Rebecca's Thoughts

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The airline industry is a sector that is often turbulent and susceptible to changing economies and world events. Despite recent innovations in the aviation industry, the sector has had a difficult time equipping its finances to be resilient against internal and external financial shocks. The sector has been historically susceptible to diseases and pandemics as seen during the Acute Respiratory Syndrome of 2003, H5N1 in 2006, and H1N1 in 2009 but also major international crises like the oil crisis in 1973, the Iran-Iraq war in the 1980s, the terrorist attacks of 9/11 and more recently the 2007/2008 recession.[1] The industry’s capacity to react and weather these shocks is dismal and often non-existent. This almost always requires government intervention and the use external funds for these companies to stay afloat. The COVID-19 pandemic is no exception, and the airline industry has taken a major hit and seen declining profits and threats of bankruptcy. This has led to an international and sector-wide need for government bailouts and programs to keep these companies alive. In the United States alone, airline companies received over US$50 billion in grants and bailouts[2] and similar trends have been seen internationally with countries putting together recovery and bailout schemes to save domestic airline companies upwards of USD$159 billion.[3] These recovery plans are not anything new to the industry as it often requires external help from the government. This paper hopes to look at why these bailouts happened and the financial circumstances that got us here. The goal of this paper is to look at the impact COVID-19 has had on the industry, and what government bailouts mean for airline companies and the countries they exist within.

The airline industry is a capital-heavy sector with many fixed costs. These costs usually come in the form of aircraft leases, aircraft parking, taxes, and employee wages. Since they are fixed costs, they are expenses that must be paid even when planes aren’t flying.[4] This means that any decrease in revenues seen by airliners can put the companies in precarious financial positions. At the beginning of the COVID-19 pandemic in 2020 global aviation saw a decrease of 50% in flights dropping to over 90% in some countries for two or more months.[5] This meant a loss of revenue upwards of US$419 billion[6] or about 1.5 billion passengers[7] due to the pandemic. This has led to what some consider a business failure within the aviation and airline industry.[8] This is something that can have long-term effects both inside and outside the sector as the airline industry is heavily connected to other sectors like tourism and the aerospace manufacturing industry.

Before jumping into the failure of the industry, it is important to understand why COVID-19 had such large-scale effects on airlines and how it has gotten to this point. The years leading up to the 1990s saw a transition towards neo-liberal and market-based economies. This put pressure on industries and companies to become more competitive both externally in terms of countries competing with one another but also internally as companies within the same sector had to compete for customers. This meant that more companies were forced to take on more debt and continued to rely on it to stay competitive, generate sales, and maintain shareholder values.[9] This is something seen across all sectors of the economy, as in the United States, the Federal Reserve, the Financial Stability Oversight Council, and the Office of Financial Research reported record-breaking levels of non-financial corporate debt in the years leading up to 2020.[10] This racking up of debt is attributed to low-interest rates seen domestically in the United States but also abroad, alongside the need to stay competitive in a growing, and in the case of the aviation business, somewhat saturated market. Companies and firms, prior to COVID-19, were borrowing money under the assumption that the economy of the future would be sufficient and predictable enough to continue paying off and acquiring new debt.[11]

The combination of high debt levels, reduced revenues, and government bailouts contributed to business failures within the sector. For the sake of this paper, a business failure is when a business can no longer act sustainably and is forced to lay off employees.[12] This usually means a sudden collapse of a company and is something firms typically do not survive without the support and financial help from a government, bank, or competitor. This is somewhat of a double-edged sword as bailouts from a government can put companies in a precarious position and heighten the risk for future bailouts or economic needs.[13] This is an idea that will be explored later in the paper but is important now because the aviation industry as a whole benefits from government support, and the privileges that come with it, like access to resources and subsidies.[14] This facilitates what some call a “moral hazard” as by the government propping up failing businesses they are essentially shielding the shareholders and creditors from contractual obligations and risk, while also allowing them to borrow more money in the future.[15] This cyclical nature was seen in the aftermath of the 2008 financial crisis, when the United States government bailed out banks and lenders, but can be applied and is seen throughout the airline industry as well. When taken to the extreme, this line of thought can see companies losing the capacity to weather economic storms and recessions and become further reliant on bailouts and debt.[16]   

