End of IAG? UK Government may take stakes in British Airways, Virgin Atlantic and easyJet this week

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There is increasing speculation that the UK Government may move to take partial control of British Airways, easyJet and Virgin Atlantic this week as part of a bail-out of the aviation sector.

It may not get this far, of course.

One option for an airline bailout is to layer it:

First, the Government offers a small short-term bridging loan, capped at what could realistically be repaid within a few months.  This is definitely not enough for Virgin Atlantic and is unlikely to be enough for British Airways and easyJet.

Secondly, the Government offers a far larger longer term loan, capped at what could realistically be repaid within 3-5 years.  This might be enough for BA and easyJet although their existing debts will limit the amount of new borrowing which they could take on.

Thirdly, if the first two options cannot raise enough money, the airlines issue new shares to the Government for cash.  This cash would not be repaid, although the shares would eventually receive dividends and could be resold in the future.

The bail-out of Lloyds Bank and Royal Bank of Scotland a decade ago had elements of this structure to it, although saving a bank is a far more complex operation than saving an airline.

Because easyJet is a UK quoted company, there is more flexibility.  The Government could provide a loan which also include warrants (the legal right to buy shares at a low price when the company recovers, with the shares being immediately resold in the market for profit when acquired).  The Government could also insist that easyJet’s shareholders put in a sum in order to trigger the loan which could, for example, be equivalent to all dividends and share buybacks made over the previous three years.

It is more difficult with Virgin Atlantic, which is a private company, and with British Airways which is a private company inside a larger quoted group.

In the case of BA, it is easier than you might imagine for the Government to take control.  Whilst British Airways is part of Spanish-run IAG, the legal structure makes such a deal fairly easy.  At present, you have a company called British Airways plc which controls the airline.  British Airways plc continues to publish its own accounts – the 2019 set can be downloaded here.

There are 2.1 million shares of British Airways plc in issue, all – or at least the majority – of which are owned by IAG.  However, it would be very easy for British Airways plc to issue new shares for cash which were acquired by HM Government.  Once the Government shareholding in British Airways plc went over 50.1% the Government would have a controlling stake although IAG would remain a minority shareholder.

It is important to note that there is no benefit in the Government buying a minority stake in British Airways plc because the shares are not liquid.  IAG would still control the business and there would be no guarantee that the Government could sell its shares at a later date.  It needs to be 50.1%+ or nothing.

Does British Airways need a bailout?

Potentially.  According to The Sunday Times yesterday, British Airways is currently losing £200m per week.

On this basis, you can assume that the whole of IAG would be losing at least £400m.  IAG’s much-vaunted €9bn of liquidity may, technically, be enough but you wouldn’t want to risk it.  ‘Liquidity’, for example, includes bank loans which are currently undrawn, but there may be clauses attached to these loans which may stop them being drawn down in a crisis.

(The Sunday Times also said: “Sources said its strategy was to stall the process and hold off accepting help until rivals competing on lucrative transatlantic routes, such as Virgin, collapsed.”  I am pretty sure that the ‘source’ in question was HFP as I have not seen anyone else putting forward this line.)

At least IAG’s equity has value though ……

As of Friday evening, the total value of IAG’s shares was £4.3 billion, of which you can probably ascribe £2 billion to British Airways.  The BA balance sheet should be strong enough to take a fairly large Government loan before essentially reaching its debt ceiling, beyond which the Government would take shares in the British Airways unit instead.

Virgin Atlantic is more problematical.  When Air France KLM was looking to invest in the airline last year, the price was £220m for 31%.  This valued the equity at £700m during a boom period for transatlantic travel and you could never argue it was worth anything like that now.  If I was structuring a loan to Virgin Atlantic I would insist that it includes the compulsory purchase of 50.1% of the airline for a nominal sum, say £50m.

easyJet is the easiest to deal with because its shares are publicly traded.  The equity was worth £2.3bn at the end of last week.  As easyJet shares can be freely bought and sold, the Government may be willing to not take full control as it would be easy to exit a minority position.  It may even be possible that easyJet is strong enough to get away with just a straightforward loan.

