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

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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.

Comments (155)

  • BrightonReader says:

    The thought of the U.K. Government and taxpayer bailing out a Spanish owned company will be an anathema to many. Equally many Brits will be surprised by the Spanish ownership full stop,

    What people see as British companies are far from it. Boots and Asda for example.

    Now what concessions will their be? Alex Cruz to take a major pay cut for starters? Having to develop and when the time comes start up proper regional services etc.? Having to give up slots at LHR?

    • mark2 says:

      The fact that IAG is registered in Spain does not make it Spanish-owned.
      The shareholders will be all over the world.

      • BrightonReader says:

        U.K. taxpayer sends money to Qatar Airlines who own 25% of IAG not a good headline ether.

        IAG is legally a Spanish company.

        • memesweeper says:

          Absolutely correct.

          Bailing out British businesses with large foreign investors is bad enough, but bailing out foreign ones is unthinkable… surely?

      • Kier says:

        Sure, but only a minority share would be British, which would be surprising to many

  • Annih says:

    I don’t see the parallels to banking here. If BA goes under, except for Jobs, so what. Someone will come out of the ashes or as you say the Government will own it. There would be no need to “split” it up as the banks acted inappropriately too. BA has just been hit (like a lot of businesses) hard and at a time where there was likely to be a large amount of revenue as we enter the holiday seasons.

    • Andrew says:

      I think the important factor is the speed of any recovery. There’s clearly a need for a ‘British’ airline so somebody would fill the gap left by BA either by starting afresh or picking up the pieces. But following the lifting of restrictions, at first at least, the appetite for risk within the airline industry is going to be very low and any new player would likely take years to get back to the level BA normally operate at. The only way to hit the ground running when things get better is by keeping the established players going. As a major shareholder the government could force BA to return to their previous schedule almost immediately even if it meant making a loss on many routes all with the larger aim of speeding the recovery of the rest of the economy and, more importantly, improving morale in the population in general.

      • Chrisasaurus says:

        The government focus at the moment is still on the “fingers in ears and eyes screwed shut” phase, pretending that since were Britain and therefore not foreign, we wont be needing to worry so much about all of this and can put economy over lives. Suggesting perhaps people might like to avoid crowded places but not actually closing pubs until told to by the french (sovereignty working out very well so far)

        The recovery will come but the problem needs facing up to first, then dealing with

  • Anna says:

    I know it’s not that easy but surely it’s time for countries to take a collective stand on tax havens and try and shake a few billion quid out of them? Everyone, especially the mega-rich, has a responsibility to do anything at all they can to help just now.

    • Qwertyknowsbest says:

      + most of the UK population !

    • BrightonReader says:

      If only we had decided not to leave an international organisation that was doing exactly that and cracking down on tax evasion.

      • Andy says:

        The EU? I’m sorry but their lack of assistance to Italy..
        and leaving it to CHINA to provide medical aid…is beyond astonishing.

        • ChrisC says:

          The EU as an organisation does not employ doctors or nurses so it can’t send anyone anywhere.

        • Kier says:

          The EU does not have any competency in healthcare. It is a national issue. Thats another perfect example of how people complain the EU doesn’t do enough but if the EU took power in some way of health activity people would be complaining that the EU is taking over a countries freedom to treat its citizens in the way it sees fit.

      • Anna says:

        I suspect that if there was the appetite for it, the UK, EU and USA could achieve something together. Meanwhile, our BOTs are sitting waiting for UK taxpayer funded support as per every crisis!

  • David Cohen says:

    Given the complex and inter-dependent nature of the IAG Group, how does as a sale of only British Airways work?

    IT services (for example) are run by IAG, not BA. Would a change ownership of one of the companies in the group affect these shared platforms?

    Surely the logical solution would be for the British, Spanish (and possibly Irish) governments to talk to each other and arrange a bailout together?

    • Rob says:

      TSB ran on the Lloyds IT platform for a number of years after it was sold. No reason it can’t be done on an arms-length basis.

  • Aleks says:

    Hi Rob (or others!) – has this update lead to a change of view from your previous article ‘Should you be concerned about losing your Avios and Virgin Flying Club miles to bankruptcy?’?

    I currently have quite a few Flying Club miles that I’m getting quite nervous about…

    Thanks

    • Rob says:

      If anything, given the Government now seems eager to intervene in everything it can, your miles should be more secure.

      • Bagoly says:

        At the risk of starting a run, I combined our Iberia avios into BA avios yesterday.
        How that works legally is a different question – can anyone explain the contractual relationships between the customer, the airline and Avios Group Ltd?

        • Rob says:

          Technically Avios Group owns your miles. However, here’s the interesting bit. Despite the way it is presented in the IAG accounts – as a standalone business – Avios Group is actually 86% owned by British Airways plc and NOT IAG. I would imagine that it doesn’t matter where your Avios ‘sit’ and all that matters is whether British Airways plc survives.

          • Marcw says:

            Not in the case of IB Plus. You are the owner. You also pay taxes when you receive a chunky welcome bonus when signing up to an IB credit card. That was the case when Santander Spain was offering 30K welcome Avios on its Iberia credit card.

      • Rachael says:

        God, please I hope so, I work for the NHS and saved for 2 years to get all my points for a 1st class ticket as a treat for myself on Virgin and have a shaky feeling it is going down the plug hole …

        • memesweeper says:

          Rachael, if your dreams come true it’ll not be First on Virgin… Upper is the best you can hope for. Don’t fret — it’s pretty good! 🙂

      • NvT1115 says:

        I hope so Rob – still have a lot left to burn 😦

    • Marcw says:

      Get rid of your Virgin miles.

  • Marcw says:

    Doesn’t the UK have a bigger fish to catch, than dealing with airlines? Their local economy should be way more important than any airline. Our behaviour will change with covid-19 and so will our travel behaviour change. Especially the business travellers (companies realise that virtual meetings/conferences are actually not that bad with current technology).

    I honestly don’t think Virgin Atlantic will survive this crisis. They’ve put all their eggs in the TA business. Unfortunately, COVID-19 will hit hardest the USA.

    I think it’s more likely that the UK, Spanish and Irish Gov agree some sort of bridge loan.

  • 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.

  • Simon says:

    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.

        • Will says:

          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.

          • Mark says:

            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….

          • Mark says:

            ..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.

        • Alex Sm says:

          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.