When looking at the framework for government bailouts and grants during COVID-19 it is important to look at the historical framework these companies work within. The market trends of the 1970s saw a push towards the “liberalization” and “deregulation” of international economies.[17] This was something the international governing body of airliners, the International Civil Aviation Organizations, wanted to prevent by initiating global multilateral governance over the economic aspects of air transportation.[18] This notion was somewhat of an expansion of the 1944 Chicago Conference which sought to implement international, multilateral agreements/treaties that governed and regulated transportation freedoms, and the economic parameters for airline companies. The Chicago Conference and the participating members ultimately failed to agree upon an economic governance of the industry and instead placed regulation and governance on the individual countries through bilateral agreements in the form of Air Service Agreements (ASAs). The first ASA was seen between the United States and the United Kingdom in 1946. There are other agreements regarding aviation economics, the creation of the World Trade Organization and the implementation of the General Agreement on Trade and Services, which are outside the scope of this paper, therefore, ASAs will primarily be discussed in regard to regulations, agreements, and bailouts.[19]

One main condition of ASAs is the idea of fair and equal opportunity, an idea not really seen until the 1960s. This is something that originated in the Chicago Conference and is important in understanding how bailouts play into agreements and how they support airline companies. During the 1990s this sentiment evolved into parameters around competition and the ability for equal opportunity for companies to compete in the industry.[20] This naturally allowed for more competition within the aviation industry, in both international and domestic markets. The industry began to see multiple airline companies basing operations within the same country forcing airliners to compete internationally and domestically for customers. This makes government bailouts more difficult as there will inherently be winners and losers within the aviation market. The companies that receive government support will likely overcome COVID-19 with the possibility of growth and profits, on the flip side, however, those who do not receive support will struggle with the possibility of not surviving the pandemic.[21]

Bailouts have always had this effect on industries and the firms working within them. This is a major critique of government intervention as it is seen as being against free-market policies and the government inserting itself into the economy. Some have observed a degree of irony in this line of thought as systematic risks within the economy make it so the government will always have a role in the outcome of the market whether or not they carry out a bailout for a company.[22] If the government chooses to support and bailout a firm then they are seen as propping up a failing business, but if they choose not to help a firm then they are choosing who gets to fail within the economy. An active choice is being made on whether or not to bail out a firm and that decision automatically inserts the government into the economy. The government as an actor within the economy affects the way companies make decisions, if they know they will be bailed out, then they are likely to make riskier decisions, and require more help from the government.[23] On the other hand, removing the insurance provided by bailouts can lead to an increase in the susceptibility of firms and industries to crises and recessions.[24]

Transparency also plays into government bailouts and the effect they can have on industries.[25] When the government is not transparent about who is going to get bailed out, bank runs can occur. In terms of airline companies, shareholders could leave the company, selling their stocks, dropping the value of the company, or airline company ratings can drop making it difficult for them to acquire the credit they need to keep afloat.[26] A lack of transparency can also lead to government inconsistency or a favouritism/bias towards one company over another.[27]

There is a general consensus that governments should strike a balance between competition and market sustainability.[28] [29] This is easier said than done as the aviation industry is extremely susceptible to crisis and economic changes. This also means that after every crisis the industry is somewhat changed, either by conscious restructuring or a loss of competitive players. This also puts domestic airlines at an advantage, as countries are likely to protect their own companies over foreign-run ones. This puts countries without a strong domestic airline at a disadvantage, and if things go especially badly, they could be without an airline.[30] In March of 2020, more than 16 airline companies either shut down or declared bankruptcy.[31] This had a major impact on employment, tourism, and supply chains as airline companies have a sprawling position in the domestic and international economies both directly and indirectly. One way of instilling sustainably in the market is through conditional bailouts. This can be done by the government requiring airline companies to use the funds received to go towards keeping staff, paying rental fees, or other fixed costs. Staff retention is a big issue for airline companies in a crisis, as once talent is lost it’s hard to get it back. It is easy for airlines to scale down operations, but is difficult for them to scale back up, this is why making cuts to routes, staff, and/or assets can have a negative impact on the company and sometimes outweigh the positives.