Will the Government need to break up British Airways afterwards?

One interesting parallel with the banking crisis was the legal requirement to break-up Lloyds Bank.  The European Commission decided that saving the bank represented ‘state aid’ and as such it was unfair to other banks operating in the UK, especially Barclays and HSBC which did not take Government money.

Lloyds Bank was required to undertake a series of moves to slim itself down, the most public of which was the rebranding of 630 branches as TSB and its subsequent flotation.

What is different here is that it is likely that all other major European airlines will receive similar help.  On this basis, none will be in a position to call ‘foul’ unless the UK bail-out terms end up being more generous than others.  However, a Government-owned British Airways would be unfairly placed to compete going forward and would arguably stifle potential new entrants into the market.

What could happen?  Here are a few scenarios:

British Airways could be split into two airlines, each with an equal mix of short haul and long haul routes, and floated separately on the stock market

An asset swap could take place between a state-owned BA and a state-owned Virgin Atlantic to create a more level playing field going forward

Ryanair and easyJet, if they remained independent, could insist that they are handed some British Airways short-haul routes due to the state aid BA received

Conclusion

This is a rapidly moving situation and it could go various ways.

We don’t know whether the Spanish and Irish Governments would want to be involved in a joint break-up of IAG, or whether the UK Goverment is happy to just save British Airways and let the other two airlines sink or swim.

We don’t know whether the Government actually cares about saving Virgin Atlantic.  It is important for competition purposes but it is not a fundamental cog in the wheels of the UK economy, unlike BA.  It could be open to legal challenges if a bail-out is not offered to any airline which wants one, however.

We don’t know how easyJet’s current internal problems will impact the willingness of the Government to step in.  Despite the crisis it is paying a £174 million dividend to shareholders this week, and its own employees are begging the Government to refuse to save the airline unless it pulls back on harsh changes to staff contracts.

We don’t know how small carriers like Loganair and Eastern Airways fit into any sector-wide deal

It’s going to be a busy week.

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Comments

  1. Bagoly says:

    Despite what WW said, I always thought Brexit (and hence EU ownership rules) made it pretty likely that BA would have to split from the rest of IAG.
    So the Covid effects are to some extent pushing at an open door.
    Competition concerns longer term are then preventing Lufthansa taking over Iberia, as well as the various smaller airlines in Europe.

  2. Ultimately I feel once this is done, cheap flights will be over and done with for a while.

    The industry will emerge with much less competition, with many airlines going bust, and the few that are left needing to repair their balance sheets.

    As an outside bet I reckon Avios may end up being suspended or seriously diluted.

    • Alex M says:

      Have to agree with the above.

      • Richard says:

        I don’t think this will happen

        None of the major airlines bar Norwegian will go bust. Their respective governments won’t allow it.

        Even if they do go bust – the planes themselves are valuable assets and don’t just disappear. If Virgin or Norwiegian went bust you can be sure their new 787s (+Virgins A350s) will get picked up.Yes, some older planes will be mothballed earlier than planned; but Airbus and Boeing will go back to churning out new ones just as before soon enough.

        Unit costs are going to barely moved by this; and revenue management skills will still be what are they are. I can’t see a large upwards “correction” in prices once things are back to nromal.

        • Largely agree, same planes will still be flying to similar destinations regardless of livery on them.

          Frequent flyer miles may well go to dust though along the way.

          If prices rise it’ll be to general inflation which seems inevitable now.

          • And on that point, any thoughts as to whether holding avios bookings is safer than avios? I’m intended to book a redemption for early next year to Istanbul to connect with a Singapore airlines redemption. I had planned to book as a Club Europe redemption with maximum cash component, though holding off as plenty of availability. Thinking now though that using up as many avios as possible and doing that sooner rather than later might be the way to go….

          • ..part of my hesitation also was that I can see that SQ route being a casualty of any network pruning, but I guess if it is a redemption with maximum miles if I can’t cancel under the rules, the avios are probably gone or worthless anyway.

