Summary

The article discusses the potential dangers of bailing out airlines during the COVID-19 pandemic, emphasizing the need for conditions to ensure public interest and job preservation.

Abstract

The COVID-19 pandemic has caused significant financial distress for many businesses, particularly airlines, leading to calls for government bailouts. However, the article argues that such bailouts must come with conditions to ensure public interest and job preservation. The Associate Director of the British think tank IPPR suggests that public money should be used in the public interest, with job preservation being the top priority. Bailout conditions should include transparency, a focus on job preservation rather than shareholder value, and a permanent public stake in the companies. The future of aviation and its environmental impact should also be considered. The article uses examples from the US financial aid bill, which requires airlines to pay "appropriate compensation" to the government and freezes stock buybacks, to illustrate the importance of attaching strings to bailouts.

Bullet points

The COVID-19 pandemic has led to financial distress for many businesses, especially airlines.
The US government has signed a $50 billion bailout bill for US airlines.
The article argues that bailouts should come with conditions to ensure public interest and job preservation.
Job preservation should be the top priority, with transparency in how funds are used.
Bailout conditions should prioritize job preservation over shareholder value and include a permanent public stake in the companies.
The future of aviation and its environmental impact should be considered in any bailout agreement.
The US financial aid bill requires airlines to pay "appropriate compensation" to the government and freezes stock buybacks.
The bill is a negotiation between the government and airlines, with airlines expected to "pay to play."
Governments must weigh their options to avoid a repeat of the 2008 financial crisis.

The Dangerous Business of Bailouts

Billions for airlines might not be the right move

As the covid-19 pandemic causes chaos throughout the world, many businesses are suffering, with entire sectors facing financial collapse.

Perhaps no businesses are struggling more than airlines. With thousands of flights grounded until further notice, the aviation industry faces mass bankruptcies.

In recent days, we’ve seen a $50 billion government bailout bill signed into law for US airlines. But the game of bailouts is a dangerous one. In the wake of the 2008 crisis, we saw enormous bailouts for banks that did little to save jobs and serve the public.

In the UK, Easyjet was the recipient of a £600 million loan but many other airlines remain in financial limbo. Virgin Atlantic and Virgin Australia, to name just two, have asked for £500 million and £700 million respectively from the British and Australian governments. This plea has been criticised enormously, considering it is led by Sir Richard Branson — a billionaire that has not paid income tax in the UK for over a decade.

Nonetheless, deciding whether more bailouts are the correct course of action require thought in several areas.

If Capitalism is a failure, then what is the alternative? | Data Driven Investor

In the current political sphere along its rhetorical voyage, we all can meet face to face with buzzwords such as…

www.datadriveninvestor.com

The Associate Director of British think tank IPPR (The Institute for Public Policy Research) says:

“The Prime Minister has said that this time must be different when the banks were bailed out in 2008. If that’s to be the case, then public money must be used in the public interest.”

Therefore, IPPR suggests that airline bailouts must come with certain conditions.

Firstly, saving jobs has to be the top priority and this must be publicly and transparently presented. By explaining to the public how many jobs would be saved and showing the expected costs, a level of trust is established when it comes to deciding how to spend funds.

Moreover, this sends a message that creating shareholder value and propping up stock prices are not the main concern. In fact, bailout conditions are likely to, and should, include a permanent public stake in the companies to build wealth after the crisis.

Further, taking a rational look at the future is also incredibly important. In the wake of 9/11, several airlines went bankrupt despite bailouts. Therefore, airlines in financial peril prior to covid-19 wouldn’t be the smartest recipients for funding now.

The competitive nature of airlines (at least in Europe) has led to undercutting on ticket prices and racking up enormous debt. Keeping such businesses afloat is unlikely to be the best use of public funds.

The future of aviation in general needs assessing. As we seek to make significant reductions in emissions from transport in the coming years, any government support for airlines should seek to gain commitments on climate change. It is suggested that setting strict emission targets, investing in new low-emission technologies and committing to offsetting practices could all be included within any agreement.

Lastly, issues such as tackling runaway pay for CEOs and board members and tightening rules on tax and preferential treatment for shareholders and private investors must be addressed.

For example, British Airways and Easyjet have paid out over £2.6 billion in dividends in the last 6 years. The Easyjet owner alone received £60 million last month, despite pleading that they would run out of money by summer.

The holding companies of Gatwick, Heathrow and other large airports were regularly paying dividends in excess of 100% of net income. Meanwhile, European airline Wizz Air maintained a tax rate averaging 3.5% between 2015–2019.

Ensuring that the creditors and owners of these businesses incur some loss is essential. Privatising gains and socialising losses (again) would be wildly unpopular.

Thankfully, the outline of the US financial aid bill has already sought to take on these issues and ensuring that a number of strings are attached.

Firstly, airline carriers must pay “appropriate compensation” to the government in exchange for financial aid, perhaps in the form of equity. This provides a level of safeguarding of taxpayer money, preventing it from being spent recklessly.

US airlines also cannot furlough staff or give them involuntary pay cuts until at least October. A freeze of stock buybacks is also in place for that period.

The bill is one of negotiation from both government and airlines. As one aviation analysts put it, “we expect the amount of involvement the government has in an airline would be based on the amount of aid it was giving to the airline. We expect the airlines to pay to play, and they should.”

Nevertheless, it is likely that governments will continue to be called upon to assist failing airlines. While the preservation of jobs is pivotal, it must weigh up its options to avoid another 2008 scenario.