Airlines and airports: what to do with the State as shareholder.

The latest events at Air France-KLM (but not only) as well as the turmoil that accompanied the announcement of the privatization of ADP are a good opportunity to come back to an often hot and passionate topic of debate: the rightness of a State to be a shareholder of an airline or an airport.

The State: a misguided shareholder?

The French state is often criticized for maintaining a stake in a largely privatized business. Bad strategist, bad adviser, dead weight, what don’t we blame it for? The fundamental issue is that the State does not have the same objectives as a business (even if there are sometimes shared interests) and that this is the reason why some people no longer want it and, conversely, the reason why others clamor for its presence.

A State is in the capital of a business for different reasons:

1°) Historical reasons. It should have been mentioned, but in fact history always falls into one of the following cases.

2°) Patrimonial reasons. I am not talking about wealth in the financial sense but in the noble sense. I am talking about the heritage that allows a country to be competitive and to remain so in the future, in particular strategic infrastructures.

3°) Geopolitical reasons. When, for example, a sector that will be strategic tomorrow has to be carried at arm’s length to get started and ensure that a country will play a role in that market. Through the businesses it is the existence of a country on the world mapthat is at stake. An arm wrestling match between states through businesses, a matter of political and economic supremacy.

4°) Social reasons. By influencing the strategy of a business, the state aims above all to control its social policy so that a large employer does not start relocating or laying off large numbers of employees. It is not so much the interest of the employee that is pursued here, even if it is the way it is marketed, but the popularity and the image of the government in charge.

5°) Financial reasons. It so happens that sometimes the State finds itself a shareholder in a business that works well and is successful in spite of it, or that it has not managed to sink completely because it enjoys a legal monopoly or is in such a profitable market that the worst manager will not be able to sink it. And in this case the state is quite happy to collect the dividends at the end of the fiscal year.

The profitability of the business, as you have seen, is not its goal. At best, it is ready to lose money in the name of higher purposes and aiming at the long term, at worst it is ready to mortgage the future of a business in the long term in the name of short term purposes or even in the name of higher purposes which again are worth to put down the competitiveness of a business. And here we often come to the case where, on the one hand, the State makes decisions that go against the interests of the business (but that doesn’t matter, it’s for the general interest) and on the other hand plays its role as a shareholder concerned with social peace and prevents it from using the social variable to compensate on the one hand for what was done to it on the other.

In short, where the State manages the great balances between different interests, the business is mainly concerned with its own interests. Logical, everyone has their own job. After all States have not been created to create value and employment, nor have businesses been created to play politics. Moreover, until now, and this is the idea behind the debate, when the State takes care of the creation of value or when the business becomes a political playground, nothing good ever happens.

Having said that, one should not focus on oneself and make a generalization about the French state and its management. Not all states are as interventionist or as clumsy or incompetent when they are.

The State as historical shareholder for good reasons

If in the airline industry we speak of “national airlines”, even if they are largely privatized today, it is for historical reasons: if we go back to the early days of commercial aviation, it was often the States that launched, financed and supported airlines.

The reason is obvious: while the airplane is clearly going to supplant the boat for intercontinental journeys and the train for long “national” distances (at the time the TGV was not even a concept), we feel that at the end of history there will first be business tourism and wealthy tourists and then mass tourism, having an airline is a tool for economic development and even a diplomatic tool. To have an airline is to exist on the world map.

The approach aims to give its nationals the opportunity to do business abroad as well as foreigners to come and do business at home. And in any case to attract tourists! When your name is Paris, London or Rome, you can’t pass up the opportunity to connect with the rest of the world in 1950. Not accompanying the development of air travel at the time is like refusing electricity and staying with the steam engine, continuing to go to New York by boat, is like staying with paper mail in the age of the Internet.

And if private players do not have the vision or the means or the risk appetite to enter this nascent market, don’t worry: the States will do it for them. I don’t think we would be at this stage of air transport development today if the States had not been there at the beginning.

