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. It will be funny when Virgin stay in business then offer cut-price redemptions to get everyone interested in flying club again and you lot have cashed all your points in for pennies and rubbish value.
    You lot would be crappy investors which tells me that you will be wrong.

    • +1

      Branson isn’t an idiot and he’s just put $250m of his own money into Virgin. Virgin will survive.

      • Novice says:

        Did he say the airline though as there are many virgin products; he could mean collectively which isn’t a lot then.

    • Mikeact says:

      I’ll hang in there for the time being, before I decide what to do with my not insignificant amount of Avios. There’s bound to be some creative ideas that will emerge going forward.

    • If there was a decent option i would cash out at least 50% but as it is going for a gift card with Virgin group is the only option worth bothering with, I think Virgin Experience Days is run by a separate company

      • I’ve no idea how long the virus is going to take to work itself through but anyone who thinks we can get away with paying people for zero productivity is very optimistic.

        Inflation is going to be the defining characteristic of the coming economic cycle and it will be very hard to manage due to it’s impacts on bonds, to which a government with an insatiable appetite for borrowing has only one option, more QE, which will result in yet more inflation.

        The days of zero interest rates may well come to an abrupt end by market force.

        • Callum says:

          I can certainly see inflation rising because of supply chain issues, but how does paying people 80% of their previous wage do that? They aren’t spending it on anything they weren’t already doing.

          • When you pay people to do nothing (in terms of productivity) then your actual output falls for a given £ GDP. So you produce less for the same price = inflation EG half a loaf of bread for the cost of a load of bread.

            It’ll be compounded as the source of that money will be printed (QE) – we’re 12 years into the first round of QE, no indication from Gov or BofE when the money will be repaid to BofE and deleted which suggests to me it won’t ever be and once the market cottons onto that you get an exodus from bonds and currency junked. Currency is already happening.

    • Spaghetti Town says:

      @ Henry. Agreed, got to hold your nerve.

      I think we’ll see one of the quickest recoveries ever both in the economy and the airline industry. No more than a year and we’ll be back to full operations.

      • Agree with that, but airlines still have to get through this in one piece.

        • Aeronaut says:

          Interesting. My feeling is that seems optimistic, but I’d be happy to hear the arguments in favour.

          I do also think it possible that, having gone through this crisis, the climate change situation might start to be taken more seriously, with possible impacts for aviation.

          Plus one can imagine a variety of other positive recalibrations to society and hence the economy.

      • Little bit TOO optimistic. I strongly believe in 1 year time we will be on a light version of lock-down.

    • Errr no, some of us redeemed Virgin miles for the most expensive hotel in the Hilton portfolio when conversion rate was 1:3 and they cost us close to nothing. One night cash price was higher than UC rent fare to USA. You haven’t been around long enough to dish out criticism.

      • Harry T says:

        RIP 1:3 conversion rate.

      • I have and I did exactly the same myself.
        But the conversion rate has changed and so has Hiltons pricing of its Hotels.
        Lol about not being able to have an opinion because u think I’m a newbie.
        What a silly way to think.

        • No, I didn’t mean that you couldn’t have an opinion, I meant that if you were around long enough you would have known about the value some got from Virgin to Hilton transfers and would not have commented as you did. At least, that’s what your comment implied to me. Anyway in this hobby as you know opportune moments come and go, for a variety of reasons none of us here get the best out of the hobby all the time, we win some and hopefully lose not so many. People just trying to make the best of the current situation and protect their investment best they can.

  2. mr_jetlag says:

    have cancelled our 2021 241 bookings to Japan for now (thanks for the workaround), that’s £1130 “taxes” not going to be tied up in future administration…

    I’m not moving my 600k Avios balances however, since I don’t particularly like the idea of cashing out for 0.5p and since Iberia / Aer Lingus will be just as bad if not worse off.

  3. About to show some ignorance here possibly, but wouldn’t cashing out miles with any airline help that airlines bottom line, by reducing their liabilities?

    • Balance sheet looks better, cash looks worse. Guess which one counts at the moment.

    • Lady London says:

      Cash is always, always king.

      When I worked in computers one very large company that ran slot machines asked us could they pay about £300,000 worth of computer in 10p pieces 🙂

  4. James Oliver says:

    I have an ANA flight to Tokyo booked in November with Virgin Flying Club miles… what is the likely outcome if Virgin Atlantic runs into any trouble? Would my booking go with them?

    • The history of other frequent flyer scheme failures is that bookings on partners are cancelled, as the partner will never be paid.

      • If you paid taxes/surcharges on credit card and they are over £100, wouldn’t S75 apply? You could then ask for comparable ticket on a different airline.

    • Graham says:

      Who knows? Probably wouldn’t be honoured. That is more than six months away and what’s the point in worrying about it now? We don’t know what is happening next month. I wouldn’t book any non-refundable items if you haven’t already until VS are back up and running.

  5. Rob. For you. With Love:
    “Qantas shares now up 30% in early trade after securing A$1.05 bln at interest rate of 2.75% for up to 10 years, broader market up 6%”

    • Riccatti says:

      Actually, a good point.

      Airlines will have investors lining up for yield (not banks, and it is intended by regs that banks don’t take tail risks on their books..). This is because of QE, and amounts of cash available.

      ECB, BOE, and now FED can simply start buying airline corporate debt (if rated sufficiently well).

