Governments have rightly extended emergency aid to help the industry cope with the fall-out from the closure of USairspace, but the real test lies in what comes next. If politicians are wise, they will take this opportunity to allow industry consolidation to run its course rather than provide an artificial cushion of state aid
It has been said before, but is well worth saying again: this is not the time to save sick airlines. If anything, the terrorist attacks should be seen as an opportunity to make some hard and long overdue choices about the fundamental structure of this industry. Not least is the question of how to handle consolidation, whether among Europe's state-nurtured flag carriers, the US market's second-tier of majors or, come to that, through alliance strategy. Either way it has long been clear that there are simply too many network carriers, all doing the same thing and to the profit of no-one.
Even before 11 September there were signs that this reality was starting to dawn as downturn loomed. The empire building of Swissair and Air New Zealand was already well on the way to collapse. The more thoughtful among the majors were pondering how to refocus around their core premium, network business. This latest crisis could now provide a stark backdrop against which to speed those decisions. So long, that is, as politicians can restrain from the instinct to save their local airlines at any cost.
So far, at least, politicians in both Brussels and Washington have been admirably canny in limiting the scope of aid. There was little choice over providing compensation for the immediate impact of the terrorist outrage. US carriers argued that these were acts of war and that the closure of US airspace was on government orders in the interests of national (and world) security. Congress recognised this by limiting the $5 billion in cash payment to amounts that the carriers could document were proportionate to the actual losses on the days of the ground stop.
Considerably more thought went into the $10 billion loan guarantee portions of the package - and so it should. Close attention is needed here if the USA is not to find itself taking the lead in a generalised airline bailout, raining down subsidies on the just and unjust alike.
The loan guarantees are to be decided by a new entity called the Airline Stabilization Board, which has only one non-partisan appointee, Alan Greenspan, the Federal Reserve chairman. The other members represent the Department of Transportation, the Treasury and the General Accounting Office - the congressional investigative unit that helped structure the entire package. "With such political appointees, this is a natural set up for picking winners and losers," says airline bankruptcy attorney Bill Rochelle of Fulbright & Jaworski.
It is also a natural set up for avoiding bad choices, especially since the loan guarantees will go first to those carriers willing to issue some form of warrant or equity so the government can share in its gains. Senator Peter Fitzgerald, a sponsor of the loan guarantee provisions that let the government claim a stake in airlines that accept the loans, says he would have pushed for more government control than mere warrants.
Fitzgerald, the Illinois Republican who cast the sole dissenting vote against the airline bailout, says he "will watch closely to see that they cut good deals for the government". For him, government ownership is the stick, not the carrot. Perhaps the stick has already worked: big airlines have been reluctant to apply for the loan guarantees and none have yet done so. The USA perhaps will achieve administratively what it failed to guarantee legislatively: a limited bailout.
The European Commission (EC) too deserves credit for holding the line in the face of massive pressure to wave through rescue packages for the region's collapsing flag-carriers. At worst the risk was that there would be a competitive subsidies battle across the Atlantic, which would wipe out a decade of solid work in weaning Europe's over-populous flag carriers off the morphine of state aid. That fear appears to have receded thanks to the EC's unyielding stand on state aid. Years ago, Brussels promised that any airlines running into trouble after the "first time, last time" state aid round of the 1990s would have to look elsewhere for help: effectively that means a choice of private capital, mergers or closure.
Belgium has been allowed to bail out Sabena, but only with a time-limited bridging loan. The Irish Government too has resigned itself to finding a private investor for Aer Lingus. Although the EC's rule does not strictly extend as far as Switzerland, its attitude has no doubt helped to focus minds as the Swissair débâcle unfolds. The Swiss Government has been careful to bring in private capital and has now an amazing list of investment partners: cantons, cities, banks, companies and individuals.
Most encouraging is that the EC has not only recognised the need for consolidation, but believes that it could now accelerate in the light of recent events. In the USA too the mood is shifting in favour of consolidation as the natural route to recovery. Other major carriers will follow Swissair, Sabena and TWA to the brink. The question is not how to save them but why they should be saved at all. Some will have to give up network ambitions, some will be acquired and some will simply fail. That is business life. By not tinkering with such consolidation, politicians will do more good than any amount of free cash.
Source: Airline Business