The same is true for airports. What is the point of flying airplanes without places to make them leave or arrive? The airport is to the airplane what the station and especially the rails are to the trainor the cables are to the Internet. Therefore, the State will most often be behind the creation of the first major airport infrastructures. Moreover in the logic the airport must even come before the plane.

Finally, all this is in a logic of “old” countries or young countries with weak liberal tendencies. In the United States, the pattern that prevailed was rather the one that worked for the implementation of the train: it was mainly the business of the entrepreneurs, the pioneers. Logical for a country that has laid its rails as it discovered itself, organized itself, and populated itself in a more uniform manner. And given its size and domestic market, it didn’t take much to convince the private sector to take it on. This was somewhat less true for airports that had to be built on public land and in which the public authorities were more involved in one way or another.

The state in a world of mass transportation

Patrimonial and geopolitical motives have thus made many States the quasi sole shareholders of a large part of the industry. Here is the picture at the time of the explosion of mass tourism.

And little by little the airlines have growth needs that the States cannot assume. The States are getting into debt and must gradually sell their holdings to find cash. It is only during the cyclical crises that the sector is experiencing that we see them put their hand in to save their national airline. This practice is then forbidden by the international institutions: shareholder yes, lender with zero interest or non-repayable funds no! In any case, today most of them cannot afford it anymore.

So airlines find themselves with states that are more or less minority shareholders, but often by means of legal mechanisms that allow them to intervene strategically and especially socially.

The same applies to airports, where public/private mechanisms and public service delegations have been set up, but where the context differs so much from one country to another, particularly in terms of legal arrangements, that it is less easy to make generalizations.

What is the point of a state shareholder in 2019?

The recent governance crisis at Air France-KLMreminds us that even with 14% of the shares, a State can be a source of conflicts and weigh on the life of an airline. Malaysia’s attitude towards Malaysia shows us that today a state can legitimately wonder whether it needs a national airline, by which I mean either state-owned or nationally funded. Even if it means letting it die. The never-ending soap opera of the Alitalia rescue shows us that the will of a state to remain the majority shareholder, alone or with national parapublic investors, scares off possible buyers. And, as far as airports are concerned, the debate on the privatization of ADP shows that there is anything but consensus on the subject.

Today, if we only look at the interest of an airline, the presence of the State in its capital makes no sense. States do not have the financial means to invest massively, no longer have the legal means to save them, but continue to weigh in the arbitrations and not always with the necessary foresight nor in the right direction. And too few airlines are such cash cows that their dividends justify the profligacy we saw at Air-France-KLM, for example. Given the cyclical crises in the sector, I would even describe the investment as speculative in terms of its return.

Geopolitics and economic development? This no longer works, at least in the vast majority of cases. There are enough people in the market to say that commercial mass aviation is a reality, that market growth will continue with some regular sectoral adjustments.

Said in more concrete terms: there is no longer any need for the State to own 14% of Air France for the airline to make its way. It will certainly do it even better without politics being invited to its board of directors, because this policy ends up generating other unhealthy games between business partners. We no longer need this to connect France to the rest of the world. And I would even say that we no longer need Air France to connect France to the world. If the airline were to disappear, its slots would be eagerly taken over by others who would continue to connect France to the rest of the world. And as far as point-to-point is concerned, low-cost airlines already do it better. And exactly the same way Air France no longer needs the State which imposed irrational choices on him, asked it to embody an untenable social model, and gave it loads of useless senior civil servants mode who only knew about the airline sector the Air France Shuttle between Paris and Bordeaux, from where they then leave for a weekend in Arcachon. We can already see that with a top management of professionals of the sector, the airline has quickly gone back in the right direction. Evidence if needed. But the airline had to suffer for reason to prevail.

Replace France and Air France by Italy, Alitalia, Germany, Lufthansa, England, British Airways and it works almost every time. And I insist on the almost.

