=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2003/04/08/f= inancial1337EDT0125.DTL ---------------------------------------------------------------------- Tuesday, April 8, 2003 (AP) ALL BUSINESS: Airlines' stock buybacks weren't best use of cash RACHEL BECK, AP Business Writer (04-08) 10:37 PDT NEW YORK (AP) -- The nation's financially strapped airlines sure could use now the spare cash that they squandered in the late 1990s. Sure, the fallout from terrorism and war, the weak economy and higher labor costs have hurt their businesses in recent years, but they've made some mistakes of their own, namely how they used billions of dollars in excess cash during the late 1990s. Instead of covering debts or putting it toward other costs, they launched massive stock buybacks that were intended to boost share prices and please investors. As long as the stock market surged and their businesses thrived, it looked like money well spent. But today, in the midst of a crippling financial mess across the industr= y, the way the cash was used has been deemed a critical error with a lingering effect. Of course, no one knew what the future would hold for the industry. When carriers were launching their buyback programs, it was the booming 1990s. Airlines' revenues kept rising, thanks to a surge in both business and leisure travel and higher ticket prices, and that more than compensated for the continued jumps in labor and other costs. As a result, the airlines were able to build up big cash reserves, but they felt like they had to put the money to work. Wall Street analysts, along with executives who were getting some compensation in stock options, liked the idea of spending it on buybacks, which have long been considered a way for companies to boost undervalued share prices. In a buyback, a company repurchases its stock and by doing so reduces the numbers of shares outstanding and gives remaining shareholders a greater percentage of ownership in the company. They also can offset the effect of stock options by negating the excess = of stock in the market that results when options get exercised. So many airlines, like many other industries at the time, started massive buyback programs. American Airlines spent more than $2.5 billion in the late 1990s, US Airways' total topped $1.9 billion and other carriers engaged in similar plans. "It was the atmosphere of the times. If you were not doing share repurchases, you were not rewarding shareholders," said Philip Baggaley, airline credit analyst at Standard & Poor's who points out that airlines were spending nearly half their net income on buybacks in the late 1990s. The repurchases did give airline stocks some lift, which not only was a boon to average investors but also to airline executives flush with stock options. But the stock gains didn't hold for long. By early 2000, the stock market began what has turned into a three-year retreat and airlines were left with stock holdings far below what they paid for them. Look at American Airlines, for instance. During its stock buyback progra= m, its shares rose above $160 a share before announcing a two-for-one stock split in June 1998. It now trades around $4 a share. And American was left in a difficult financial position when other troubles surfaced. The terrorist attacks in New York and Washington in 2001 dramatically curbed airline travel, which was already under pressure from a downturn in the economy. The pullback in demand has only intensified in recent months as the war with Iraq neared and then got under way. At the same time, their costs have just kept rising, with new expenses f= or upgraded security, underfunded pensions and higher fuel costs adding to already bloated labor costs. Their debts have also grown significantly. Carriers have had to borrow money just to meet their payrolls and pay their bills. Things have gotten so bad that some airlines, including United and US Airways, have filed for bankruptcy protection, and the industry is asking the government for $9 billion in aid on top of the $15 billion bailout that came after the 2001 terrorist attacks. Even American Airlines chairman and CEO Donald Carty has said in hindsig= ht that the stock buybacks limited the carrier's financial flexibility. "The repurchase of stock, the bad use of their money, contributed to an already bad situation with their cost structure that they needed to address, but didn't," said Frank Werner, associate professor of finance at Fordham University's Business School. It's not that having the extra cash would have changed everything for the airlines. But it might have given them a little cushion for the fall. Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org =20 ---------------------------------------------------------------------- Copyright 2003 AP