        • Moreover, consumer pressure may make airlines ditch some of their outdated and anti-consumer rules, such as ‘Saturday night rule’, return fares being cheaper than one-way, lack of flexibility on cancellation and refunds. They will need to win customers’ loyalty back

          • Lady London says:

            Based on long, long history airlines’ ditching of outdated and anti-consumer rules won’t last one single second longer than the airlines can get away with.

            Particularly as under all circumstances except completely going bust – which is so unlikely – British Airways will remain a dominant airline. Remember the old BMI slots? Remember Flybe slots? Yeah, they spent time in other ownership but guess who’s got them now.

        • ChrisBCN says:

          It’s been a popular trope for year after year after year that ‘norwegian is about to go bust’. Of course it might still happen, but their government gave them a rescue last week.

    • Lady London says:

      And any outstanding refunds due on passenger flights that were cancelled become lower priority debt? And let’s not talk about vouchers…

    • Spaghetti Town says:

      I disagree, We will likely have a low period of about a year and things will be ramped up again back to normal.

  3. Slightly OT. I have 100k virgin miles (and wife has additional 20k and daughter 5k). For a family of 4 I don’t think I will get much value from these, notwithstanding the fact my miles may not be safe.

    I was looking to transfer them to Hilton. Firstly is there a way to transfer without calling the flying club (e.g. online). I have tried the number but understandably the call centre is swamped and dealing with more important queries. Secondly is there a way of merging our miles together or would I have to transfer them separately to Hilton and then try to merge them?

    Thanks

    • You need to call.

      Must go into separate Hilton accounts but Hilton lets you send from one person to another for free so that’s not an issue.

  4. insider says:

    If I were the British government, rather than weaken the position of BA (which all of your scenarios do), I would remove Virgin entirely from the market as and produce one strong hub carrier that can compete with the other big European carriers. Having 2 sub-scale hub carriers at and airport that will now almost certainly never get a 3rd runway is madness when competing for traffic across Europe.

    • I’d recommend you spend your isolation period doing an Open University economics degree 🙂

      • insider says:

        ok – so if we had 2 sub-scale airlines operating at a constrained Heathrow, the cost would be higher (because they are both sub-scale).

        range of destinations is likely to be lower because they will both be competing on overlapping routes, but price to consumer may well be lower as a result. But choice would be vastly limited. Do you really believe all the marketing hype from Virgin that they’ll fly 15 domestic routes and open all these new destinations? That’s utter rubbish, they will act like any commercial business and overlap the most profitable routes (like they do already).

        So ultimately the government chooses to have 2 airlines in a pergutory-esque position where they can’t really grow or do anything meaningful, or have 1 strong airline coming out the end of it. I don’t mind if they call it Virgin to make you happy, but I as a consumer would much rather that option, and have them competing with LH, AF-KLM etc. easyJet and Ryanair would continue to keep them honest on shorthaul routes.

        • Novice says:

          I’m not an expert obviously but can’t they do it where BA becomes London eg south hub and Virgin becomes Manchester eg north hub.

          And instead of competing with each other, try to become better and compete with ME3 Airlines.

          • insider says:

            that is kind of what I was suggesting – BA doesn’t just compete with Virgin, it competes with the global airlines. The infrastructure in the UK is too constrained to have 2 hub carriers in one airport, it just doesn’t work. If Heathrow was expanding then fair enough, but it’s highly unlikely to happen now.

            Unfortunately Rob’s comment was unhelpful and patronising, and rather than put forward a counter argument, it just gives the sense of ‘I’m smarter than you’. As usual, in pure theoretical economics, maybe he has a point, but there are many other factors that have been oversimplified / not thought about *in my opinion*, but maybe I am just stupid

          • Actually @Rob, maybe you will use the time when you can’t be bothered with pushing articles about the long list of business fares sales, 90% of which were irrelevant for 90% of readers anyway, and do a series of posts on civil aviation and airlines business economics etc. This would be much more useful than looking down at readers and telling them to do an OU course?

