Does state aid for airlines work?

Grounded

The entire aviation industry has been brought to a near standstill due to the pandemic. The International Air Transport Association (IATA) prediction of losses is almost three times the amount it forecast in a “worst-case scenario” five weeks ago (read more). „The industry’s outlook grows darker by the day,” said IATA chief executive Alexandre de Juniac.

A report by the Center for Aviation (CAPA) predicts that most airlines would collapse by May if governments don’t step in to help. The CAPA report evaluates liquidity in airlines, based on the gross level of cash and cash equivalents as reported most recently. On this basis, the airlines that are most comfortably liquid are low-cost carriers Wizz Air and Ryanair. Wizz Air said it has liquidity to last one and a half years. The CAPA revealed which airlines are winning in the liquidity stakes in Europe: Finnair, with 133 days of liquidity, IAG with 132 days and easyJet with 113. Air France-KLM, Turkish and Lufthansa came in at 81, 66 and 51 days respectively. Austrian Airlines and Lufthansa Group have 51 days of liquidity.

Mr. De Juniac said leaving the middle seat vacant was among likely conditions for a resumption of air travel. „Airlines typically break even above 75 per cent seat occupancy,” he added.

State aid

The US government agreed a USD25bn bailout for the airline industry. Passenger airline companies are receiving direct aid as part of the USD2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (Cares Act) — an economic relief package passed in order to allow them to continue paying salaries and benefits to employees in the coming months.

The grants to major airlines including American, Delta, Southwest, JetBlue and United will probably come with strings attached. According to the Wall Street Journal, the airlines had wanted the loans to be forgiven but the US Treasury Secretary, Steven Mnuchin, told carriers that 30 per cent of the assistance would need to be repaid, and that airlines would have to offer stock warrants — giving the government the right to buy shares in the companies — on a portion of those funds. American Airlines will receive USD5.8bn as part of the deal and plans to request a loan for a further USD4.8bn.

Meanwhile in Europe, state aid interventions have to be approved by the EU’s competition authorities, but a new relaxed rulebook is designed to favor such bailouts. Belgium, Denmark, France and Sweden have already been given the green light for support schemes worth hundreds of millions of euros. But transport Commissioner Adina Vălean told EURACTIV in an interview that “raising these [green] conditions now is not necessarily something I would support,” adding that the priority now should be to focus on the virus recovery strategy.

Brussels Airlines, a Lufthansa subsidiary, will receive state aid, its president Etienne Davignon told Belgian newspaper La Libre Belgique. “The principle is now established that we will benefit from state aid,” Davignon said. The European Commission (EC) has also approved a Swedish loan guarantee scheme to support airlines affected by the coronavirus outbreak.

Lufthansa’s CEO Carsten Spohr said the company would seek state aid in Germany, Switzerland, Belgium and Austria because of the extended period of the crisis, adding he was optimistic talks would lead to positive results. The Austrian government revealed that talks are ongoing with Lufthansa on the conditions for a deal to save Austrian Airlines, which has completely ceased flight operations. People close to the matter told Reuters that Germany was in talks to provide Lufthansa, which has grounded 95 per cent of its fleet due to the pandemic, with billions of euros in state aid and could take a stake in the airline.

Mr. Spohr added that Lufthansa was lucky to have a liquidity buffer of more than EUR4bn, but some of that was owed to customers that have paid for now-cancelled flights and the carrier was currently losing cash at a rate of EUR1m per hour, possibly for months to come. Lufthansa, which also owns Swiss International, Austrian Airlines and Brussels Airlines, has previously said it was considering requests for state support.

TAP Air Portugal has requested state aid to secure its future. The Portuguese airline has appealed to the government for a bailout that it hopes will strengthen its position after COVID-19.

The South African government has refused South African Airways (SAA) an additional loan of approximately EUR500m. “We are currently assessing the impact of this development on the business-rescue process and will communicate any decisions to be made,” the airline’s administrators (who were put in charge in December 2019) said in a letter to Bloomberg.

