Should airlines be bailed out by governments or not?

Airlines across the world are asking for public money to see them through the unprecedented crisis for the sector created by the Covid-19 pandemic. But many say they shouldn’t get it. Ben Chu examines the economic case for and against state rescues

What’s the actual harm in letting airlines like Virgin Atlantic fail? (Getty)

No one disputes that the coronavirus pandemic has destroyed the financial viability of many airlines through enforced lockdowns and a general collapse in air travel.

But there’s a great deal of disagreement about what the response of governments should be to the plight of these companies.

Richard Branson is publicly pleading with the UK Treasury for a large public loan for Virgin Atlantic.

But many – not least the boss of Ryanair, Michael O’Leary – object that the multibillionaire should use his own money to keep the airline flying, rather than seeking public funds.

Meanwhile, Mr O’Leary is threatening legal action over the moves by European governments to prop up their own national carriers, saying that this public subsidy threatens to undermine fair competition.

The US airlines are receiving $25bn (£20bn) from the US government. But many analysts complain that these bailouts reward managements that were financially reckless before the crisis hit.

Some argue that these companies should be allowed to go into administration and that the airline industry should embark on a long overdue process of consolidation.

So which side is right here? How strong is the economic case for public bailouts of private airlines in the context of Covid-19?

What’s the case in favour?

The essential argument is that these airlines have been hit by a catastrophe that they could not realistically have financially planned for.

And government actions, in the form of travel bans and lockdowns, have directly wiped out the sector’s revenues at a stroke.

So, like millions of other companies, airlines have a legitimate claim on public financial support to see them through this emergency.

Furthermore, airlines, as transport companies, have a vital role in facilitating wider economic activity so governments have a particular interest in ensuring their survival because they will be needed to facilitate the eventual recovery.

But what if these airlines were badly run?

One of the complaints heard particularly in the US is that airline executives spent their free cash-flow in the preceding years on share buybacks (transactions that boost their stock prices and, usually, executive remuneration), leaving them financially exposed in the event of a major downturn in revenue. Bailing them out now thus rewards reckless executive behaviour.

It’s true that US airline industry collectively spent a hefty $50bn on stock buybacks over the past decade, virtually all of their free cash-flow. That’s money that would have served them well now.

Yet airline executives were not alone in this. Buybacks were a depressingly common feature across the corporate landscape of the past decade. And the trouble with withholding support from one corporate sector seen as having behaved irresponsibly is that it raises the difficult question: why not from others too?

A related argument is that these airlines were so financially weak that their lives are being artificially extended. Virgin Atlantic, for instance, has made losses for the past two years.

Yet, again, one could make this point not just in relation to airlines but across the private sector. Officials plainly lack the time or ability to systematically examine each company to decide whether or not it would have survived or not in the absence of the Covid-19 pandemic – nor, of course, could we be sure they would reach the right answers.

The argument that a business backed by someone as wealthy as Richard Branson should not receive public funds is superficially compelling. But, once again, one could make it relation to countless other firms in receipt of public funds in this crisis.

If this recession is akin to a natural disaster rather than a regular turn in the business cycle there is a strong argument for a blanket bailout rather than one that seeks to distinguish between good and bad firms or firms run by good and bad people. And that logic applies to airlines too.

What about competition?

There is certainly chronic overcapacity in global aviation, which is one of the reasons so many airlines tend to be financially unstable.

Michael O’Leary may be right that rescuing weak national carriers disadvantages more successful companies like Ryanair.

Yet competition is a nuanced argument. While many routes have excessive competition on others there’s a danger of too little if the only viable challenger, for instance, goes bust.

And some routes are not very profitable but socially valuable. Loganair serves remote Scottish airports and is requesting a UK state bailout.

What’s the actual harm in letting them fail?

Some see a central fallacy in the pro-bailout case, namely the idea that when an airline fails it automatically goes out of businesses.

American airlines are notorious for going into Chapter 11 bankruptcy, where their creditors are wiped out, and then starting up operations again debt-free.

Why not do the same this time, rather than protecting the claims of shareholders and creditors and the jobs of executives?

Virgin Australia was refused a bailout by the Australian government and went into voluntary administration this week. But there are already reportedly firms looking at buying its assets.

Airlines’ landing slots at busy airports are some of their most valuable assets and are likely to be snapped up rapidly. Richard Branson, incidentally, made this very point in 2009 when he was arguing against airline bailouts.

Yet while it’s true that in normal times administration and bankruptcy do not necessarily mean an airline (and, importantly, its services) disappear, policymakers would be justifiably cautious about assuming this would be the case if multiple airlines went through this process simultaneously – and that the free market would behave as frictionlessly as hoped.

This time it’s different?

Viewed as an individual policy choice there are plenty of valid economic reasons to object to airline bailouts.

But in the context of a generalised, global and unprecedentedly large private-sector shock, one can understand why many politicians are writing cheques – and it’s difficult to say with confidence that they are wrong to do so.