EU airlines' Covid-19 bailouts will come with strings attached

Europe’s airlines, struck down by the Covid-19 pandemic, shouldn’t expect a free rein from the European Commission on receiving emergency bailouts from national governments.

While governments are eager to ensure the survival of their airlines, particularly national flag carriers, the EU regulator can be expected to insist on strict conditions to ensure that any measures are fair to the industry and don’t distort the market.

Many airlines were already struggling before this crisis, with several going bust in recent months as climate-conscious Europeans cut down on short-haul flights in a crowded market. Flag carriers, in particular, have long been accused by their independent rivals of receiving undue indulgence from their governments.

The Covid-19 pandemic doesn’t change that equation. There will be bailouts but not a money hose; the shock of the crisis may accelerate the existing trend towards poorly-run airlines being bought or going bust.

National governments as well as the EU regulator appear to recognize the need for moderation. The message from a meeting of Europe’s transport ministers on Wednesday was one of support, but not at any price.

“We need to give companies the financial margins they need to survive the crucial period, while avoiding that one company’s solution becomes another company’s problem,” Croatian minister Oleg Butković — who was chairing talks — said following the conference.

In the red

Airlines around the world have been among the companies hit hardest by the pandemic as governments close borders and passengers shun unnecessary travel. Many in Europe have laid off most of their staff until the crisis subsides, or turned to national governments to help them weather the storm.

Some were already struggling, both among flag carriers and short-haul airlines. Italy’s Alitalia has been unable to turn a profit since 1998, and its state of near-permanent crisis epitomizes the challenges the European Commission faces when seeking to reform or downsize such a potent national symbol.

Portugal’s TAP Air has only just emerged from years in the red, with the government holding a substantial share in the company. And among regional airlines, Air Berlin, Monarch, Thomas Cook and Flybe have all be relegated to the history books in recent memory.

But the Covid-19 outbreak has put otherwise healthy airlines into difficulty. Pan-Scandinavian flag carrier SAS, for instance, has announced that it will lay off around 90 percent of employees and has shut down flights “until there are conditions to run commercial aviation again.”

It and many others including Finnair, Virgin Atlantic and AirFrance-KLM have approached national governments for support.

Notably, however, some others haven’t. IAG, which owns British Airways and Iberia, has suggested it may not need government support. It has 7 billion euros ($7.5 billion) in cash and a credit line, and has struck a deal to cut pilots' salaries by 50 percent.

Ryanair has cash reserves worth 4 billion euros, while Easyjet has 1.6 billion euros in the bank and planes to offer as collateral. Lufthansa said this week it would not need a bailout and warned against "unfair market conditions."

The healthier airlines can be expected to lead the opposition to any government largesse for their weaker rivals — as they did early this year when the UK government was considering a loan to regional operator Flybe. The loan fell through and the airline collapsed earlier this month.

The difficulty for governments and the European Commission will be deciding which airlines will remain viable once this crisis has passed, and which were already being artificially propped up. Then, they will have to tailor their rescue packages accordingly.

Rush of support

A peculiarity of Europe’s airline sector is the continued attachment of national governments to national flag carriers such as BA and Air France. These have traditionally been first in line for public support in difficult moments, and this time is no different.

Italy is moving to renationalize Alitalia, putting on hold its search for a buyer. Air France-KLM, meanwhile, has already received promises of support from French economy minister Bruno Le Maire, who has been consulting with the Dutch government over how to protect the airline, in which both governments hold a stake of around 14 percent.

“There’s no question of seeing the great flagships of French industry disappear,” he insisted earlier this week.* “We run the risk of losing this industrial heritage, this technological heritage, and this know-how, and well we would indeed go as far as nationalization.”

His UK counterpart Rishi Sunak said airlines were among the sectors “facing particularly acute challenges,” promising to investigate a “potential support package specifically for airlines and airports.”

SAS has received a joint $302 million guarantee from the Swedish and Danish governments, and an exemption from antitrust rules in Norway. Finnair says it has received reassurance from the Finnish government that “it will actively support Finnair through this exceptional period.” The privatization of Croatia Airlines, meanwhile, has been put on hold.

EU response

The European Commission has made it pretty clear that airlines, like event organizers or retailers, will be entitled to emergency aid for losses stemming directly from their fleets being grounded by Covid-19. National capitals can also offer grants and subsidized loans to help companies through the crisis.

Plus, the commission has already suspended the “use it or lose it” rules for four months, which require airlines to use airport landing slots or risk having to give them up to competitors. That’s designed to stop airlines from having to operate “ghost flights” just to keep their stall at the market.

But the crisis will also exacerbate deeper failings at some of Europe's carriers. State support for that kind of problem will only be approved by EU regulators in tandem with a negotiated plan showing how the business will become viable — perhaps by selling planes, dropping routes, firing staff or divesting airport slots.

The commission will be loath to see ailing, poorly-managed airlines propped up while Europe's few healthy ones shun support, burn through their cash and cut wages.

It's conceivable that state aid regulators will use the review to shake up cozy relations that may dampen competition. Ryanair, for example, has long alleged that KLM receives privileged treatment at Amsterdam's main airport.

In the wake of the banking crisis a decade ago, regulators forced major changes at banks as a condition for them to receive aid. In certain cases it also made shareholders take on losses.

EU antitrust chief Margrethe Vestager has proven equally ruthless in the airline sector. In 2013 she effectively allowed flag carrier Estonia Air to collapse by ordering the government to claw back 85 million euros in restructuring aid and prohibiting a further 40 million euros in subsidies.

“It would not be a good use of taxpayer money to keep Estonian Air in the market artificially — nor would it be fair to competitors, which have to compete without such support,” she said at the time.

The EU’s state aid guidelines for airlines and airports specify that “very distortive” forms of aid can be allowed “under exceptional circumstances.” That does not mean, though, that national governments now have carte blanche to bail out any and all comers.

Covid-19 may bring forward the day of reckoning for Europe’s struggling airlines.

*MLex translation from the original French.