If Rishi Sunak bails out the airlines, he needs to learn lessons from the past - Carsten Jung
The aviation industry faces mass bankruptcies due to the coronavirus crisis. If the government decides to proceed with a bailout for the industry, it should heed the lessons of past bailouts. Any support package needs a clear social objective – protecting jobs and the climate – while also being a fair use of government money.
Measures aimed at slowing the spread of the coronavirus are wreaking havoc in the aviation industry. As passenger numbers plunge, some airlines are ceasing almost all their flights, potentially for several months. Yet they continue to have significant cash outflows including wage payments, ticket refunds to passengers and debt repayments. The gloomy outlook means banks might soon stop lending to them, driving them towards potential bankruptcy. The Bank of England is offering firms across the UK favourable loans via banks, but the airline industry might be too weak to qualify. And even though the Treasury is offering companies subsidies to continue paying staff while the pandemic continues, this is unlikely to be enough to cover all the airlines’ costs.
Those that have approached the UK government for help include British Airways, EasyJet, Ryanair and Virgin Atlantic. Details are scarce, but they seem to be arguing that to cover their cash shortages they need billions of pounds in support. This could come in the form of favourable loans, state guarantees, lower tax bills or injections of new equity capital. The latter would mean the government becoming a shareholder in these companies and benefitting from any future profits. The Chancellor, Rishi Sunak, has indicated that the government becoming a shareholder in these firms is a “last resort” and that firms would need to exhaust all other options – including existing support schemes – before negotiations could take place. There is a strong economic rationale for government intervention to protect the aviation industry in some form. Approximately 80,000 jobs are attached to these four airlines – many of them in the UK. Accordingly, some see these firms as too important to fail, both for the labour market and for the wider economy. Others, however, suggest that the industry was already set for future decline – in part due to the need to reduce emissions from aviation – and that there are other ways to support affected airline staff.
If the government does decide on a bailout, this must come with clear conditions. Looking back at previous bailouts – their pitfalls and their successes – provides some key lessons on the form this intervention should take.
Be transparent about the rationale for any bailout
Even the best-designed government bailouts can end up as a net cost to the taxpayer. For instance, the US government assistance to the auto industry succeeded in preserving many jobs, but still cost American taxpayers more than it saved. Similarly, the bailouts for American airlines after the 9/11 terror attacks did not prevent some of them from going bankrupt a few years later anyway.
An airline industry bailout might still be worthwhile in the current crisis. But the UK government must be transparent about how this is in the public interest – such as by explaining how many jobs will be saved, and by publishing the expected costs. Depending on its analysis of the situation, the government could also decide to bail out just some but not all of the four firms in question, while supporting workers in other failing firms by other means.
Such transparency is important to establish trust, allowing taxpayers to assess how the funds are serving the public good, and will not end up as handouts to the firms’ investors.
Make sure private investors pay their fair share
Any rescue package needs to ensure that private sector creditors and owners bear some of the losses. When the US auto industry was bailed out, debtors had to accept losses to reduce the amount of state funding needed to a smaller and more acceptable level. In this way, investors who had benefited from profits over previous years were asked to contribute before taxpayer money was put on the line. The lesson is that any bailout should ensure that ‘bailing in’ of private investors is done as much as possible. Encouragingly, Rishi Sunak’s most recent statements indicate that he agrees.
Require protection of jobs, employment rights and green standards
One key motivation for a bailout is almost always to keep people in work. So, ensuring that an agreed proportion of workers are retained should be a requirement for any support. Firms receiving funds should also be required, in due course, to set out a Jobs and Fair Wages Plan, including limits on executive pay. And they should commit to becoming leaders in their fields on green standards. This could involve for instance, adopting efficiency targets, including moving towards green fuels and a commitment to invest in green technology and innovation; second, committing to early phasing out of older, more polluting planes; and third, moving to science-based standards for any emission offsetting programmes. As part of the bailout package, all of these conditions could be monitored and enforced by an oversight body.
Be realistic about the future
Aviation is in many ways a risky industry that may be worth less in the future than it was before the coronavirus crisis. There are at least three reasons for this.
First, in Europe (unlike in the US), it is seen a competitive sector. This means it is not unusual for airlines to get priced out of the market by competitors and driven to bankruptcy. This means future success in the airline market – and future profits – is far from certain. In other words, it is at least conceivable that a part-nationalised airline might end up as a loss-making drain on government resources.
Second, air travel may well remain subdued even after the crisis if, for example, more businesses learn that video-conferencing is a worthwhile alternative to flying their employees to meetings around the globe.
And third, aviation is a key contributor to climate change – making up 2.4 per cent of global emissions And, if past trends continued, emissions would be expected to triple by 2050.
The government’s commitment to achieving net zero emissions by 2050 will therefore have a big impact on airlines’ business plans. Achieving this target will mean cutting down heavily on non-essential forms of travel, switching to clean, yet-to-be-invented technologies or finding ways to deliver and pay for substantial carbon capture elsewhere.
So far, airlines have paid lip service to the target, but presented no viable plans to achieve it. In its own projections, the industry anticipates continued, unimpeded growth. Airlines’ business plans, their investments and their profit promises will, somehow, land back on earth in the face of the climate crisis.
For these reasons, the design of any government support for UK airlines should take a realistic view of their future profitability. Air travel will continue to be important, but the government should not have blind faith in its growth when it decides whether to become a major funder of the sector.
It is not an enviable decision for the Chancellor to have to make. But if the government decides to bail out the airline industry, the lesson of history is that the design of the package is crucial.
It should guarantee that jobs are protected. It should ensure taxpayers get a fair deal, by making sure private investors pay their fair share. And it should, at its heart, recognise that even without the impact of the coronavirus crisis, tackling climate change will transform the aviation industry in the years ahead.
Carsten Jung is an IPPR Senior Economist