Airline industry at a crossroads with government action to determine future

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Developments over the last few days give the impression that the airline industry has reached a critical crossroads. easyJet announced that its entire fleet is now grounded, Air Canada announced the furlough of 16,500 staff, British Airways announced a temporary stop to all operations at Gatwick and is on the brink of furloughing 36,000 staff, and American Airlines made it clear that it wants to access $12bn of government support funding.

Which way the industry goes from here remains to be seen, but government action, or in some cases a lack thereof, will be a key determinant.

Few industries have suffered the level of Covid-19 disruption that airlines have. Mass groundings and staff furloughs have seemingly become daily announcements and Korean Air has even warned that it may not survive the pandemic. Lufthansa CEO Carsten Spohr warned of a potential industry-wide existential crisis and that state aid would be required. A few weeks ago, this seemed a Doomsday scenario but it has now become reality.

IATA has estimated that the global airlines industry will see revenue loss of $252bn this year, a fall of 44% on 2019. It’s plain to see that the industry cannot simply absorb such a loss. Government help is required.

Some governments have been more proactive than others in this regard. In the US, the Trump administration immediately pledged to support the industry ‘100%’ and then made good on this promise by providing approximately $50bn of aid for the industry as part of the CARES Act. Airlines are systemically important in many countries, helping them compete on the global stage and employing thousands of people directly. There is also significant indirect benefits via operations such as retail, airports, construction, and aircraft manufacture. The US Government realises this and has reacted accordingly by taking appropriate action.

Conversely, a lack of action in the UK is baffling. The country’s airline industry is at a virtual standstill yet Chancellor Rishi Sunak has chosen to play hardball. He has so far refused to offer up government cash as a bailout service. In some ways, this is laudable, but it is no longer practical.

There are undoubtedly some serious questions to be asked about dividend policies, share buybacks and a lack of prudence from some airlines when it comes to maintaining cash reserves, but this is not a time for moralising. The country’s aviation sector needs help, and fast.

The US has shown the way and attached conditions to accessing the aid. Any airline receiving a loan under the programme is barred from making stock buybacks for the term of the loan plus one year. This is a great solution to a clear problem and will help the US airline industry weather the storm.

Governments that do not step in and help the industry in this unprecedented time of need will reap what they sow. The probability of airlines failing will increase markedly and a less competitive, less effective airline industry will emerge in those countries post-Covid-19.

The airlines industry has reached a critical crossroads and how governments act now will have long-lasting, far-reaching consequences. They must get it right.

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