          • But we could make a lot of money from the other 10%, which is absolutely not the case with a series on airline economics 🙂

          • @AlexSm it’s Robs classic arrogance. He will never accept that he is/was wrong (unless it’s very obvious). Sometimes it feels like he mixes reality with how he wants thing to be to CREATE opinion. But he was wrong with Avios devaluation (I don’t know how many years – maybe 2? – he said BA signed off major changes to the BA Avios program), FlyBe survival, ITB Berlin happening regardless. And now BA splitting from IAG and Virgin Atlantic surviving this hurricane. LOL.

          • “do a series of posts on civil aviation and airlines business economics etc.”

            I think readership would decline pretty rapidly

          • London-New York is the most profitable route in the world, by some margin. Forget Tokyo. Forget China. This is the business class route and the only reason Virgin has survived all these years. Plus they’ve done a decent job to be fair. I had to add that bit in case any VA watching.
            Manchester isn’t going to cut it.

            Check out this useful infographic –
            https://www.visualcapitalist.com/top-airline-routes-by-revenue/

            Fascinating.

      • Novice says:

        😂

        • Novice says:

          The 😂 is for Rob’s comment because I have a degree in Economics but that doesn’t guarantee free market view-point.

          There’s many different schools of thought in Economics as you probably know yourself.

      • One might speculate that an abacus and basic multiplication tables would be closer to his level of ability.

    • ChrisC says:

      BA is not a sub scale hub carrier

      What world are you living in???

      • insider says:

        I was referring to Rob’s comment that if you hand half of BA’s slots to Virgin then you will have 2 sub scale operators.

        • I didn’t say half. Lloyds Bank wasn’t forced to sell half its branches. BA has around 110 long-haul planes whilst Virgin has 25-ish? Moving 20 from BA to VS would be enough.

          • Paul Pogba says:

            Doesn’t BAs dominance of Heathrow remove competition? If you were in a system reset situation (which is where we may be going), wouldn’t you leave BAs aircraft and cap any one airline at 25% of slots at Heathrow? It would free up room for Virgin or easyJet (or if you were feeling generous, Ryanair, norwegian, etc) and force BA to try and make routes out of Gatwick, Manchester or Edinburgh work.

          • Except that a significant proportion of BA’s traffic at Heathrow is connecting (I can’t remember exactly how much, but Rob may know). That requires a critical mass to work and if that is broken routes will quickly start to become unviable – think a number of 787 routes that BA has launched over the last couple of years to new and smaller destinations.

            True, a number of those routes may not be viable anyway in the immediate aftermath of CovID-19 but the effect will trickle down.

            That, in turn is likely to lead to connecting traffic being pushed to other European hubs, which may be good in terms of taking pressure off of Heathrow, but bad for our economy as spend is diverted to non-UK based airlines and we get fewer stop-over visitors. That in itself is also unlikely to make much difference from a miles flown / climate change perspective as the capacity is simply moved.

            A competing hub operation based, say, out of Gatwick might be better. It did cross my mind that a combination of Virgin Atlantic and Easyjet’s UK operations might be formidable if they could be brought together in a way that works. That would mean a considerable departure though from Easyjet’s current operating model as they are point-to-point only. Virgin is already Worldwide by EasyJet partner airline but all that does is bundle third party connection insurance so far as I can tell; you still have to ‘self-connect’.

    • Spaghetti Town says:

      I think the employees of Virgin and all the other businesses that rely on them, would disagree with you

    • Richard says:

      There are a lot of non-trivial questions about what we as the UK/UK business/UK consumers “value” as the benefits of different airline set ups for Heathrow.
      The general case being, what is the benefit to us of a destination not served by direct flights getting once daily service from one airline. And the cost of a direct flight served by BA only that would lose its flight if BA had less planes and slots. Or a route going from one airline daily to two airlines daily. Does this necessarily make that much of difference? The magnitude of that difference compared to the zero airlines to 1 airline gap will be important to the value of splitting BA. Similarly, is there much/any benefit going from 4 to 5 airlines on a route?

      The answers to these have to considered as well as the pure economics of what allows BA to churn out profit..