There are many proposed ways to make the airline industry more sustainable. One way of doing this is through investment in disaster reduction. This can come in the form of investing in the future by investments in disaster reduction initiatives, strengthening disaster risk governance, and preparing responses and recovery plans.[32] Other options can come in the form of government regulation that disincentivizes small, financially unstable firms from entering the industry.[33] This is somewhat of a controversial solution and can be seen as contributing to either “heightened competition” or “destructive competition” depending on who is allowed to enter the field.[34] When regulations are lax, smaller, low-cost carriers are allowed to enter the competition. This can drive the price of tickets down, making it unsustainable for larger firms to compete. On the other hand, if restrictions are too narrow monopolies or oligopolies can arise which can also lead to problems down the line.  

The airline industry is an easy target when it comes to public image around bailouts and how/when they should happen. It’s an industry running on an unsustainable model where fixed costs are high, and a crisis can have a large impact on the sector. This combined with high levels of corporate debt, incentivized by the free market, and trying to stay competitive, has made it so any small blip in the economy can put airline companies in a position of decline and business failure. COVID-19 has only exasperated all of these issues with the application of safety measures like restrictions on travel, social distancing, and the grounding of planes. These are objectively good measures in regard to curbing the spread of the virus, but put airline companies in a tough position as they cannot do their primary job. This means that government intervention is important to keep these companies alive and in a good enough position that they can make it through the pandemic. Unfortunately, bailouts are not always the best for an industry and can only perpetuate a cycle of bailout after bailout. This is why it is important for airline companies moving forward to find sustainable methods to run their businesses and recover in a way that is good for the industry.

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[1] Kaitano Dube, Godwell Nhamo, and David Chikodzi, “COVID-19 Pandemic and Prospects for Recovery of the Global Aviation Industry,” Journal of Air Transport Management 92, no. 92 (May 2021), https://www.sciencedirect.com/science/article/pii/S0969699721000053.

[2] Andrew Ross Sorkin, “Were the Airline Bailouts Really Needed?,” The New York Times, March 16, 2021, sec. Business, https://www.nytimes.com/2021/03/16/business/dealbook/airline-bailouts.html.

[3] Megersa Abate, Panayotis Christidis, and Alloysius Joko Purwanto, “Government Support to Airlines in the Aftermath of the COVID-19 Pandemic,” Journal of Air Transport Management, no. 84 (September 2020): 101931, https://doi.org/10.1016/j.jairtraman.2020.101931.

[4] Jae Woon Lee, “Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport,” Journal of International Economic Law 24, no. 2 (November 18, 2021): 703–23, https://academic.oup.com/jiel/article/24/4/703/6430629.

[5] Megersa Abate, Panayotis Christidis, and Alloysius Joko Purwanto, “Government Support to Airlines in the Aftermath of the COVID-19 Pandemic,” Journal of Air Transport Management, no. 84 (September 2020): 101931, https://doi.org/10.1016/j.jairtraman.2020.101931.

[6] Ibid.

[7] Joseph Amankwah-Amoah, Zaheer Khan, and Geoffrey Wood, “COVID-19 and Business Failures: The Paradoxes of Experience, Scale, and Scope for Theory and Practice,” European Management Journal 39, no. 2 (September 6, 2020), https://doi.org/10.1016/j.emj.2020.09.002.

[8] Ibid.

[9] Joseph Amankwah-Amoah, Zaheer Khan, and Geoffrey Wood, “COVID-19 and Business Failures: The Paradoxes of Experience, Scale, and Scope for Theory and Practice,” European Management Journal 39, no. 2 (September 6, 2020), https://doi.org/10.1016/j.emj.2020.09.002.