Let’s start with a counter example: Icelandair. Iceland may be a fantastic country, but I don’t think it would welcome so many tourists without Icelandair which not only brings tourists who want to visit the country, but also offers a stopover (free stopover before leaving to its final destination) to all its passengers in connection between the United States and Europe. How many would have stopped 24 hours to visit without that? Icelandair is the armed arm of the tourist development of Iceland and if the State left Wow to its sad fate I do not think that it will not help Icelandair in a way or another if the worst were to arrive. This has already happened in the 80’s but after a few years the airline hastened to buy back the State’s shares and say “thanks for everything and goodbye”.

More concretely, Dubai, Abu Dhabi and Qatar need Emirates, Etihad and Qatar Airways. Without the power of the hubs of these airlines, we can imagine tourism collapsing and the links between these cities and Europe or Asia being reduced to the bare essentials. The same goes forOman Air, which is offering a stopover to its business and first class passengers at the Ritz Carlton in Muscat this summer.

England and Spain have nothing to do with IAG, owner of British Airways and Iberia. Ironically, its largest sovereign shareholder is the State of Qatar, and the absence of a strong European shareholder base is a problem in the context of Brexit.

France holds 14% of the capital of Air France-KLM (and twice as much in voting rights), while the Dutch state, in its great tradition, let its national airline live its life until the French government thinks more about its own balance and its national airline than about the development of the groupwhich led to the reaction that we know. The solution, in our opinion, was not the entry of the Dutch state into the group but the exit of the French state.

The German state leaves Lufthansa royally alone and, like IAG, the Lufthansa Group (Lufthansa, Swiss, Austrian, Eurowings, Brussels Airlines) is doing very well, thank you. More interestingly, the Lufthansa Group is the third largest shareholder in Fraport, the powerful operator of Frankfurt airportand some 20 other airports around the world, with an 8% stake. Does this make you think of something?

Airports are patrimonial shareholding .

This brings us to the privatization of ADP. For me, one thing is clear: an airport is a heritage, a country can live without its national airline, not without an airport operator that plays the game and behaves like a partner. If we take the logic to the extreme, a totally private airport operator could push for the development of one city rather than another. The hypothesis that a single player could preside over the destinies of several major competing hubs (such as Roissy, Heathrow and Frankfurt, for example) and arbitrate between the three is highly improbable, but the possibility must be kept in mind. And even without this, seeing a private operator decide not to abandon Roissy but to underinvest in order to concentrate on hubs with greater development potential is not a fantasy. This is pure long-term investment logic.

So if the public authorities leave the airlines to their own devices, they tend to keep their hands on the airports. As far as Fraport is concerned, 51.3% of the capital is held by the State of Hessen (and not the German State) and the city of Frankfurt and therefore 8% by Lufthansa. Not an idiotic idea at all, and if you think that what counts in such a scheme is the partnership between the major airline of the largest airport operated and the airport operator, an investment by Air France in ADP makes much more sense than the options currently being considered from an economic and industrial point of view and would be less risky than to risk the rescue of the irreformable Alitalia.

By the way, if we go back to the airlines, don’t give me the example of the United States. Yes, the State lets them live, yes, it does not subsidize them illegally as the Gulf countries are suspected of doing, but with chapter 11 of the bankruptcy law it allows them to get through the crises by investing at the expense of their creditors. The absolute joker against bad management, the get out of jail free card. Let us be clear: with such a system, without the French State owning a single percent of Air France-KLM, the group would have today a brand new fleet and state-of-the-art cabins.

The State as shareholder? But which state?

There are too many different situations and legal contexts to draw any truth from this. But yes, the presence of a State in the capital of an airline is not the only or the best way to help it. And if the state is there for other reasons they are wrong.

As for airports, if the States have to keep an eye on them, they should favor an industry based approach (by associating the airlines) rather than the logics of professions.

Photo : shareholders by hxdbzxy via Shutterstock.