  6. Pretty insane strategy from the government here.

    Run your cash piles and credit lines down and if you go into administration we’ll step in.

    The weakest will get bailed out first and the strongest will have to sit there running their reserves out until they go into administration at which point they’ll get a bail out.

    It might not be a reward for failure but it’s certainly a punishment for success.

    • Callum says:

      That is the fundamental basis of our tax and benefits system though. Given that’s what happens to individuals I guess there’s some sense in treating businesses the same way.

      • In normal times I agree but right now punishing those with cash reserves for a situation they did not cause doesn’t really help.

        In the case of BA and EasyJet they aren’t struggling because they ran unprofitable businesses, they’re struggling because due to a once in 50+ year event they have no customers for air travel, but they will once this is over.

        There’s no evidence to suggest that if you bankrupt them the next airline to emerge would have been able to weather this storm and it’s quite likely you either get a government run disaster or a bunch of inexperienced lower quality alternatives.

        In this case also on individual basis the government have bailed out wealth owning payrol employees before they run any reserves down in their 80% to stay at home payment.

  7. Good. There should be no bailouts.

    • I’d be interested to know your opinion on wether the Rolls Royce bain out are the time of the RB211 was a bad idea….

      The idea that you’ll let a company go to the wall during this only to be replaced by a company that would also have gone to the wall during this baffles me, that’s not capitalism by any stretch.

      • Rolls Royce was well before my time, but I would have gladly let the banks fail in 2008.

        I despise government intervention.

        Of course it is capitalism. How is it capitalism if we keep bailing out the losers? Maybe the airlines shouldn’t have spent 99% of their liquid net on share buybacks?

        It’s up to the shareholders to save the airlines, not the government.

        • And I’m generally sick of the “privatized profits, socialised losses” crony capitalism. The govenment should drop dead too.

          We could have free markets with real price competition, but instead the government decided to nationalise railways, because now when everyones preoccupied with covid, nobody will bother to scrutinize Whitehall on that decision.

          Capitalism.

          • Railways are the worst example of privatisation

          • They were never really privatised. The government was still telling the companies where to go, where to stop, and at what price to sell the tickets at.

          • pauldb says:

            If airlines or railway operators go into administration, it’s because no investors can see a path for them back to profitability. No shareholder is being bailed out by this, they would lose 100% (or maybe 99%).
            You can’t really compel investors to put in fresh money – hopefully that’s obvious.
            So in those circumstances, if you say it has to be free market competition to provide transportation, you get no transportation.
            The only alternative is that all of us, as taxpayers, fund the operators.

          • I agree with you on crony capitalism but a large part of why our countries industry is gone is due to lack of long term foresight and a willingness to allow companies to go bankrupt during hard times.

            The bank bailouts were badly executed 12 years ago but if banks failed 1. Gov would have had to pick up a huge tab for guaranteeing lost deposits and 2. Loads of business reliant on credit from banks would not have remained liquid and failed.

            If anything this government behaviour encourages bigger dividends in the good time so you get bailed out faster in the bad time’s and don’t waste the cash you worked hard to build.

  8. Fred Hopkins says:

    Good work on encouraging people to bail out and take whatever cash reserves BA & Virgin et al have. I get people want their money but you’re just happily (almost gleefully) expediting their demise. Let’s see how happy you are Rob when HfP doesn’t have its backbone topic of BA, Avios & Amex to dissect on an hourly basis.

    • If BA or Virgin emailed you and said ‘will you make us an interest-free loan for two years, and by the way there is no security attached to it’ would you send them some cash in the current scenario? Of course not.

      This is exactly what we’re talking about here – people making an interest-free unsecured loan to a struggling airline, at a time when their own job may be at risk.

  9. Along with the Avios and Virgin miles dilemma, what about the IAG shares that a lot of us own.
    Hang in there or take the hit

  10. ‘ 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.’

    … which is the fastest way to make this come to pass … so, “we’re all in this together, unless I lose my Avios points” is basically the HFP take on this global pandemic?

    • We’re talking about cash, not points.

      Tell me, honestly. Would you accept a £2,000 voucher from Virgin Atlantic today if you had the choice of a £2,000 cash refund instead? Remember that your voucher is NOT protected under S75 so you can’t claim from your credit card.

      • My view is that the refund rules should be binned in these exceptional circumstances – they are clearly not designed for this type of total shutdown scenario and if the value of everyone’s future bookings were kept in the airline, perhaps that would make the existential difference.

        And to answer your question, no if I was offered the choice by the airline I would take the cash, but if I was not then I’m fine with that and certainly not on here, or anywhere, bleating about “being entitled” to a refund, which collectively would sink the airline. It’s the ultimate “I’m alright, Jack” – there are real people there, with jobs to worry about, it’s not just some faceless money tree.

  11. This is ridiculous. Airlines are in trouble because of government imposed restrictions. It’s not like the situation with the banks in 2008, where the problems were largely of their own making. Therefore coordinated government action is required internationally to support otherwise healthy airlines.

    • Agreed. Aim should be to exit them all from this in the same situation they entered it as far as is possible

    • Bagoly says:

      Exactly.
      If the governments had not put restrictions on travel, airline bookings would be down, but still substantial, and people would be getting Covid faster (although not necessarily more of them in the long-term)
      So the governments are the cause.
      Admittedly the UK government has not banned foreigners visiting in the same way that other governments have done, but governments as a whole took the decisions.

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