Milad Sherzad discusses how Covid-19 has plunged the aviation industry into crisis and what steps must be taken for recovery.
When the financial crisis struck just over a decade ago, the core foundations and morality surrounding government bailouts came under fire as many felt those who had created the crisis, let alone be potentially benefiting from it, were in fact the ones being bailed out. Now again, with the Covid-19 pandemic, bailouts are coming under fire where they should be considered essential. While bailouts were mainly constrained to the financial sector in 08/09, nearly every firm in the UK is in need of some form of bailout or financial assistance this time around due to the fact that this is such a widespread crisis. A major subject of controversy here is the potential bailouts of commercial airlines in the UK, with companies such as Virgin Atlantic (Virgin) seeking roughly £500mn due to the huge slump in demand for global air travel. Airlines have notoriously come to be known as penny pinchers, sucking the tax payer’s teat of each and every pound they can; all the while their service has declined to abysmal levels. As such, the question remains to be answered, do these airlines deserve to be bailed out?
Chancellor Sunak has made his position clear on government bailouts being the last resort for airlines and, in a sense, I support him. Richard Branson and his tax haven of Necker Island have no doubt cheated the UK government out of countless tax returns and cost the UK taxpayer even more. For him to then go to the Government begging for cash is completely ludicrous. Not only does Branson have such great personal wealth and hypothetical debt to the UK, but many UK airlines have enormous cash reserves which they should naturally utilise in a time like this to keep themselves afloat; British Airways (BA) for example claim they have over £8.5bn in reserve. Despite this, I still believe a bailout for Virgin at least is justified. This is due to the fact that their reserves are minuscule compared to BA and not only do they support around 10,000 jobs but crucially also provide direct competition on some of BA’s most lucrative routes. This competition is no doubt beneficial to the consumer and giving BA any monopoly power on these routes could be catastrophic as it would give them the ability to suck the consumer dry even further with inflated prices. The collapse of many regional airlines could also have detrimental effects for the airports that they serve. With so many jobs and an entire industry at risk, can the government really afford to let it all collapse?
Government inaction has arguably already led to Virgin losing around a third of its workforce and further inaction risks the complete implosion of the UK aviation sector. While opponents argue that this crisis is a natural shift toward a lower carbon future for the aviation industry, through this downscaling, I beg to differ. Aviation is essential to our modern everyday lives: transporting cargo, migrants, tourists, and much more; we cannot afford to let it be crumbled by this scenario that the industry did not inflict upon itself. By letting some airlines collapse, the remaining few will have little to no pressure to adhere to any climate reform as there would be less competition. However, I do believe that a classic no-strings bailout will also lead to a limited change in these companies and the inevitable financial mismanagement will strike again, leading to another bailout request. But the fact of the matter is that airlines operate on notoriously thin margins with even the smallest disruption to service having a severe detrimental effect on revenue and profits. The essential service they provide and their intrinsic financial instability must be protected, although the airlines cannot go scot-free. Naturally, a compromise must be reached.
We can no doubt see that the airline industry is crucial to the UK but it must pursue a greener future, as jobs and the environment cannot be traded off for one another. The solution, hinted upon by Shadow Business Secretary Ed Miliband, is fairly logical: the Government takes an equity stake in the airlines provided they pledge and pursue greener futures. If the government does not stipulate this, monopoly power will no doubt arise and many skilled jobs will be lost. A governmental equity stake in aviation is the only viable path to both a greener and more prosperous future, but whether the government acts on this is another story.
Milad Sherzad is a student at the University of Edinburgh currently about to enter the 2nd year of an Economics and Politics degree. Within politics, his main passion lies within Transport and everything linked to it. He also enjoys aspects of national economic policy and developmental economics.
He tweets @milad_sherzad