COVID-19, airlines and government handouts

The COVID-19 pandemic has affected the airline industry like no other event in its 100-year history. Passenger traffic is down by more than 90% in most regions of the world, and the few services that are operating are flying primarily cargo or are repatriating nationals back to their home countries. Earlier this week Virgin Australia entered voluntary liquidation and four Norwegian Air subsidiaries declared bankruptcy, while Air Mauritius followed into administration today (Wednesday). Some carriers have already collapsed - it was the last straw in the long-running Flybe saga - and many many others are hanging on by only a thread. Tens of thousands - if not hundreds of thousands - of employees have already been furloughed, while others have lost their jobs permanently. And it’s not just airlines – airport ground staff and suppliers to the industry are being badly impacted. Even Airbus says it will take a huge hit to its aircraft manufacturing programs while employing people in the UK and across the globe.

Above: Virgin Atlantic have been re-equipping their fleet with new, quieter, cleaner aircraft, like the Boeing 787 Dreamliner (pictured) and the Airbus A330.

Left: Flybe was an early victim of the Covid-19 Pandemic

Meanwhile the expenses don’t stop. Aircraft leases running into hundreds of thousands of dollars a month (per airframe) still have to be paid, and maintenance inspections that are based on calendar periods still have to take place – the failure to do so results in multi-million dollar aircraft becoming worthless hunks of metal. The aircrew that are retained on payroll at present have to maintain their currency in simulators to ensure they can fly when the bounce-back finally starts, while many head office functions have to be maintained to plan and prepare for next year and beyond. With no cash coming in, the effect of the shut down on balance sheets is approaching catastrophic levels with United Airlines, one of the world’s largest carriers, forecasting a loss of around $2bn for Q1 alone.

In the midst of all this, Sir Richard Branson has appealed to the UK government for £500m to help support Virgin Atlantic Airways. His requests have apparently so far been rebuffed while casual observers have decried the appeal for money that has come from a serial entrepreneur valued at around £5bn, suggesting he should bail out his company himself.

So should Virgin Atlantic be bailed out by the government, or should it be left to survive or fail based on its own resources? The answer is rather complex and involved:

Firstly, Branson doesn’t actually have £500m in cash to pump into Virgin Atlantic - most of his worth is invested in other companies and cannot be readily converted into a capital injection for an airline.
Secondly, Branson’s Virgin Group only owns 51% of Virgin Atlantic, while the remaining 49% is held by US-based Delta Air Lines. Delta is facing its own challenges right now and presumably isn’t willing, prepared or even able to match any cash injection from Branson. A one-sided refinancing would have a fundamental impact on the ownership of the business, and is not something that could be accomplished overnight. Should the UK be bailing out a company that is 49% American-owned?
However, Branson is now well into his sixties and has plenty of other projects to keep him occupied and the Virgin brand in the public consciousness. Virgin Atlantic has been marginally profitable at best and loss-making quite frequently, leaving the question of whether Branson actually needs Virgin Atlantic anymore open to question. Realistically, he could walk away now having made an impact on the airline world, and leave what is undoubtedly a cut-throat market to others.
The UK government has already provided a loan of £600m to easyJet and is negotiating arrangements with other carriers based in the UK. It seems almost certain others will get some form of government support. Providing surety to one business and not to others seems tantamount to distorting a competitive market, a game in which ministers get to decide which businesses survive and which are left to rot. Surely if one airline is offered a lifeline with beneficial terms, others in the same market should be offered the same deal? How would you like it if you and your neighbour were both unemployed through no fault of your own, and the government offered support to your neighbour but not to you? Or if you ran a business which the government did not help, while your competitor down the street was propped up with state aid?
The UK Chancellor of the Exchequer has already admitted that the government will not be able to help every business and every family during this time of crisis. By definition then, some will be left to fend for themselves and potentially fail. The future shape of the airline industry then seems set to be determined by unqualified individuals (cabinet ministers who are not extensively versed in the industries and businesses they are judging, assisted by civil servants who have equally not been exposed to the real-world challenges faced by industry) who decide which firms are helped and which are left to fail. It is a sad indictment on the state of this country that a few elected MPs and a coterie of un-elected civil servants get to decide which businesses survive and which collapse - and have similar influence over millions of individual people's future too.
It also needs to be noted that Branson isn’t asking for £500m of taxpayers money - he is asking for a loan on commercial terms that will have to be repaid when the business bounces back. On the same terms as other airlines such as easyJet have already been offered.
The alternative to providing a loan to Virgin Atlantic that will help secure its short term future is that the business is likely to fail. The loan would save the jobs of several thousand staff who, if the business collapses, are likely to be out of work and relying on government benefits programs for quite a long time as the aviation industry will only very slowly rebound to where it was before. So the loan can be seen as providing job security for thousands of ordinary workers, rather than providing funds to an extremely wealthy individual. Furthermore, Virgin has $4bn of aircraft orders outstanding, all of which will provide jobs (or not, if the airline closes) to workers in the UK who make the wings and engines.