[10] Kathryn Judge, “The Truth about the COVID-19 Bailouts,” Forbes, April 15, 2020, https://www.forbes.com/sites/kathrynjudge/2020/04/15/the-covid-19-bailouts/?sh=9046acd3b778.

[11] Joseph Amankwah-Amoah, Zaheer Khan, and Geoffrey Wood, “COVID-19 and Business Failures: The Paradoxes of Experience, Scale, and Scope for Theory and Practice,” European Management Journal 39, no. 2 (September 6, 2020), https://doi.org/10.1016/j.emj.2020.09.002.

[12] Ibid.

[13] Joseph Amankwah-Amoah, Zaheer Khan, and Geoffrey Wood, “COVID-19 and Business Failures: The Paradoxes of Experience, Scale, and Scope for Theory and Practice,” European Management Journal 39, no. 2 (September 6, 2020), https://doi.org/10.1016/j.emj.2020.09.002.

[14] Ibid.

[15] Kathryn Judge, “The Truth about the COVID-19 Bailouts,” Forbes, April 15, 2020, https://www.forbes.com/sites/kathrynjudge/2020/04/15/the-covid-19-bailouts/?sh=9046acd3b778.

[16] Ibid.

[17] Jae Woon Lee, “Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport,” Journal of International Economic Law 24, no. 2 (November 18, 2021): 703–23, https://academic.oup.com/jiel/article/24/4/703/6430629.

[18] Ibid.

[19] Ibid.

[20] Jae Woon Lee, “Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport,” Journal of International Economic Law 24, no. 2 (November 18, 2021): 703–23, https://academic.oup.com/jiel/article/24/4/703/6430629.

[21] Ibid.

[22] Roy C. Smith, “The Dilemma of Bailouts,” The Independent Review 16, no. 1 (2011): 15–26, https://www.jstor.org/stable/24563222.

[23] Roy C. Smith, “The Dilemma of Bailouts,” The Independent Review 16, no. 1 (2011): 15–26, https://www.jstor.org/stable/24563222.

[24] Todd Keister, “Bailouts and Financial Fragility,” The Review of Economic Studies 83, no. 2 (October 29, 2015): 704–36, https://doi.org/10.1093/restud/rdv044.

[25] Jae Woon Lee, “Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport,” Journal of International Economic Law 24, no. 2 (November 18, 2021): 703–23, https://academic.oup.com/jiel/article/24/4/703/6430629.

[26] Kaitano Dube, Godwell Nhamo, and David Chikodzi, “COVID-19 Pandemic and Prospects for Recovery of the Global Aviation Industry,” Journal of Air Transport Management 92, no. 92 (May 2021), https://www.sciencedirect.com/science/article/pii/S0969699721000053.

[27] Roy C. Smith, “The Dilemma of Bailouts,” The Independent Review 16, no. 1 (2011): 15–26, https://www.jstor.org/stable/24563222.

[28] Jae Woon Lee, “Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport,” Journal of International Economic Law 24, no. 2 (November 18, 2021): 703–23, https://academic.oup.com/jiel/article/24/4/703/6430629.

[29] Roy C. Smith, “The Dilemma of Bailouts,” The Independent Review 16, no. 1 (2011): 15–26, https://www.jstor.org/stable/24563222.

[30] Kaitano Dube, Godwell Nhamo, and David Chikodzi, “COVID-19 Pandemic and Prospects for Recovery of the Global Aviation Industry,” Journal of Air Transport Management 92, no. 92 (May 2021), https://www.sciencedirect.com/science/article/pii/S0969699721000053.

[31] Ibid.

[32] Ibid.

[33] Megersa Abate, Panayotis Christidis, and Alloysius Joko Purwanto, “Government Support to Airlines in the Aftermath of the COVID-19 Pandemic,” Journal of Air Transport Management, no. 84 (September 2020): 101931, https://doi.org/10.1016/j.jairtraman.2020.101931.

[34] Ibid.