Covid propels governments into the cockpit with the help of a flag bearer

Decades after being freed from government control, many of Europe’s largest airlines are being forced back into state arms by the pandemic.

With air travel still showing no signs of recovery in the region, carriers may have to face their saviors as powerful shareholders for some time to come. Air France-KLM on Tuesday became the last to secure a € 4 billion ($ 4.7 billion) bailout that will see the French government reappear as its largest shareholder with a stake of until 30%. The flag bearer joins Germany Deutsche Lufthansa AG, Alitalia SpA, Sweden SAS AB and TAP Air Portugal to see a greater state presence as a result of the aid sought to tackle one of the industry’s worst crises.

Airlines have been among the hardest hit by Covid-19, which has decimated air travel. Even before the last setbacks, the The International Air Transport Association said carriers would need an additional $ 80 billion in government money this year. The current concern in Europe is that demands from state shareholders risk skewing the industry in ways that would impact everything from cost reductions to route decisions and ticket prices.

“While the bailout of airlines in the context of the Covid-19 crisis is certainly a legitimate emergency measure, it is suspected that this could serve as an excuse to revert to public carriers serving political agendas, at least for some. governments, ”said Sascha Albers, professor of international management at the University of Antwerp.

Condition check

Rescues mean countries increase stakes in airlines

Source: Bloomberg data, airline filings

Before Air France-KLM’s announcement on Tuesday, European Union states had funneled at least 23 billion euros into airlines through loans, guarantees, capital injections and subsidies.

Airlines around the world have received state aid. In June, Cathay Pacific Airways Ltd. sold preferred shares and warrants to the Hong Kong government convertible into a stake in the airline. Singapore Airlines Ltd. raised funds through a rights issue backed by a state investor Temasek Holdings Pte. In the United States, the government has made about $ 50 billion in aid available to carriers since the start of the pandemic in the form of grants and loans to cover personnel costs.

Job cuts

European governments find themselves with serious stakes more than two decades after the start of the privatization of the region’s airlines – British Airways in 1987, followed by Lufthansa in 1997 and Air France in 1999. – cost of carriers, EasyJet Plc and Ryanair Holdings Plc.

To prepare for the post-pandemic era, airlines will need to carefully consider their cost structures and organization. In Europe, with strong unions in former public carriers, political interference in business operations can be tempting for some governments, especially with issues such as layoffs, analysts said.

“Many governments still see a national carrier as part of their overall political vision,” said John Strickland, who heads JLS Consulting in London. “It is not surprising to see new government investments in Air France but the key question is whether this will lead to attempts to impose political direction on the group’s management beyond their business objectives.

In France, a country with a long history of State intervention in the corporate world and a long-standing participation in Air France-KLM, the government was quick to offer guarantees that it would ensure the carrier survival.

“Air France is a major and strategic company for France,” Finance Minister Bruno Le Maire said in an interview with Bloomberg TV on Wednesday. “I would not say that this is the last support we are providing to Air France.”

Public interest

Even in the Netherlands, which was more wary – slower to grant loans last year and not offering additional help on Tuesday – the government admitted the airline was too important for the country to go bankrupt.

“The AF-KLM network is important to our economy and the two airlines indirectly facilitate a lot of jobs,” said the Minister of Finance WopKe Hoekstra wrote on Twitter on Tuesday. “It is in the public interest of France and the Netherlands that the airlines Air France and KLM go through this crisis.”

Germany’s 20% stake in Lufthansa following its multi-a billion-euro bailout has plunged the state back into the heart of a company privatized with fanfare two decades ago. Berlin also loaned billions to Condor and TUI AG to fly them through the coronavirus storm.

“For many airlines, the lack of government support could ultimately spell disaster, especially for the major carriers.” said Shukor Yusof, founder of aviation consulting Endau Analytics.

Strict conditions

The European Commission has been under pressure to authorize aid and save the region’s economy. It’s respected, but comes with stringent conditions that make it less comfortable for carriers – forcing them to abandon airport slots, limiting executive pay and banning acquisitions in some cases. It is also playing hard bullet on Italy’s plan to create a new, smaller transporter from the ashes of Alitalia.

All this has not stopped discount carriers such as Ryanair and Wizz Air Holdings Plc to cry foul. They argue that the bailouts will distort the market and create an unfair advantage.

Ryanair, which Wednesday warned it will struggle to return to profitability this year, has filed more than a dozen legal appeals against the EU approvals. He argues that such help discriminates against it unfairly and will help rivals come out stronger, lower tariffs and swallow up others.

In February, the Irish company suffered a setback in the first two appeals, when the bloc’s lower court ruled that the French and Swedish grants did not violate EU state aid rules. He has vowed to appeal his first legal losses to the EU’s highest court.

Slot machine war

In France, Air France is being asked to give up 18 slots at Orly airport. Ryanair says that is nowhere near enough to allow others to offer a competitive challenge to its dominance. Air France-KLM has around 1,000 slots at Charles de Gaulle and Orly, the two airports in the Paris region.

In Germany, bailout terms will do little to loosen Lufthansa’s iron grip on the country’s most lucrative airports and travel routes. While the Commission has asked Lufthansa to leave 24 slots at its two main German hubs, take-off and landing rights cannot go to companies that already have bases at these airports, preventing Ryanair from expanding to Frankfurt and Easyjet in Munich.

Yet “carriers like Air France and Lufthansa have different strategic priorities than low-cost short-haul carriers, and serve strategically important routes around the world,” said Darren Ellis, Air Transport Management Lecturer at Cranfield University. “If governments didn’t bail out airlines, you would cede the long-haul market to state-backed carriers in other regions, including the Middle East.”

Many see the presence of governments in the industry as a temporary phenomenon, with airlines likely to reduce their dependence on the state once travel resumes and the world moves towards post-pandemic normal.

“Airlines have access to attractive, better and cheaper financing than governments can offer, so when travel volumes return, companies will have no incentive to stay with states.” Paris-based analyst Yan Derocles said Oddo BHF.

Still, some people are suspicious.

“There is an old French saying which says: beware because the temporary can sometimes become the permanent”, declared Jorge Guira, associate professor of law at the University of Reading.

– With the help of Mary Schlangenstein, Diederik Baazil, Joost Akkermans, William Wilkes, Hanna Hoikkala and Kyunghee Park

(Updates with the Mayor’s commentary in the 11th paragraph.)

About Mariel Baker

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