  5. Noah Bowie says:

    IAG can get by if it is given long term loans from the British, Irish and Spanish governments. The whole idea of the UK government taking stakes in airlines seems to be the worst case scenario. Whatever happens I assume the UK government would far rather give long term loans in order to avoid the mess of having to reorganize the entire UK aviation market. All UK airlines will receive government funds but I highly doubt that stakes will be bought in any airline. The only scenario where I see the potential is if an airline is on the brink of collapse and there’s nothing else the government can do. But even then they’d only do it for easyJet, BA or a regional carrier now that Flybe is gone. Given that similar measures are being floated by governments in France and Germany the EU has to decide whether to waive the rules or have to go through the immensely complicated and expensive task of reorganizing the European aviation market, effectively handing control to Ryanair and easyJet. With the exception of Alitalia European governments will stay away from ownership or part ownership of European airlines.

    • Lady London says:

      @Noah Bowie there are a lot of HfP readers who do this kind of thing professionally and Rob made his money in that business too.

      There are various ways to do it. For example @Benilyn mentioned yesterday support from government could be structured as senior debt with warrants attached. This would be one variety of combo product that could be used. So government could choose how it took its money and its access to assets either just as a backup up case the loan didnt get paid back as expected. Or, government could build it so they got to take assets / shares anyway. That they could later resell, either freely or at times/ under conditions to be built in.

    • “With the exception of Alitalia European governments will stay away from ownership or part ownership of European airlines”

      I disagree with that statement. According to Wikipedia currently
      1)The Finnish government is the major shareholder in Finnair. It has 55.8% of the shares while no other shareholder owns more than 5% of the shares.
      2) The French state and the Dutch state each have 14.3% of the shares in Air France-KLM
      3) The Swedish government owns 14.8% and the Danish government owns 14.2% of SAS.

      So there’s no reason why both the Spanish and British governments could not do the same and each take an equity stake in IAG or even directly in BA and Iberia in exchange for supporting their respective airlines. .

      Also the Finnish government announced last Friday that is was guaranteeing Finnair’s 600 million Euro pension premium loan to aid the flag carrier on the same day the Norwegian government gave a loan guarantee of 300 milllion Norwegian Kronor to Norwegian Air so the precedent is set for government loans to be offered to Lufthansa, BA and Iberia.

  6. Seems like plans afoot in the package travel industry.

    Imminent change in the law for your right to refund. Will be in the form of a Govt-guaranteed voucher, instead of cash. Doesn’t mention similar measures for flight only, although BA appears to have gone rogue on this!

    https://www.independent.co.uk/travel/news-and-advice/package-holiday-refund-rules-suspended-abta-coronavirus-a9417261.html

    • Lady London says:

      Hence my saying don’t sit around and you don’t legally have to wait 72 hours before your flight booking flies to formally request your refund. Get in now.

      I wouldn’t be advising this if BA hadn’t been so nasty and sneaky by fr*gging their website quite deliberately to deny customers their rights when they are still in a better position than many if those customers are going to be.

      The 72 hour creep in was also totally an attempt to frustrate customers rights to a refund whilst BA in backgroubd has been petitioning government and regulators overturned and is hoping to buy time not to pay out.

      Given the relative strength of BA as compared to each of their passengers it is disgusting that BA- who surely can raise finance better than any passenger – is seeking to deny, abuse customers and try to remove their hard won rights in this way. BA will be able to withstand this. Consumers may not.

    • Which is all very well, but are they going to guarantee that holiday companies won’t ramp up prices to the extent that the vouchers don’t actually cover much of the price?

      • Optimus Prime says:

        Exactly. Or make it count for a trip to same destination in same travel class regardless the dates.

      • Lady London says:

        Holiday companies to the extent they can, airlines for sure.

  7. Journeying John says:

    Let’s hope this means the end of BA’s cynical exploitation of slot dominance in the UK when the crisis is over and there’s real competition leading to a better service for all.
    Good to see Cruz has at last been willing to make a personal salary sacrifice… Given all that was being done to BA staff terms and pay, it was unsustainabke that he would retain his full salary and benefits package.

