Will coronavirus cause the airline sector to crash?

The government has ruled out a bailout for the airline industry – for now. US carriers appear to be even more vulnerable to the downturn.

(Image credit: Passengers in face masks walk around Heathrow Terminal 5 © Richard Heathcote/Getty Images)

British airlines and airports have been told they “will not receive an industry-wide bailout”, says Gwyn Topham in The Guardian. This has prompted warnings from British airports that they may have to “shut down temporarily”. While Chancellor Rishi Sunak said there could be discussions with individual firms “as a last resort”, these would only take place “if all commercial avenues have been fully explored”. There would also have to be “equitable and fair treatment” of businesses across the sector – a problem given that British Airways owner IAG has already “distanced itself” from calls by Virgin Atlantic and easyJet for a bailout.

Quite right too, says Martin Vander Weyer in The Spectator. There’s no reason why airlines should be “front of the queue” for support. People will still need to fly when this crisis is over, so the industry “should be... capable of restructuring and regrowing in response to renewed demand, even if bankruptcies are left behind”. Not only are many airlines, such as IAG and easyJet, extremely profitable, but they also have strong balance sheets to tide them over. If the worst comes to the worst, they should be demanding that banks and aircraft leasing companies “share the pain” of the crisis.

How much worse could it get?

The government could nonetheless eventually be forced to take more radical action, says the Financial Times. With airlines likely to be grounded for at least three months, “conventional rescue measures” may not suffice. So the Treasury is looking at unconventional solutions, such as injecting “billions of pounds” into companies in exchange for shares that “would eventually be sold back to private investors”. This could either be done directly or via loans that would subsequently convert into equity, making the taxpayer a “substantial shareholder” in the airlines.

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An alternative to taking direct equity stakes, says Ed Cropley on Breakingviews, would be to follow the example of New Zealand’s bailout of its national carrier, Air New Zealand. This involved lending money at a relatively high interest rates, backed up by a dividend freeze and a mandatory rights issue, while retaining the right to convert debt into equity if the airline defaulted.

Some airlines may be reluctant to take taxpayers’ money, but they will have only themselves to blame if they end up in the “bosom of the state”, says Oliver Shah in The Sunday Times. Flying is highly cyclical, yet various airlines have spent heavily on dividends and share buybacks and not put enough aside for times of trouble.

Still, British airlines are still in far better shape than their American counterparts, as Cropley points out. Delta Air Lines, for instance, has total cash reserves equivalent to only 7% of last year’s operating costs, a third of IAG’s proportion; it spent $10bn buying back its own stock over the past five years. Expect heavy turbulence across the Atlantic.

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Dr Matthew Partridge
Shares editor, MoneyWeek

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

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