Government should only bail out airlines under strict conditions

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Ambarish Chandra is an economics professor at the University of Toronto Scarborough and the Rotman School of Management, at the University of Toronto.

With the news that WestJet is slashing service to numerous destinations, pressure is building on Canada as the only G7 country that has not yet committed funds to support its domestic airlines. The government has indicated that a bailout package is being prepared, and the industry is lobbying for forgivable loans. But the government should only agree to bailouts under strict conditions.

There is an important case for bailing out troubled industries in certain circumstances – when there is a temporary period of turmoil after which companies can be expected to return to normal. This helps to preserve consumer choice, competition, and jobs that would otherwise have been lost. For example, these bailouts were necessary, and successful, for the airline industry following 9/11, and the automobile industry following the 2008 financial crisis.

But it is not clear that this is the case with the airline industry in Canada. There is still no end in sight for the coronavirus pandemic, and even the vaccines under development may well take years to fully roll out. Canada expects to see ups and downs for many months, during which public worries about travel will remain, as will travel restrictions and quarantine rules. With such uncertainty, and especially given the many urgent demands on government funds, a bailout for airlines feels like a bottomless pit.

Moreover, even when the virus is finally conquered, the airline industry is unlikely to look the same. While leisure travel will eventually rebound, there are strong indications that business travel may never fully return. As long as the pandemic continues, employers will be reluctant to ask their employees to travel for work, both because of the lost productivity from quarantine restrictions, and also their ethical and legal concerns from causing their employees to fall sick. Numerous employers have committed to cut back international travel for the foreseeable future.

And the longer our new normal continues, the more obvious it will be that business travel is largely unnecessary. A lot of corporate travel is akin to an arms race, where firms offer face-to-face meetings to clients and customers simply because their rivals are doing so. The disruption of the pandemic is prompting all employers to re-evaluate their decisions and spending, and they will find that they can do just as well without making their employees travel to trade shows, conventions or conferences given how easily business meetings can be conducted online, thereby improving employee productivity by eliminating travel days.

If business travel does falter, it makes airline survival much more challenging, given that expensive tickets contribute about 50 per cent to 75 per cent of airline profits. While some airlines can retool around leisure routes, this is not a nimble industry, and some carriers will surely not survive the coming shakeout. Even the cost of maintaining grounded planes during the coming winter will be ruinous for many carriers.

The Canadian government must also consider the competitive landscape after the pandemic. WestJet has already slashed service, while Porter Airlines has not flown a single plane since March. Air Canada is about to pick up the pieces of Air Transat for less than a third of the price discussed before the pandemic. Late 2021 may well reveal a barren competitive landscape – with Porter out of business, Transat folded into Air Canada, and a weakened WestJet. In this scenario, Air Canada would stand ready to monopolize many domestic and international routes, with its deep pockets, strong brand and valuable international alliances.

The point of bailouts should be to preserve or enhance competition, not to prop up already strong companies that can exploit weakened rivals or throw money at companies that are likely to fold regardless. The government must consider whether bailouts – for any airlines – are truly warranted, and at a minimum should insist on tough conditions for support.

The conditions being discussed do not go far enough. The restriction on using public money for executive compensation is easily circumvented, and the expectation that airlines will resume key routes will be better enforced by regulators having a seat at the table. Lufthansa has already agreed to a government stake of 20 per cent in return for Germany’s assistance. The Canadian government needs to do the same here and insist on board seats as well.

A significant government stake will ensure that future decisions around airlines are taken with the interests of consumers and employees in mind, rather than the returns to shareholders and top executives.

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