Should Govt bailout airlines? Why and Why not?

Should national governments spend taxpayers money to rescue airlines in distress due to corona virus breakout? Are there any real benefits of this act or is it sheer wastage of public money? In this article let us try to assess the situation and weigh the pros and cons of possible govt bailout to private airlines.
Arguments against govt support to private airlines:
Those who oppose any kind of Govt funding to private airlines offer following justifications/points to support their point of view:
  • Flying is a luxury, not an essential service.
  • Airlines never share their profits with Govt. Why privatize profits but publicize loss?
  • Why prioritize airlines? There're dozens of other industries that are in distress
  • As such airline industry is capital intensive, low margin and high competition. Probability of airlines making profit is low even after govt bailout. Why waste public money?
  • I want my taxes to be spent on poor people, to build hospitals and other social welfare measures, NOT to subsidize someone's holiday travel
These are fair points. Prima-facie it appears fair. Majority of India's people may not feel the difference if airlines fly or not. We'll park these thoughts aside and proceed with next sub topic:

What is expected to happen with India's aviation industry without Govt support?
This detailed CAPA report says many Indian airlines will shut shop within few months without govt support. Situation is similar all around the globe. Below is the current numbers for India- fleet size and market share

Current fleet
Domestic Market Share (%)
Air India group
(AI, AI Express, Alliance Air)
Go Air
Air Asia India
Others (Star Air, Trujet etc)
  • Of the above, Air India is anyway in a loss and will continue to be supported by Govt with or without bailout, till a buyer could be found. So Air India is mostly likely to survive this crisis. But will Govt manage to find a buyer? Will they decide to keep pumping money forever or would it make sense to shut down Air India over a period of time? We don't know.
  • Indigo has strong balance sheet, has initiated salary cuts and other measures and will most probably survive the crisis assuming things improve within a few months.
  • Spicejet & GoAir seem to be most vulnerable among India's airlines.
  • Vistara and Air Asia India will most likely survive the crisis- Both of these companies have less aircrafts (30-40 each) and have backing of major corporate houses (Tata Group, Singapore Airlines, Air Asia Malaysia). So assuming corona virus crisis ends in a few months, Vistara and Air Asia will mostly manage but may have to cut routes and halt expansion.
Assuming two airlines shut down and others cut their network significantly to cut losses, below will be the impact:
  • Ticket Price will shoot upwards, particularly for non metros. Surviving airline will try to extract its pound of flesh from passengers who do not have any options
  • Unemployment for employees of failed airlines and its ripple effect on secondary businesses (catering, ground handling etc) and subsequent impact to govt (reduced tax collection) and other industries (like hotels)
  • Airport fees may increase: Airports will not have to recover their fees from lesser number of passengers, so per passenger fee will go up.
  • Losses to banks, lenders and investors: When airlines go bankrupt, Banks that have loaned money will have to write off, other lenders also need to salvage the situation. Investors need to take the hit, including retail investors who have bought airline shares.
Why won't promoters pump in more money?
Airline owners are usually rich people. But they are pure businessmen and not charity workers. They always look for potential profits before pumping more good money after bad. If they feel it is not worth, they are happy to let an airline collapse. They all have enough personal wealth to live comfortably for rest of their life somewhere far away (say London) and many not have any motive to invest more. Even if they want to, airline is a capital intensive industry- a few crores won't work- hundreds crores will be needed. Any investor will hesitate to pump so much money.

Arguments in favor of Govt bailout for airlines
While companies run with pure commercial motive of making money for their investors, Govts have larger obligations- to keep people employed, to keep economy running and to ensure essential services keep functioning. Current Corona Virus crisis is not personal fault of airlines. It is a global problem. Only well funded Govts can assist major industries in recovery.

If a government infused funding prevents an airline from collapsing, below are the direct and indirect benefits.

Direct benefits:
  • Jobs preserved: Depending on the size of an airline, several thousand jobs will be saved
  • Indirect jobs supported: When an airline keeps flying and people travel, thousands of indirect jobs can sustain-such as
    • Taxi drivers, 
    • Hotel staff, 
    • Airport staff, 
    • Airport store employees, 
    • Ground handling, 
    • Travel agents & travel/holiday portals
    • Domestic help/people employed above people in Aviation industry
  • Increased Tax Collection: A part of funds induced by govt comes back to the govt in the form of tax. 
    • Employees pay income tax, 
    • Various services like tickets, hotels, airport/in-flight purchases, taxi booking are all taxed at various levels, 
    • Petrol filled by taxi driver after dropping off a passenger brings tax.
    • Business generated by travel results in tax and so on
    • All these potential tax revenue will vanish if air travel doesn't happen
  • Less stress on economy: If an airline keeps running, banks don't have to declare existing loans as NPA. With travel and tourism resumed lots of money circulation happens and economy will keep going
Indirect benefits
  • Prevents cartelization: If only two airlines remain, they can cartelize the market, increase prices and exploit passengers. Having at least 3-4 players in the market sustains competition and keeps prices in check
  • Country's reputation: Allowing major corporations to fail spoils a country's image as investment destination.
What should be the right way to invest?
There is a perception that Govt bailout means giving free money to airlines. This is not necessarily true. There're multiple ways Govt can offer support:
  • Option 1: Equity infusion: Govt invests money against shares. Later if airlines make profit and share prices go up, Govt will get good returns on the investment made.
  • Option 2: Loan against collateral: Govt may ask banks to give loans against some kind of collateral. Assuming the collateral is good (like aircrafts, buildings or other assets), this is relatively low risk
  • Option 3: Relaxed policies and taxes: By reducing tax, by removing some restrictions Govt can support just by taking a cut on its revenue and making travel cheaper
  • Option 4: Provide other stimulus to encourage travel: Cheaper/easier visa norms, increased Leave travel Allowance, tourism campaigns to encourage more travel etc can also restore demand, without any direct infusion of money into airlines.
Why airlines? Why not other industries?
  • Last year Automobile Industry made desperate plea for Govt help, but Govt turned a blind eye.
  • Many other industries have also sought tax relief. 
  • Govt did nothing when Kingfisher and Jet Airways went belly up.
Govt's funds are also limited, so it may not act unless absolutely necessary or until situation gets very desperate.

From a Govt's point of view, following factors hold importance
- We can't bail out everyone- what are the probability that everyone else will line up if we bail out this industry?
- How essential is this service? Can people manage without this industry?
- Positives of providing a bail out- will it help recover economy, will it save jobs?
- How bad is the risk of not doing anything? Can we get away without giving bailout?
- People's perception: Would a bailout be seen in wrong perception? Would it affect our votes?

What is happening around the world?
USA: Airlines are likely to get 60 billion $ out of 2 trillion govt bailout package
UK: Virgin Atlantic has sought Govt funding to sustain country's airlines
Norway: Norwegian has sought Govt lifeline to survive

Most airlines around the world are struggling and desperately counting on Govt lifeline to stay afloat. It remains to be seen which all govts will bailout their airlines and how many airlines will wind up.

Should govt fund all airlines?
I don't think so. Airlines that were in deep loss well before Corona Crisis, Airlines known for poor management or airlines that do not have much hope of recovery and profit in near future may probably be left to wrap up. If there's no reasonable hope for an airline to survive and turn profitable, providing temporary lifeline is waste of public money.

When will this Corona Virus Crisis end?
Assumption world wide is that crisis will be under control in 3-6 month timeline and travel may resume towards the end of this period. But this is only a hope and we need to see how things improve or worsen over time.

What are your thoughts? Would Govt of India bail out India's airline industry? Do you think it is good idea? Would you be fine if 3-4 airlines go bankrupt? 

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