A few points to ponder before beginning a bailout of airlines
Bail out the airlines? Clearly, some form of government support may be needed soon, but a bailout is a misleadingly broad term. Ministers should keep a couple of principles in mind as they respond to ill-defined calls for help.
First, financial assistance – which could be loan guarantees or secured lines of credit – is best offered on an industry-wide basis on equal terms to everybody. Those terms also have to be extremely favourable to the state. If an airline wants a state loan secured against an aircraft, for example, it cannot expect that aircraft to be valued at pre-coronavirus prices.
Second, be strict about who you’re trying to support. It is not the shareholders. If owners have sanctioned business models with little equity or cash protection or unsecured assets, their losses cannot be underwritten by the public purse. Why should the Italian taxpayer cough up another €600m to rescue Alitalia, a financial basket case long before coronavirus? Even if the underlying business of an airline is viable, the price for shareholders could be steep – loss of ownership control.
The good news, of a sort, is that strong airlines think they can absorb a fair amount of shock. As they grounded most of their fleets, easyJet, Ryanair and IAG, owner of British Airways, made a show of their supposed financial virility.
EasyJet said it has a £1.6bn cash balance, an undrawn credit facility of $500m (£402m) and mortgage-free aircraft worth £4bn. Ryanair paraded cash and cash equivalents worth €4bn. IAG said it has €7bn in cash plus €1.9bn of finance facilities. It not clear how quickly those resources would be depleted during an extended period of no flying, but at least the companies seem to have the right approach: they know their own funds are first in line.
Meanwhile, some non-lending methods of support look simple to grant. It’s fair for airlines to ask that their rights over landing slots be secured until the turmoil passes; it’s not as if other airlines are itching to launch new flights to nowhere. There’s also an argument for suspending air traffic control charges during the recovery phase, whenever that arrives. As for a suspension of air passenger duty, governments can take a view when there are passengers again.
In the meantime, ministers need to tread carefully: as Virgin Atlantic demonstrated, the airline folk who will need most protection in the weeks ahead will be the employees. Keep your eye on them.
Is this a good moment to shut down the stock markets?
If stock markets are only delivering confidence-sapping readings, why not close them for a while?
After yet another big “down” day for share prices, the idea might sound appealing. Let every investor, saver and pension fund trustee take a time-out from staring at red screens. It would be the ultimate circuit-breaker. Instead of a 15-minute halt to trading, as happened again on Wall Street on Monday after an opening fall of 7%, everyone could go away and reflect on the long-term.
A moment’s thought, though, says it would be a terrible idea. First, the only guaranteed outcome would be more panic. There would be an immediate spill-over into markets that matter more for the functioning of economies in the real world, such as government debt.
Second, even if almost nobody is currently using stock markets for the traditional purpose of raising fresh capital, share prices are still giving useful price signals. One of the most important came when stocks tumbled last week after President Trump tried to reassure the US public that his administration was on top of events. Investors’ verdict – that the president was still underestimating the size of the healthcare crisis – was brutal but necessary.
One can – just – imagine circumstances in which closure might be advantageous: if governments around the globe were about to unveil a coordinated fiscal strategy to reinvigorate economic activity. A temporary suspension, if followed by a truly impressive fiscal barrage, might add to the sense of a reset and encourage a whoosh of confidence.
The trouble is, such a joined-up global approach is currently hard to imagine. The market’s lukewarm response to the G7 finance ministers’ vague statement on Monday about doing “whatever it takes” was another useful indicator: there was an absence of detail, which is the bit that matters. The market picture may be ugly, but one still has to look.
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