Will States save airlines?

No need to explain much: airlines are in bad shape. In very bad shape. Some have already closed down and others are on the verge of doing so.

Some examples?

Flybe to start with. Not necessarily a good example, though. Flybe was already quite sick and the COVID-19 will have finished to kill it. Other candidates for an announced death? Alitalia, Korean, Malaysian? Again, sick airlines, so this would confirm the common idea at the beginning that the virus is only dangerous for weakened organisms.

But now we have reached the point where everyone from Delta to Lufthansa to Air France is grounded and in great danger. So much so that the three major alliances have for once succeeded in joining forces to ask for help from States.

Some, and I am thinking in particular of Delta and Lufthansa, are strong enough to survive a crisis of a few months. Moreover, last week Lufthansa (which made a profit before interest and taxes of 2 billion Euros last year compared to 1.1 for Air France KLM) declared that state support was not necessary at this stage while recognizing that nothing will be the same afterwards. Air France-KLM will certainly not be able to hold out as long as its neighbor, but we can praise the efforts of the management and staff, which have put the business in a better position to tackle the crisis than it would have been one or two years ago.

But when even the strongest risk to come out of it bloodless, it is beyond the competitive cleavages: it is a whole sector that must be saved or at least supported.

Hence the call to governments. Hence the fact that some, as in France, have spontaneously raised the possibility of nationalization if necessary. The same at Alitalia but in a different context: COVID-19 or not nationalization was the only possible outcome to the dramatic soap opera we have been following since 2017.

But there is often a gap between words and actions that is not always crossed.

Should airlines be saved?

The question of the necessity, the interest and even the legitimacy of such a rescue can already be raised.

In this era of environmental awareness that sometimes leads to blind hysteria, why save an industry that is killing the planet? Already because it doesn’t kill it that much and is far from being such a poor student if you look at the subject objectively.

Then because we have to come down to earth: a world without planes is impossible. This will be seen objectively after a few weeks of almost worldwide air lockdown.

Finally, because between airlines, their employees, airports, manufacturers and their subcontractors, we are talking about a sector that provides a living and a job for millions of people, that provides a living for territories. In short, it is as much a social issue as an economic one.

Can states save the airlines?

Then there remains the question of legality. Wanting is good, being able is better. There are competition regulations that are not made for nothing. In other words, the States do not have the right to bail out airlines as they may want. At least not for free, without compensation.

Now, when we see that Europe is abandoning (temporarily?) the 3% deficit rule, we think that a lot of barriers could fall afterwards. And so much for the competition. To be honest at TravelGuys we are opposed to any form of government intervention to save private businesses. They only have to take responsibility for their current or past strategic and management mistakes and the taxpayer does not have to pay for them.

Yes, but here they don’t only pay for their mistakes. And given the extent of the phenomenon, it is easy to admit that if all the airlines are saved in this way, no one or no state will file a complaint for infringement of the rules of competition because the competitors have done the same. When no one respects the rule, the rule no longer exists. When everyone cheats, no one cheats. And all the more so when everyone agrees to do it, and especially, as is bound to happen, with the blessing of the police.

No one has an interest in seeing their partners collapse. It is in the interest of the competition that competition continues to exist and that we do not end up with 5 airlines dictating their fares. The United States has no interest in seeing Air France, Lufthansa and others disappear because otherwise who will buy Boeings? The same goes for Airbus, which is selling loads of A321s to american airlines. When the boat sinks, everyone has to row and bail together, and everyone seems smart enough today to understand that.

So all is well (so to speak) in the best of all worlds? Not necessarily

Some airlines are technically more difficult to save than others

If there is a rescue it will not be wild. If money is injected, it will be on a temporary basis, in the form of repayable loans, although we will be less careful about the conditions than in normal times.

Another possibility is the injection of capital. And here it gets really complicated.

The capital of a business is by definition limited. If the State wants to increase its participation in the capital, it must buy back the shares of the current shareholders. This can be useful to protect against possible takeovers (which cannot be excluded at the end of the crisis) but it does not bring in new money to relieve cash flow.

A capital increase is therefore necessary. This is where it gets interesting.

If, for example, Air France increases its capital so that the State brings in money, its current shareholders will find themselves “diluted” and their investment will lose even more of its value. And by weighing less they will lose voting rights and weigh less in the choices of the business. And let’s not forget that Delta and China Eastern have recently invested in Air France, in which they each hold 8.8% of the capital, and that the Dutch government holds 14%.

In short, in the case of Air France, either Delta and China Eastern decide to follow and increase their shareholding proportionally (with what money?) or there will be a blockage. Delta and China Eastern have no interest in seeing Air France-KLM disappear or weaken, but they have no desire to be diluted. Their ability to follow the eventual capital increase will depend on a quick closing of the dossier.

Lufthansa is not there, but in any case its shareholding is less problematic (only banks and funds, no institutional or industry players).

We are not there either for IAG (British Airways, Iberia…) but if the State were to intervene it would have to talk about it with Qatar which owns 21.5% of the group and is moreover the first shareholder.

As for Alitalia, although no one will oppose the injection of 600 million euros from the State, once the crisis is over, Europe is likely to ask for clarification even if it understands the emergency situation today.

Less worries on the other side of the Atlantic: as usual, the good old Chapter 11 will be brought out and it will be back on track.

So yes, the rescue of the airlines by the States will be a strong and necessary economic gesture for some. But it will require political maneuvering that is anything but simple with the airlines, whose ownership reflects the intersecting interests of the players in the industry.

To be continued…

Photo : storm on a plane by YILMAZUSLU via Shutterstock