Airports around the world have become parking lots for grounded planes. The last time this many aircraft were idle was after the terrorist attacks of September 11 2001. Today’s near-shutdown of commercial aviation caused by the coronavirus is worse. It is likely to last much longer than the one two decades ago, and poses more of an existential threat to airlines.
Faced with the likelihood that carriers go bust, what should governments do? The calls for assistance are loud and urgent — global airlines need up to $200bn of support to help them through the crisis, the International Air Transport Association said on Tuesday. In the US, carriers have asked for an aid package worth $50bn. That would dwarf the $15bn granted after 9/11. In the UK, Virgin Atlantic says the industry needs assistance totalling £7.5bn. These are enormous sums, particularly when many industries — hotels, tourism, the entire hospitality sector, to name just a few — are making similar claims for support. If there were not enough of a strain on national treasuries already, health services the world over have a more important requirement for a serious injection of funds. Politicians must also consider how granting aid to airlines fits into the bigger picture of climate change and targets to cut carbon emissions.
While many political leaders will see the survival of airlines as strategically important — they are often called “flag carriers” for good reason — it is not hard to build a case that airlines should have to fend for themselves. Airline investors have done pretty well over the past decade, as consolidation has allowed companies to make money.
This is particularly true in the US, where a few mega-carriers have not only made decent returns but devoted much of their free cash flow to share buybacks. A recent analysis by Bloomberg found that the five biggest US carriers spent 96 per cent of their free cash flow in the past decade on stock buybacks. Several have in the past also availed themselves of US laws governing bankruptcy protection.
In Europe, where too many airlines are still chasing too few passengers, a shake-out was always inevitable. There are carriers whose business models would not be sustainable even without the stress of today’s pandemic. In Italy, the state is poised to hand Alitalia a €600m rescue package; if it happens, the bailout would mark just the latest intervention by the state. Any rescue must come with strict conditions attached. Above all, the government must make sure the interest of the taxpayer is protected. Similarly, if a carrier is rendered insolvent by the crisis then this could mean the government taking ownership — albeit only temporarily — before a comprehensive restructuring.
Given the importance of airlines to the wider economy, there is nevertheless a case for co-ordinated, short-term state support to help them weather this storm. No one knows how long it will last and even those carriers with access to cash and credit lines today may require assistance in a few months’ time. Ensuring liquidity to keep operations going and to keep up payments to suppliers is vital. Short-term loans, grants or tax relief are all options governments should consider. As with any loan, however, airlines must put up collateral in exchange. Governments should have priority over other non-trade creditors, even secured ones.
The UK and Australia are among those due to announce targeted packages in the coming days. Aviation will play a key role in the global recovery effort once the crisis passes. A targeted approach to help carriers navigate the turbulence is the right way forward — but not at any price.