages should be tightly regulated. This regulation should apply both during and after any bailout.
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Ensure accountability. Require regular public reporting on how the bailout funds are being used, with the penalty of repayment if the funds are misused.
These measures would not only protect taxpayers but also help restore public confidence in corporate governance and responsibility.
The True Cost of Bailouts
Bailouts may seem like a necessary evil during a crisis, but they come with long-term costs that far outweigh the immediate relief. By insulating companies from the consequences of poor financial decisions, we encourage future recklessness. The airlines that are now asking for $50 billion in aid are the same companies that spent billions on buybacks instead of preparing for a downturn.
Instead of rewarding bad behavior, we should let the natural corrective mechanisms of the market take place. Chapter 11 bankruptcy provides a path for companies to restructure and emerge stronger while still protecting jobs and maintaining operations. If Congress insists on a bailout, it should include strict conditions. These measures are necessary to ensure these companies don’t repeat the mistakes that brought them to the brink.
The bottom line is clear. We cannot allow companies to shift the cost of their failures onto taxpayers without consequences. If we do, the next crisis will lead to even more companies seeking government handouts. Meanwhile, the lessons of fiscal responsibility will continue to go unlearned.
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