Economics of Aviation: Why & How Airlines should be bailed out

Commercial aviation has always been dealt with shock owing to acts of terrorism and economic downturns, but in the wake of the coronavirus pandemic, airlines are facing unprecedented crisis, both regionally and internationally. According to McKinsey & Company, during one of their briefings on Covid-19, it was noted that out of 30 key industries, air and travel and commercial aerospace would be most severely affected for the duration of the pandemic and its effects. 

            Generation of revenue for airports is directly proportional to traffic travels, but save for cargo flights handling essential services, many airlines have been grounded at 90% of their flight capacity. By February 2020, commercial flights were connecting more than 20,000 cities, a situation that rapidly dropped to 6,500 by end of March. This follows the bans and cancellations on flights, as countries continued to close their boundaries, one after another. Unfortunately for airports, while employees may take pay cuts or be sent on unpaid leaves, little can be done to save the operational costs of airport infrastructure, given terminals and runways cannot be closed or relocated. Even for essential services aircraft, the normal landing and taking off is interdependent on many other aviation players, including equipment and firefighters on site. 

            In the Issue published by the International Civil Aviation Organization (ICAO) on June 8, 2020, the year will have an overall reduction of seats offered by airlines at between 40% and 53%; a general reduction of passengers at between 2,291 and 3,061 million, with the potential loss of gross operational avenues likely to rise to between USD 302 to 400 billion, compared to the USD 314 billion  estimated in April by the International Air Transport Association.

             Fig. 1: Comparative change in the number of flights tracked for same date, exactly a year before

            A report by IATA has noted that African airlines are staring at a possible loss of $28 billion in GDP alone, and a regional loss of 2 million jobs, out of the possible 25 million jobs being jeopardized around the world, both in aviation and related sectors. With grounded fleets, airlines are quickly running down their cash reserves, technically driving them into bankruptcy, and substantially being positioned to breach debt covenants. A prediction by the Association of Aviation Ground Handlers (AGHAN) has placed loss for operators at N20 billion by end of June, with fears of surpassing this amount if the airspace will remain closed beyond June. 

Fig. 2: Domestic aircraft movements at key airports in Nigeria, 2018 (Statista, 2020)

            According to the Nigerian Bureau of Statistics, about 8.4 million passengers go through the various airports in Nigeria annually, a figure that rose by 12.06% in 2019.

Fig. 2: Domestic and International Air Passengers (2008-2018).

            Just three years ago, IATA documented the importance of air transport and its impact on Nigerian economy, looking at jobs, tourism and investment, and flows of trade.

            Thanks to air transport, the report further noted that foreign tourist expenditure, exports and foreign direct investments, ran into billions of dollars.

 At this point, it is difficult for anyone to confidently project the timelines for resumption of international aviation. This impact will largely be mitigated depending on how long the pandemic persists, the intensity of the outbreak in various jurisdictions, the measure put in place to contain the crisis, the prevailing economic conditions of both individuals and institutions, as well as the confidence level of consumers on air travel. With increased operational costs and reduced demand, the general path to recovery may be slow.

            The sad reality is that the Minister for Aviation had already unveiled a plan to grow the country’s GDP by more than N1.2 trillion, which would translate to 1% increase in 2020, up from 0.6%. This growth would be a great stimulus to Nigeria’s economy, but COVID 19 has become a merciless thorn to this plan, washing away the gains made so far and paralyzing the projected positive impact. To recover that which has been lost and to achieve that which was planned, the collective proactive approach of various stakeholders automatically becomes an essential service.

            In solidarity with airlines and their staff, urgent intervention measures are necessary, not only for the short-term, but also medium-term and for long-term. This is because aviation and viruses are like oil and water – they can’t mix well. An ordinary day at an airport is characterized with queues of people, close contact, going through security checks, buying at foodcourts, duty free shopping, clearing at the customs, boarding and alighting from planes. The virus is also said to live on hard surfaces, including wood and metal, which are very common sites in airports. All this is bound to change when operations resume, and will definitely come at a cost. Consequently, it is inevitable that airlines must be bailed out, to reposition them to the crucial role they play in both national and global economy.

            With limited bank support, government intervention as a last resort lender, insurer and owner, will definitely be the way to go. For instance, the Chinese airlines are mainly funded by government, something that has seen their share prices only drop as slightly above 10%, compared to majority of other international airlines, which have seen a drop in share prices by 50%.

            Reasonably so, many airline unions are lobbying for government subsidies and massive bailouts. Already, the UShas extended a USD2 trillion package to assist her aviation industry, $78 billion of which is meant for loans and payroll support for workers and airlines. Others include EURO 300 million for British Airways from the UK government, NOK 3 billion loan guarantee for Norwegian Air by the state, the South African Airways looking for 21 billion Rand, a $70 million funding for Kenya Airways, and 500bn Naira for Nigerian Airlines by the Central Bank. 

While there are many ways in which various stakeholders can save the aviation industry from the wrath of this pandemic, the following creative solutions could save the day:

Loans be extended at preferential rates

Governments to offer grants and subsidies

Airports and Airlines to access secured financing

Loan repayments be deferred on mutual agreement

Banks to offer guarantees

Governments to offer guarantee on loans between airlines and foreign lending agencies

Governments to offer cheaper federal loans

Tax relief

Measures to support corporate bond market

The role of airlines in the post Covid-19 economic recovery cannot be overemphasized. As they continue to coordinate repatriation of thousands of various nationalities and move essential goods like medical supplies, the earlier governments and financial institutions come on board to rescue the industry, the faster tourism and manufacturing hubs will be connected, boosting trade in virtually all aspects. It is a win-win situation for airports, airlines and the government.