Why Airline Wages Rise, And Why Stock Buybacks Don’t Matter

U.S. airlines agreed not to buy back stock until September 30, 2022 as part of their government bailouts during the pandemic. It would have been unseemly to pick taxpayer pockets and immediately turn around and distribute those same funds to shareholders. (There were also limits to executive compensation for the same reason, Congress didn’t want to be embarrassed by the airlines once they had the money.)

Now that the buyback restriction is about to end, unions don’t want airlines to spend money that way, arguing that the funds should go into the operation instead (paying workers more, natch).

“We can’t allow executives to send one dime to Wall Street before they fix operational issues and conclude contract negotiations that will ensure pay and benefits keep and attract people to aviation jobs,” Sara Nelson, international president of the Association of Flight Attendants, which represents some 50,000 cabin crew members, said in a release announcing the anti-buyback campaign Thursday.

The campaign is also supported by the Association of Professional Flight Attendants, Air Line Pilots Associations, International Association of Machinists and Aerospace Workers, the International Brotherhood of Teamsters, the Transport Workers Union of America, and the Communications Workers of America.

Spending cash that airlines are generating on buybacks doesn’t really influence wages. Wages at airlines go up as a symptom of cost disease. As wages rise elsewhere in the economy due to productivity gains, airline wages have to go up to compete for staff, even though a flight attendant or pilot is no more productive than they were in previous years. Pilot wages, especially, go up when the government limits the pool of available pilots (Cf. 1500 hour rule, mandatory retirement age).

Unions largely affect the form that compensation pays (work rules versus cash) and to whom compensation is paid (redistributing income from junior employees to senior employees through seniority even though an airline is generally not getting more productivity from more senior employees). And airlines like Delta will pay employees more to convince them not to join unions, in order to save themselves the associated deadweight loss (Delta’s historically better financial and operational performance has been tied, in part, to being mostly non-union).

Here is the completely wrong way to think about contract negotiations at an airline,

“Every dollar that goes toward stock buybacks is a dollar that could have been used to reduce disruption by addressing understaffing, high turnover, excess overtime, and low starting wages,” said Richard Honeycutt, chair of CWA’s Passenger Service Airline Council.

Indeed, airlines aren’t about to start buying back stock because of:

  • debt loads, piled on during the pandemic
  • high fuel costs
  • possibility of recession reducing demand for travel

The airlines that are strongest financially could return to buying back shares if the economy stays strong, fuel prices moderate, and demand continues. But that just means those airlines are profitable, which is a necessary condition for achieving any of labor’s goals. If anything stock buyback and wage growth may correlate positively, rather than negatively.

Buybacks are one of the most misunderstood elements of finance among the public at large.

  • When airlines generate cash that belongs to shareholders they can invest it or return it. They are generally low growth businesses, and there are better opportunities for investment outside the airline. So dividends/buybacks move the cash to more productive places – that is good for society because it means money invested in productive, innovative ways.

  • Buybacks don’t even, generally, raise share price in a material lasting way. Share price includes the cash, when they distribute it the airline has both a lower value and fewer shares.

    Stock buybacks do not make shareholders wealthier. The cash already belongs to the shareholders. It is in the company’s account. The company distributes the cash and is therefore worth less, while (in this case ex-) shareholders invest it elsewhere.

  • Buybacks have historically been more tax-efficient than dividends though of course there will now be a 1% tax.

Whether a business is holding sufficient cash to operate (especially given mountains of debt!) is a reasonable question in the context of corporate governance. As a labor union issue it’s a red herring, except insofar as their concern is bankruptcy reorganization and abrogating contracts. But that is, of course, still the basic prudent management question.

That we’re even having the discussion about buybacks gets at why airline stocks have low multiples. They do not have high return opportunities to invest their cash.

And that’s the major reason (aside from how badly mergers often go, and how costly they can be to manage) that JetBlue shouldn’t take nearly $4 billion in cash and use it to buy an airline. They’d be better off taking the cash and investing it in almost anything else, even a broad-based stock ETF.

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