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An American Sob Story

April 13, 2020

In a crisis, everything is stress-tested.

 

That includes business models. Companies thought to be large enough to handle anything are being stretched to their limits.

 

The COVID-19 crisis is illuminating the value of preparation and the steep costs of not preparing.

 

I bring this up because the airline industry, specifically American Airlines, needs help. And by all accounts, it seems President Trump will accommodate. But one of the true reasons American needs help is because it did not prepare for a “rainy day” and it’s storming right now.

 

From 2010 through 2019, American’s business thrived on reduced competition and increased fees. It recorded $7.6 billion in profit in 2015 and earned billions in profit every year the rest of the decade.

 

In 2017, American CEO Doug Parker said, “I don’t think we’re ever going lose money again.” And let’s not forget, during this time we also saw our seats get smaller, snacks cost more, fees go up, and so on.

 

Now here we are, the company on its knees, in mere weeks following a decade of prosperity.

 

I don’t feel sorry for American. Why do we reward companies for mismanaging their businesses?

 

American could’ve done a lot with those profits. It could’ve shored up reserves for a future crisis. It could’ve settled ongoing labor disputes. It could’ve invested to improve its industry-worst service ratings.

 

Instead, the people in charge bought back the firm’s stock to increase its earnings per share. And it wasn’t just American. More than $23 billion was spent on stock buybacks from 2011-2019 by American and Southwest Airlines.

 

Through these actions, American shrank its cash reserves while borrowing heavily to build new planes and retrofit old ones to fit more seats. It’s now about $30 billion in debt.

 

The thing is, we need the airlines. They’ll never be allowed to collectively die. These bailouts are de facto insurance against failure.

 

But are these past actions how we want conduct business going forward?

 

During the last crisis, we let individuals suffer and helped the big guys. That left people hurt. This time let’s start relief at the bottom.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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