    • Lady London says:

      Seriously @Journeying John, there will be no lasting impact to the top management. It’s actually insulting that even a 20% cut was claimed. I have been on the inside of such things quite a few times and seen the reality of how these claims unfold.

      Btw I don’t begrudge senior management who lead customers well being rewarded. It’s the lies about what they truly end up with as compensation, and interim implications that they too are “suffering”…Oh puh-Leese

      • Lady London says:

        Lead customers –>> lead businesses. Think an update to this phone has reset text editing back to advanced level 🙂

  8. I wonder if this is a collision of Rob’s former career and this one? The reality is that IAG has a long way to go before it exhausts its cash, cash equivalents, lay-offs and restricting of its current financing agreements. Once we get to that point the virus situation will have changed – either for the better or worse, but more of the trajectory will be known. We might know if temporary cash-flow measures, government guarantees or long-term ownership of the travel industry is the answer. I don’t see whole-scale nationalisation as long-term solution.

    I also see no reason why the Irish, Spanish and UK governments would not work together on a project of this scale? All three economies depend on air travel to a larger extent than other, more central, European countries. An SAS-style structure is hardly beyond the pale – it just requires co-operation. Other countries face the same issues. Thinking of individual business units is not at all helpful – especially for a company like IAG which is, in normal circumstances, well managed and viable.

    I don’t accept the premise of most of the article, because I don’t accept that one government can, would, or should, prop-up airlines with operations across the continent. Its not the 1980s anymore. Who would bail out Ryanair, for example? Ireland? The UK? Poland, Austria or Malta? What about the huge operations they have/had in Italy – Alitalia has been nationalised, but should FR be offered money on the same terms?

    • > it’s not the 1980s any more

      It’s not anything anymore! There’s nothing to compare this to. No rule book to read. We are reinventing how the planet works in real time.

      • Finnair is bailed out. Norwegian is bailed out. Macron has said he will nationalise Air France if needed. Lufthansa is about to finalise a bail out. The ME3 don’t need bailing out. If BA went into administration these airlines will be flush with cash to buy the Heathrow slots (at a fire sale price anyway) and you don’t have a national airline left.

        • I’m also reminded of the fire of London, where all sorts of plans were considered straight after the fire to rebuild the city in different ways, the grid system, spirals, grand parisian boulevards, etc. In the end they rebuild it pretty much as it was – with all the twists and random turns.

        • Spaghetti Town says:

          @ Rob you are correct. The government would just now allow it happen, especially in a post brexit world etc etc.

      • I agree – I should have worded it better. Its not like each airline exists independently, as an extension of government, these are cross-boarder corporations and the interests of multiple governments intertwine. I don’t accept the premise that BA would have to be separated from IAG, I feel it is more likely that the three governments would work together.

  9. It is time for the Airport owners to step in and show their wallets in support of the airlines. After all one cannot operate without the other. These mega property owners (landlords) are never made accountable. Manchester Airport Group owners of Stansted and Manchester airports hold a massive capital expenditure chest enough to building a second Stansted runway which had been buried and two restaurants on grounds surrounding the airport. Yet another no starter due to lack of demand. Big ideas but plenty of cash.

  10. In-chan Kim says:

    What happens to any points e.g. Avios if an airline goes bust?

    • Very likely to be virtually worthless, if not totally.

    • Virgin or BA (or easyjet) for that matter going bust would send out a disastrous message, so it won’t happen. The country is facing catastrophe – anyone fretting about their air miles needs to look at their conscience. No reason not to hold tight.

      • Shoestring says:

        is that ‘police marksmen please shoot the stockpilers on sight’ Jack?

        • Jeff said that. I said that hoarders should be jailed – you’re a drain on resources and hindering national efforts during a time of crisis, as well as hurting vulnerable groups.

          • Shoestring says:

            I’m not hoarding anything

            having said that, got 520 loo rolls coming on Sunday delivery just in case

            anyway, sorry mistaken identity, I was pooped at the time only 2 hrs sleep

  11. There’s no way the Spanish government will let Iberia sink, it’s their crown jewel and they’d rather incur heavy losses.

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