Months after coronavirus was declared a global pandemic, airports and airlines are increasingly feeling the strain of rigorous nationwide lockdowns, international bans on non-essential travel and a dramatic drop in passenger rates globally.
While some governments are now planning to ease out restrictions and gradually return to normality, aviation still looks far from recovering, its revenues plummeting while cash runs out.
Faced with gloomy prospects, sector players have been lobbying for bailout packages to keep them afloat through the crisis.
Aviation’s misery in numbers
“The global aviation industry has been brought to its knees by the virus,” says Ask Traders senior market analyst Nigel Firth. “Entire fleets have been grounded and staff laid off in order to control costs whilst demand evaporates.”
Recent figures from the International Air Transport Association (IATA) show global passenger demand fell by 14% in February 2020 compared to the same time the year before. The steepest decline witnessed since the 9/11 terrorist attacks, it is expected to have further plunged throughout March and April when the pandemic’s epicentre shifted towards Western countries.
As Scope airlines analyst Azza Chammem explains, this is the result of widespread travel restrictions attempting to limit the spread of the virus. “Airlines have grounded at least 70% of their fleets, and in some cases, all their aircraft,” she says. “Aircraft makers face the double blow of disruption to supply chains and the prospect of cancelled aircraft orders and lower future demand, with a knock-on impact on their own suppliers.”
Impending lockdowns and flight cancellations are costing airlines dearly. In March, easyJet grounded its entire fleet until further notice while Delta Air Lines recently posted a net loss of $534m for the first three months of 2020.
Overall, IATA currently expects revenues to fall by $314bn in 2020, which represents a 55% decline compared to 2019.
Meanwhile, airports around the world are facing just as many challenges. Data from Airport Council International (ACI) forecasts the industry will lose some $67bn in 2020. “The longer this crisis lasts, the greater the risk for all, especially airlines,” says Chammem, “as they run out of cash to cover fixed costs, essential operating expenses, leasing and interest payments.”
Covid-19 bailout options for aviation: nationalisation and the case of Alitalia
Over the past few months, governments have been providing their domestic industries with different types of financial support in the form of takeovers, relief packages and bailouts.
A controversial example is Italy’s flag carrier Alitalia, a long-time struggling company run by state-appointed administrators. Earlier in March, coronavirus-stricken Italy plunged into a strict quarantine that inevitably hit aviation revenues. Faced with the prospect of bankruptcy, the Italian Government decided to take full ownership of the airline through a $650m investment becoming effective in June.
The move didn’t come as a surprise to many but has since attracted criticism. “From the point of view of a long-troubled airline like Alitalia, nationalisation might be the best scenario,” says Chammem. “Yet doubts would remain about the airline’s long-term future.
“In Europe, governments have long sought to minimise their exposure to such a cyclical and competitive industry, preferring regulation to ownership of airlines and airports, freeing up funds for investment and spending elsewhere.”
Veronique de Rugy, senior research fellow from non-profit think tank the Mercatus Center at George Mason University, believes nationalising carriers could do more harm than good: “It is precisely the privatisation and the deregulation of the airline industry that has led to the explosion of travel,” she says, “making it accessible for all and [bringing] better services, lower prices, higher quality, safety.”
Inside the US’ $50bn package for the airline industry
From the smallest regional carriers to giants like American Airlines, United and Delta, the whole US aviation industry has been crippled. Reports show that the number of Transportation Security Administration (TSA) screenings at airports fell 95% in April compared to the previous year, while United recently warned its investors of a net $2.1bn net loss in Q1.
The US Government recently approved a $50bn bailout package for airlines and a further $10bn for airports. Half of the sum will come in the form of payroll grants and the other half as loans. While over 200 airlines have applied for the scheme, American Airlines will get $5.8bn and Delta $5.4bn. As for airports, about half of the pot is to be split among the US’ 32 major airports. All beneficiaries will be entitled to the sum on the condition that they will keep 90% of their workers employed.
Yet while this package will come as a relief to the troubled industry, the Mercatus Centre’s de Rugy points to its disadvantages. “Bailout and [subsidies] are government-granted privileges,” she says. “Usually they only serve a few politically connected firms but they have significant costs, many of them are hidden.”
This is because when a bailout takes place, resources are “shifted away from non-subsidised industry right to the subsidised one in a way that is completely disconnected from the merits of other projects”.
Companies that have been bailed out could also feel disincentivised from coming up with future crisis strategies. “If you know that the government is going to bail you out each time, why try and plan better for the next crisis?” she says. “It will just take longer for them to fail but they will fail. There’s so much a bailout can do to prevent the failure of a big company, especially if the company doesn’t change its way.”
Last resort: the UK’s current relief strategy
For some aviation stakeholders in the UK, a bailout is the only feasible option. At Heathrow, Europe’s busiest and largest airport, passenger rates fell by 52% in March compared to the same time last year. The hub expects this number to have further dropped to 90% in April.
Since the enforcement of a nationwide lockdown in late March, UK stakeholders have been asking the government for stronger financial support. “World-leading British airports, carriers and services companies are feeling unprecedented pressure as we speak,” comments Confederation of British Industry director Tom Thackray.
So far, the government has remained sceptical about bailing the industry out, ruling this option as a ‘last resort’. Instead, it is encouraging airports and airlines to discuss alternatives with their shareholders and creditors.
In the meantime, it has also been holding negotiations with individual airliners. Earlier this year it agreed to give easyJet a £600m loan, while it is currently in similar talks with Virgin Atlantic.
Yet according to Thackray, this might not be enough. “The government now needs to be genuinely open minded and flexible about how it can best get behind the sector,” he says. “An approach that recognises the economy-wide importance of aviation to the UK will build off the government’s already strong record for helping businesses through this crisis.”
As for flag carrier British Airways, Downing Street is reportedly considering part-nationalisation. The company has already furloughed 35,000 employees and is playing a crucial role in repatriating Britons stranded abroad.
However, according to Ask Traders’ Firth, this should only be considered as a “worst-case scenario”. “Demand is expected to return over the coming years,” Firth says. “The biggest risk is if this turns out to be a deeply entrenched slowdown rather than a short sharp slowdown.”
Experts’ view: what option is the most effective?
Firth says the best relief option will depend on when travel bans are lifted. In the short term, the ideal package would have to include “deferral of taxes, reduced regulatory costs and [a focus] on protecting workers”, though measures should be re-considered were lockdowns to be extended in the months to come. In either case, a key requirement for obtaining the package would have to be “security of assets” such as landing slots.
Meanwhile, Scope’s Chammem argues that the primary form of government support should be having “short-term work schemes and similar policies to provide relief for salaries and wages of airline staff while preserving employment”.
She adds that despite many airlines entering the crisis with already “stretched balances sheets” there might also be scope for the release of debt guarantees, which “imply increased leverage or involve conditions such as job guarantees, providing security such as share options or aircraft which curtail an airline’s independence”.
If a bailout is selected, this should come under strict conditions, including prohibiting “stock buybacks and share dividends for at least a year after the loans have been repaid, as the US is considering”.
Finally, Mercatus Centre’s de Rugy believes bankruptcy to be the most preferable option for the aviation sector. “There are many different reasons why we should always be against bailouts but in the case of the airlines it’s particularly problematic because they have an alternative and that is called bankruptcy, which works really well,” she says.
“Bankruptcy prevents the systemic risk that we fear when a company goes down. Airlines have gone through bankruptcy many times before – they could have gone through yet another one and have come out of it fine on the other end.”