Government to UK aviation industry: Drop Dead

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Following a number of days of talks with British Airways, Virgin Atlantic, easyJet and representatives from UK airports, the Government has refused to provide a package of financial support for the UK aviation sector.

According to reports, a letter was sent by the Chancellor of the Exchequer this afternoon which made it clear that there would be no industry-wide package of measures.

Government to UK aviation industry - drop dead

The Government did say, however, that it would be prepared to talk to airports or airlines “as a last resort” when they would otherwise need to appoint an administrator.  There would be no discussions until companies were at the brink and had exhausted all other options for raising finance.

The letter implies that any deal would involve the Government taking partial or full control of the airline or airport involved through the acquisition of newly issued shares and would not involve any Government loans.

Whether of not the Government chose to save any particular business would depend on:

“whether the business makes a material contribution to the economic activity of the UK, the importance of maintaining a thriving competitive aviation sector in the UK to deliver connectivity and the equitable and fair treatment across businesses in the sector”

Here is the full text (click to enlarge):

Rishi Sunak letter to aviation sector

and

Government letter to aviation sector

The reference to ‘maintaining a thriving competitive aviation sector’ looks like a signal to Virgin Atlantic that the Government is willing to take it over if required.  There had been some speculation that Virgin Atlantic could be sacrificed as long as British Airways was protected.

The Government stated that airlines and airports are already benefitting from the ability to reclaim up to £2,500 per month of the salary of furloughed workers.  There was also an implication that the Government may soon allow non-investment grade companies to access pots of state funding which may benefit the weaker players in the sector.

In terms of airports, Karen Dee, chief executive of the Airport Operators Association, said in a statement:

“After having publicly announced a support package for airports and airlines, we’re surprised by where we find ourselves today. Our industry will now have to fight on its own to protect its workforce and its future”

In terms of ‘what does this mean for me’, I would say that in no circumstances now should you accept a credit voucher from British Airways, Virgin Atlantic or easyJet.  Insist on cash.  It is an unnecessary risk if you have an option.

Now that the Government had made it clear that no financial support will be available, it is unlikely that banks will be queuing up to provide loans to the sector.  The credit card companies are also unlikely to release the funds they are refusing to pass over for flights booked in the future.

In the case of IAG and easyJet, it would be virtually impossible for them to issue new shares in the market at this time – although both have enough reserves to keep going for 3-4 months.  (The Sunday Times said last week that British Airways was losing €200m per week so, assuming IAG as a whole is losing €400m per week, their €9 billion of liquidity is good for another 3-4 months.)

For more information on this, click this Google search link and visit the Financial Times story at the top.  Doing this gets you over the FT paywall.  The Sky News version is here.

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Comments

  1. JP_MCO says:

    Does anybody else think that a good way for Virgin to incentivise people booking might be to revise the rules on the use of the Companion voucher? I’m sure there’s a fair few people out there (myself included) who would be willing to break into their pile of Virgin Atlantic miles and make some bookings for later this summer if they could use the voucher in a similar way to what BA allows with their 2-4-1. This could provide a healthy cash injection into the company. I know that Rob said that someone at Virgin wanted to keep a ‘carrot’ for Gold members but when things are as dire as is being reported shouldn’t they use any and all means at their disposal to keep the money coming in?

    • Shoestring says:

      definitely

      do you get a chance to pay >£100 per person alongside the Virgin miles? – to get S75 protection

  2. Michael says:

    I think this is the right approach. UK taxpayer funded bailouts should be the last resort. Whatever assistance should be consistent with the economic contribution to the UK economy. It’s complicated by the fact that these same airlines also contribute to the economy of other countries, and by logic should be asking for bailouts from Spain, Italy, Poland, St. Lucia, Barbados, etc. For example, many of easyJet and Virgin leisure routes to holiday destinations don’t contribute a lot to the UK economy as they cater to mainly outbound traffic.

    The case isn’t helped by the fact that EasyJet is paying a dividend of £171m to shareholders of which £60m goes to Stelios Haji-Ioannou. EasyJet shareholders need to make the decision whether to take the dividend, and putting the rest of their investment in the airline at risk or, not paying the dividend and giving the airline a lifeline to shore up the books to whether the storm. They can’t rely on the British taxpayer to take the risk off their hands.

    Also, the Chancellor is quite rightly telling the airlines to go first to their shareholders. In the case of Virgin Atlantic, it is owned by the Virgin Group (20%), Air France-KLM (31%) and Delta Air Lines (49%). If Virgin Atlantic ceased, their valuable slots will be quickly replaced up by other airlines, including their current shareholders, thereby maintaining competition.

    • The problem is its a game of musical chairs. Those sat on the planes and slots now are vulnerable as they have fixed costs they cannot avoid.

      Those who would take over those planes and slots after administration don’t have those same burdens now so it’s not really fair competition that they get to wait in the wings and pick up the pieces once the risk has gone.

      What you need here is some restructuring of the fixed costs somehow to take them away for now and bring them back in the future. I’m not saying pump money in directly but somehow you need to put these companies on hold for the future. Let the poor ones go bankrupt when business returns and the good ones flourish.

      Let’s say you get a foreign government step in to help their airlines and they end up taking the slots at LHR and buying easyjet and running for a profit for the next 20 years, is that really a good outcome? Better still Air China buys it up. (and yes I know IAG is spanish and that its owned by all sorts of people)

    • KLM/AF pulled out of their purchase, so it remains 51% VG and 49% Delta. Delta cannot invest more because it is a non-EU airline.

  3. Dominic says:

    Government won’t let any of these airlines collapse, but makes sense to force them to do everything they can (using theirs and owner reserves) before the Government supports them.

    • W6 traveller says:

      Totally agree. They will use any govt. grants to buy back shares before they ‘save their employees’. Done it before, will do it again. Let the owners take the hit before we pay to keep their Lamborghini’s polished…

  4. Re: Rob’s advice not to accept a Credit note- is this feasible? I thought the article yesterday suggested that EU rules were changing on Flight cancellations such that airlines could offer a credit note rather than cash?
    Not world-ending, but I might have considered taking EasyJet up on a reschedule of my 2020 Easter flights for Feb half term next year had they not set the rules so that I get no reimbursement for the ~£500 fare reduction vs. the flights I have booked! As such, they’ve made me determined to get my cash back if I can…

    • That is for package holidays (or flight+hotel or flight+car bookings). Nothing changes for flight only bookings.

      • That’s great- thanks Rob. Love collecting points, and travel- but not a travel pro like most on here!

  5. Have seen various things about how to force refund with BA here, but is there any advice for how to claw back money paid to Easyjet? All I’ve heard from them via email is an offer to rebook up to Feb 2021 without a change fee.

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