Decades after being unshackled from government control, many of Europe’s largest airlines are being forced back into the arms of states by the pandemic.
With air travel still showing no signs of recovery in the region, the carriers may have to contend with their saviors as powerful shareholders for some time to come. Air France-KLM on Tuesday became the latest to get a 4 billion-euro ($4.7 billion) bailout that will see the French government reemerge as its biggest shareholder with a stake of up to 30%. The flag-bearer joins Germany’s Deutsche Lufthansa AG, Alitalia SpA, Sweden’s SAS AB and TAP Air Portugal to see a bigger state presence following aid sought to cope with one of the industry’s worst crises.
Airlines have been among the hardest hit by Covid-19, which decimated air travel. Even before the latest setbacks, the International Air Transport Association said carriers would need as much as $80 billion more in government money this year. The concern in Europe now is that demands from the shareholding states may skew the industry in ways that would have an impact on everything from cost cuts to route decisions and ticket prices.
“While bailing out airlines in the context of the Covid-19 crisis is certainly a legitimate emergency measure, the suspicion is that this might serve as an excuse to return to state-owned carriers serving political agendas, at least for some governments,” said Sascha Albers, a professor of international management at the University of Antwerp.
Prior to Tuesday’s announcement, European Union states had channeled at least 23 billion euros into airlines in the form of loans, guarantees, capital injections and grants.
Airlines the world over have received state aid. In June, Cathay Pacific Airways Ltd. sold preferred stock and warrants to the Hong Kong government convertible into a stake in the airline. Singapore Airlines Ltd. raised funds in a rights issue backed by its biggest shareholder, state investor Temasek Holdings Pte. In the U.S., the government has made about $50 billion in aid available for carriers since the start of the pandemic in the form of grants and loans that can only be used to cover employee costs.
European governments are being left with significant stakes more than two decades after the region’s airlines began being privatized — British Airways in 1987 followed by Lufthansa in 1997 and Air France in 1999. The 1990s also saw the EU’s deregulation of the airline industry, boosting low-cost carriers including EasyJet Plc and Ryanair Holdings Plc.
Preparing for the post-pandemic era will require airlines to take a hard look at their cost structures and organization. In Europe, with strong unions at former state-owned carriers, political interference in commercial operations may be tempting for some governments, especially with issues like job cuts, analysts said.
“Many governments still take the view that a national carrier is part of their overall political vision,” said John Strickland, who runs JLS Consulting in London. “It’s not surprising to see further government investment in Air France but the key question is whether it will lead to attempts to impose political direction on the group’s management beyond their commercial objectives.”
In France, a country with a long history of state intervention in the corporate world and a longstanding stake in Air France-KLM, the government was quick to offer up guarantees that it would ensure the survival of the carrier.
Even in the Netherlands, which was more circumspect — slower to provide loans last year and not offering up additional aid Tuesday — the government acknowledged the airline is too important to the country to fail.
“The network of AF-KLM is important for our economy and both airlines indirectly facilitate lots of employment,” Finance Minister Wopke Hoekstra wrote on Twitter Tuesday. “It is in the public interest of France and the Netherlands that airlines Air France and KLM get through this crisis.”
Germany’s 20% stake in Lufthansa following its multi-billion euro bailout thrust the state back into the heart of a company that was privatized with fanfare two decades ago. Berlin also lent billions to Condor and TUI AG to keep them flying through the coronavirus storm.
State aid is “a sovereign guarantee to say that we’re behind this carrier and we are going to ensure that it will be sustainable post-Covid,” said Shukor Yusof, the founder of aviation consultancy Endau Analytics. “For many airlines, the absence of government support could ultimately mean disaster, especially for the large carriers.”
The European Commission has been under pressure to rubber-stamp aid and save the region’s economy. It’s complied, but attached strict conditions that make it less comfortable for the carriers — forcing them to give up airport slots, restricting executive compensation and banning acquisitions in some cases. It’s also playing hardball on Italy’s plan to create a new, smaller carrier from the ashes of Alitalia.
All that hasn’t stopped discount carriers such as Ryanair and Wizz Air Holdings Plc from crying foul. They argue that bailouts will distort the market and create an unfair advantage.
Ryanair, which on Wednesday warned that it will struggle to return to profitability this year, has filed more than a dozen court appeals against EU approvals. It argues that such aid unfairly discriminates against it and will help rivals to emerge stronger, slash fares and swallow up others. The Irish company in February suffered a setback in the first two appeals, when the bloc’s lower court said French and Swedish subsidies didn’t violate EU state aid rules. It has vowed to appeal its first court losses to the EU’s top court.
In France, Ryanair says the 18 slots that Air France is being required to give up is nowhere near enough to allow others to offer a competitive challenge to its dominance at Charles de Gaulle and Orly airports. Air France-KLM has about 1,000 slots at the two Paris-area airports.
In Germany, for Easyjet and Ryanair, the terms of the bailout will do little to loosen Lufthansa’s iron grip on the country’s most lucrative airports and travel routes. While the Commission demanded Lufthansa ditch 24 slots at its two main German hubs, the takeoff and landing rights can’t go to companies that already have bases at those airports, stopping Ryanair from expanding at Frankfurt and Easyjet in Munich.
Still, “carriers like Air France and Lufthansa have different strategic priorities than the short-haul low-cost carriers, and serve strategically important routes around the world,” said Darren Ellis, a lecturer in air transport management at Cranfield University. “If governments didn’t bail out the airlines, you’d hand over 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 state reliance once travel picks up and the world heads into a post-pandemic normal.
“Airlines have access to attractive financing that is better and less onerous than what governments can offer so when travel volumes come back, companies will have no interest in staying with the states.” said Yan Derocles, a Paris-based analyst at Oddo BHF.
Still, some people are wary.
“There’s an old French saying that goes: beware as the temporary can sometimes become the permanent,” said Jorge Guira, an associate professor of law at the University of Reading.