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8 April 2020

Why the government is bailing out airlines ahead of charities

A complex lobbying war is being waged by individual airlines to secure government support, but some companies have also been making recent dividend payments to shareholders.

By George Grylls

Virgin Atlantic’s petition for a government bailout has been clever. The airline has struggled with profitability over the years and now, like the rest of the industry, is in a parlous state because of the coronavirus pandemic. Air traffic figures have fallen off a cliff, with the International Air Transport Association estimating that travel restrictions now cover 98 per cent of global passenger revenues.

“Even an airline that’s not flying is still incurring a lot of costs,” says John Strickland, the director of JLS Consulting, pointing to the constant overheads of storing and leasing planes.

Last month, Virgin wrote a letter to the government demanding “emergency credit facilities to a value of £5-7.5bn” on behalf of the whole industry. But Rishi Sunak wrote back ruling out a general bailout, saying that individual companies could apply for taxpayer support only “if all commercial avenues have been fully explored, including raising further capital from existing investors”.

With so many companies forced to appeal, begging bowl in hand, to the Treasury’s sense of charity, what Virgin Atlantic did to set themselves apart from the crowd was to enlist three other companies — Airbus, Rolls-Royce and Heathrow — to write letters to the government on the company’s behalf, thus making the implicit point that if Virgin went under, so would many more British companies. And they were backed by an efficient, industry-wide lobbying operation, with Airlines UK co-ordinating a letter signed by almost 40 MPs, putting pressure on the government for more support.

As a result, individual UK carriers have begun making headway with their pleas to the Treasury. EasyJet, whose entire fleet is grounded, received a £600m loan earlier this week. A bailout for Virgin seems likely in the near future. But some MPs have expressed dismay that the airlines have managed to elbow their way to the top of the government’s agenda ahead of sectors that many consider in greater need.

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“It’s deeply disappointing that the UK government has failed to come forward so far with a substantial package to rescue charities, voluntary organisations and social enterprises — many of whom are on the frontline when it comes to dealing with coronavirus and its consequences,” said Stephen Doughty, Labour MP for Cardiff South and Penarth, comparing the government’s handling of one sector directly linked with the effort to mitigate the effects of the pandemic with one that is not. “It’s not acceptable to treat these crucial sectors as some sort of Cinderella at the back of the queue behind other parts of our society.”

What is more, the airline industry has not exactly made the best case for itself. Just before EasyJet received its government loan, founder Stelios Haji-Ioannou, whose family still own a third of the company’s shares, took a £60m dividend payment from the company, while Bloomberg reported earlier this week that Richard Branson had moved $1.1bn of shares in Virgin Galactic from the US to the British Virgin Islands. EasyJet and British Airways have both announced plans to furlough staff, while Virgin is “offering a one-time voluntary severance package to all employees”.

“You could easily imagine circumstances where governments hand out these loans which may or may not ever be paid back, and through clever accounting they end up becoming part of the next dividend payment, while staff are being furloughed,” says Dr Doug Parr, chief scientist at Greenpeace. “So I think that any loan needs to come with a condition that it’s not being used for shareholder payouts or bonuses, and that there’s a high degree of transparency around it.”

In response to the airlines’ lobbying, Greenpeace has also sent a letter to the government, demanding that, in exchange for support, the state ought to take equity in companies in order to “provide some steerage to the sector as a whole”. Greenpeace would like to see conditions attached such as the acceptance of a frequent flyer levy, an end to runway expansion and increased rights of representation for workers. But experts predict that, like in the US – where a $58bn general bailout does seem to have been finalised – dividend payments in particular will be the government’s red line.

“Any airline that wasn’t willing to engage in that is going to sow seeds for problems in its future,” says John Strickland. “If an airline was to take public largesse and to turn round and spend it on dividend payments, share buy-backs and executive bonuses, then it would not be likely to secure a long-term position in the marketplace, as there would be an enormous backlash. Carriers in the US have committed specifically not to do this.”