US airline Delta currently have a 49% stake in Virgin Atlantic

The decisions related to Virgin Atlantic are not isolated though. During this crisis, the government has thrown the economy and the future of millions of families under a bus in the name of protecting all of us from this virus. This is a virus that the vast majority will contract and survive after a short illness, and plenty will not even know they have had. It is a virus that has not even doubled the normal death rate in the UK. It is a virus that has sadly killed more than 17,000 in the UK, but has already blighted the lives of hundreds of thousands (if not millions) more through lost income, jobs and livelihoods.

COVID-19 kills - of that there can be no doubt. But it is not the mass killer it is being made out to be (see also Kevan James column; The Trial of the People). There have been far worse pandemics in the past and while it is tempting to believe that modern medicine can do more than it could in the past it cannot do everything, as this virus has shown. As has already been said, the vast majority of us will catch COVID-19, have a torrid few days at worst, then get over it and carry on as normal. Sure, social distancing and attention to personal hygiene are good approaches to mitigating the effects of the virus - as is protecting those who are truly vulnerable and making allowances for those who are genuinely unwilling to face the risk. But for most of us the virus will merely be a small bump in the road rather than the headlong dive into misery that shutting down much of the economy represents.

The problem is we live in an era of fly-by-night politicians who are more concerned about their image today than they are about the long term viability of the nation they purport to support. In less than five years, plenty of them will be gone from the public limelight. But at that point, the hardship caused by the lockdown will still be blighting a huge number of people impacted by their decisions. Not one of our politicians seems to be prepared to or have the guts, to put their head above the parapet and admit that while a loss of life is tragic, the long term viability and prosperity of the nation is more important - that the needs of the many outweigh the needs of the one or the few. Our politicians are looking for solutions to the here and now to make themselves look good. They are not looking to the long term, which given the fickle nature of the electorate, then might not have to deal with anyway. As a result, our politicians are failing to consider the long term emotional effect of lost jobs, lost income and ruined livelihoods that will affect millions.

The harsh reality is the economy needs to be restarted, and restarted urgently. Not in three weeks, not on a yet-to-be-determined date further into the future, but now - right away. Those that can and want to work need to be allowed to go back to it, and start generating business that puts money into the economy to support its long term future. At the same time, the vulnerable need to be protected and supported so that they can play their part once this thing has been ridden out and drugs are available to combat it.

easyJet are set to benefit from Government support (Tyler McDowell)

That brings us neatly back to airlines. Airlines are shut down not because the businesses want to be shut down, and they are not shut down because there is no need to travel. Airlines are shut down because the government has place onerous restrictions on our movements that mean very few of us are allowed to travel even if we want to. Yes, there would have been a significant downturn resulting from COVID-19 and that would have created a challenges for airlines, but essentially the government has all but made a unilateral decision to shut down the airline industry and create all this hardship for employees working within it.

And that’s the real rub. Airlines aren’t in this mess because they made the mess. They are in a mess created by the virus, but in an even bigger mess than they need be in because the government has created a business environment for the airlines that is much worse than it needs to be. And that, as much as anything else, is why Virgin Atlantic should be given a loan by the government that will go some way to ensuring it and its staff survive intact and come out of this chaotic situation fit to continue to provide its employees with a livelihood and the wider population a fair and competitive travel market.

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COVID-19, airlines and government handouts