With so many people hunkered down at home, it’s no surprise that the travel industry is in peril. But Chicago Booth’s Steven J. Davis says that while the US should want to prevent airlines from shutting down entirely as a result of the COVID-19 crisis, it needn’t bail them out to keep them out of bankruptcy.
Credit support makes a lot of sense for businesses. Bailing out shareholders makes less sense.
The airline industries, if they go bankrupt again as a consequence of this, they can continue to operate. They've been through bankruptcy before. I don't see a particular reason to bail them out. Bail out the shareholders, that is.
That's quite distinct from a liquidation of the company and its operational capacities. That's the distinction I'm drawing. Bankruptcy court is designed to maintain critical operational capacity while ownership is transferred from the old stockholders to the new stockholders.
Now, there are some nuances to mention in the current environment that differentiate it from normal circumstances. It's possible to imagine that there be such a wave of bankruptcies in the wake of this crisis that it might overwhelm the bankruptcy court process, and so there might be some special provisions, because we don't want the airlines to shut down after this comes back. But I'm not going to shed too many tears if they go bankrupt.
So that's one thing I would say.
Just based on news accounts, there's obviously a huge amount of pork barrel spending that is buried in the stimulus bill that I think, on economic grounds, is not a desirable outcome, but in terms of political expediency, that may be how you get the bill passed. So that's true in any emergency situation, at least to my knowledge: where there's a large stimulus bill, there are always many pieces in it that have nothing to do with the crisis at hand and shouldn't really be part of the stimulus bill on economic grounds.