Airlines around the world have received immense financial aid since the onset of Covid. New York Times estimates that Washington paid $600,000 for each airline job saved. The reason is obvious: Governments are justly concerned about the vital role of airlines to the economy. After all, civil aviation is a highly specialized complex system which, once collapsed, could not be rebuilt overnight.
State aid distorts markets
Such massive, unprecedented government aid will surely impact the industry for the long term. Will it severely disrupt the competitive equilibrium among airlines? What will be the unintended consequences? And how shall airlines best manage the impact on their international competitiveness?
Ryanair, for one, is crying foul. It has filed 16 cases against the EU Commission calling state aid to inefficient national airlines discriminatory with severe risks of long term market distortion. By June 2021 Ryanair celebrated three rulings in its favor (KLM, TAP, Condor)
From the beginning of commercial aviation, governments have intervened in the air travel industry with a portfolio of policy measures such as: government airline ownership, price and capacity regulations, foreign ownership caps (e.g. 49%), bilateral air services agreements based on strict reciprocity, outright cash subsidies, and state aid.
Liberalization benefits at risk
During the past four decades, huge progress was made on the liberalization of the airline industry with measurable benefits accruing to passengers, communities, employees, and airlines. Now however, Covid induced government intervention has set back this progress.
History shows that government ownership often results in policies aimed at preserving the value of the government’s airline investments at the expense of abundant services and lower prices, thus setting back the benefits of liberalization. Some governments have subsidized only their flag carrier whereas others have subsidized In addition to the types of financial assistance listed above, this time governments have adopted further intervention measures like payroll assistance, preferential loans, and regulatory goodies like suspending the use-it-or-lose-it airport slot allocation rules.
Survival of the fittest? Temporarily suspended
Consolidation has been a part of airline industry evolution with weaker carriers being absorbed by stronger ones. Government subsidies will interfere with this ‘natural’ industry evolution. Some marginal operators will survive longer than they would otherwise, while some stronger players will be unfairly hurt by artificially propped up competition from subsidized airlines.
The top 30 global airline brands have all been helped to a greater or lesser degree. Some will have been strengthened and some will come out weakened relative to their peers by the uneven financial aid given. Airline industry rankings could change as the entire competitive landscape has been undermined. For example, in the US, major airlines received a substantial bailout package in April 2020, followed by a second and a third. Meanwhile, in nearby Canada, Air Canada did an amazing job of managing its way through the crisis without government assistance until after the US carriers were already on their third tranche of bailouts in 2021. How will the competitive landscape be impacted by the differing approaches of Ottawa and Washington?
Betting on the right horse?
One challenge for nations with multiple airlines is to decide which ones get state support and at what levels. Whatever they decide, they are unlikely to be able to preserve the status quo competitive landscape. Why: Inevitably, the post-Covid landscape will be different in than the pre-Covid world. For instance, business travel may be less and leisure travel more. The lucrative intercontinental traffic may come back late. Hub and spoke flights may be less popular than point to point flights. If so, governments may end up having supported national icon brands that are engaged in the least efficient business models for the new competitive environment.
What’s more, over the last months brand new airlines have sprung up. By June 2021 alone, The Wall Street Journal had already counted more than 90 new upstarts. They are seizing the rare opportunity of abundant availability of capital, aircraft, pilots, and airport slots, all at depressed prices. Many of them will perish along the way. But those that survive will be lean competitors to the debt-laden and government controlled incumbent airlines.
Factoring in both, new demand patterns and distorted competition
Business strategists at any airline will need to adapt quickly to the new competitive environment with heavy and uneven state intervention. They will need to factor in these government distortions along with Covid induced market changes, a tall order.
It will take excellent management to secure a top spot in the new equilibrium. With our entrepreneurial mindset, UNEX can assist industry players, new or legacy, to set a new post-state aid post-Covid course to attain that coveted leadership spot.