“All options are now blocked to any form of real continuation of the airline,” said Peter Attard Montalto, head of capital markets research at Intellidex, to Bloomberg. “Basically, the only option now is liquidation.”

Meanwhile, Virgin Atlantic has been told to re-submit a bid for a GBP500m state bailout package. The government was left unimpressed with an initial funding bid, the Financial Times reported. The airline had not done enough to show it had explored other options to bolster cash before asking for state aid, according to the newspaper which cited one person familiar with the matter. Virgin Atlantic, which is 51 per cent owned by Sir Richard Branson’s Virgin Group and 49 per cent by Delta Air Lines, last month requested emergency financial help in addition to the coronavirus package made available to all British companies. The airline is seeking a bailout, split between a commercial loan and a credit guarantee to release funds from card companies withholding payments.

Blue Air, the largest Romanian air carrier and the second-biggest player on the local market, after Wizz Air, has asked the government for a rescue loan at a preferential interest rate. Romania’s government has approved a EUR37m loan for the state owned airline Tarom airline earlier this year.

Eco-conditions?

The state aid will come with strings attached. The Austrian Minister for Environment Leonore Gewessler told reporters that the money should be used to help hit the sector’s climate targets. “If we are talking about several hundred million euros in taxpayers’ money, then it is clear that [it] will be linked to conditions,” Ms. Gewessler said. Coronavirus state aid for Austrian Airlines should support efforts to cut aviation’s carbon footprint, the Alpine republic’s environment minister added. “When it is about an industry that particularly needs to contribute to climate protection, then it makes a lot of sense to use this situation to support this transformation,” she said.

It is unclear what specific climate conditions could be written into a bailout deal but options reportedly include a pledge to reduce short-haul flights, increase cooperation with rail companies, heavier use of eco-friendly fuels and bigger tax contributions.

The chair of the European Parliament’s transport committee, Karima Delli, urged the French government to do the same with any assistance it grants to national carrier Air France. Ms. Delli’s compatriot on the environment committee, Pascal Canfin, also insisted that cash “must be accompanied by a commitment to define an ecological transition contract for the company because public money must not only be used to save but also to transform.”

More than an aid

However, many airlines will likely need more than just state-backed loans. Passenger demand has almost collapsed against high fixed costs. Many in the industry will rapidly burn through available cash. Balance sheets may not be able to sustain further borrowing — even if guaranteed.

In addition to direct financial support, other rules are being relaxed for the airline industry. For example, on March 19^th, the Norwegian government temporarily suspended competition law rules in the transport sector, including specific airlines, for three months. This allows airlines SAS and Norwegian Air to cooperate to ensure the maintenance of minimum passenger services and socially critical functions by coordinating flight schedules.

Critics

Wizz Air has criticized plans by governments to provide state aid for their national carriers. “Most European airlines have been badly mismanaged when it comes to liquidity. Now they’re all begging for state support. Governments should only be stepping up in areas of employment and reducing charges such as air navigation costs,” the airline’s CEO, Jozsef Varadi, told Bloomberg. „Interventions could put Europe’s liberalized, market-driven aviation regime back by five to ten years,” the CEO said adding that with many private operators failing as governments favor flag carriers that have struggled to compete with Wizz and other budget airlines. Mr. Varadi said he was concerned that Germany in particular might dole out billions of euros in backing for Lufthansa that would “completely destroy the market” and set a precedent for bailouts with a social agenda. Lufthansa has predicted it would be years before air travel returned to pre-crisis levels. EasyJet has also said it would defer delivery of 24 Airbus jets.

A smaller future

John Strickland, an independent air transport consultant, told Business Insider that one thing is sure: „Aviation is going to be smaller.” And among the things at risk are Europe’s famously cheap flights, which regularly let people fly for the equivalent of just a few dollars, and for some underpin their entire way of life.