Foaming the Runway

What Is Foaming the Runway?

Foaming the runway in a financial context is the practice of making a last-minute infusion of cash into a company to forestall bankruptcy. It can also refer to the practice of providing a financial buffer for companies that are perhaps one crisis or loss away from insolvency.

Understanding Foaming the Runway

Foaming the runway is a general statement in business, which refers to preparing for a potential disaster and a means to prevent that disaster.

The term comes from the practice of spraying fire suppression foam on an airport runway before an emergency landing as a means of helping reduce friction and sparks, and also slowing down a plane. In 1987 the Federal Aviation Administration (FAA) in the United States withdrew its endorsement of the practice but does not legally prevent it.

In a business context, for example, a company that is not generating enough cash to pay its suppliers decides on obtaining a loan so that it can pay its suppliers to stay in business and remain solvent can be considered as "foaming the runway." 

If a company is in significant financial trouble before having to obtain an infusion of cash, foaming the runway may simply delay the inevitable. Prudent investors should not assume that a cash infusion will save a company, and should carefully review all available information before making an investment decision.

Benefits of Foaming the Runway

The main benefit of foaming the runway is that the cash infusion buys time for the company to turn itself around or make any operational changes to prevent it from going down the path of insolvency and eventual bankruptcy.

The cash infusion will keep the company afloat until it can improve its sales, costs, margins, or other areas that will sustain the business from its core operations as opposed to relying on external funds from outside sources.

This is not to say that a business can no longer rely on equity financing or debt financing as a normal course of business operations, but rather, not rely on this type of infusion as a sole means to survive and stay in operation for the long term.

Real-World Example

One prominent use of the term involves former U.S. Department of the Treasury Secretary Timothy Geithner. As part of the agency's policy of propping up banks during the subprime mortgage crisis, Geithner has been accused of standing in the way of facilitating the refinancing of home loans in order to foam the runway for troubled lenders.

His preferred policy, according to some industry watchers, was to provide little leverage for homeowners who were underwater on their mortgages and in danger of default to renegotiate mortgage rates, repayment terms, payment amounts, or other loan terms.

In effect, his policy squeezed already troubled homeowners to continue making unsustainable payments so that troubled banks would have a larger cash cushion to avoid default or insolvency. In essence, he was helping banks foam the runway by providing little assistance to homeowners that had mortgages with those banks. The homeowners were the foam in this example while the banks were the airplanes.

There was little assistance at the time to homeowners through the Home Affordable Modification Program (HAMP). As a result, many homeowners turned to the bankruptcy courts as an alternative to foreclosure. Geithner's actions have been looked upon negatively as he turned away from helping individuals and families.