It’s been a while since the world has thought about the principle of airlines being too big to fail. The current coronavirus pandemic, however, is prompting governments to reexamine this doctrine as they consider the specifics of airline bailouts. We take a look at whether some of the US’ largest airlines risk collapse post-coronavirus. Are Delta and United too big to fail?
What does it mean to be too big to fail?
The principle of a company being too big to fail is rooted in the theory that if a certain entity ceased to exist, due to financial collapse, it would cause catastrophic effects on an economy or financial system. This means that the absence of this company, or in this case airline, would have detrimental effects on the economy, GDP and a country’s reputation.
Airlines can be too big to fail. But perhaps not all of them. Some of America’s largest airlines would certainly be in that category. The likes of Southwest, which has a domestic market share of around 20% according to the Bureau of Transport Statistics, would have a detrimental effect on the US economy and transportation of passengers if it were to collapse.
So, what about United Airlines and Delta Air Lines? United has around an 11% domestic market share in the US. Delta has a 17.5% domestic market share. These figures demonstrate that the airlines are particularly integral to the US aviation and travel industries. However, that might not be enough to guarantee their operation. The after-effects of the coronavirus could work adversely on the success of these airlines.
What is standing in the way of Delta and United?
United Airlines and Delta Air Lines’ prosperity relies on a certain unknown factor. How will the travel industry respond once the threat of coronavirus has diminished? At the moment, there is no way of knowing. Some fear that in the future, despite the relaxation of quarantine regulations and travel bans, passengers will still be reluctant to fly. The practice of social distancing may, psychologically, still prevail.
If that’s so, then these two airlines may struggle to regain their popularity.
That said, the benefits of international air travel greatly outweigh the advantages of other modes of transport. Though passengers may initially be cautious about flying again, this animosity likely won’t last forever.
So, are United and Delta too big to fail?
In a statement to CNBC’s Trading Nation, Mark Tepper, the CEO and President of Strategic Wealth Partners commented that United and Delta would manage to survive the coronavirus. He said:
“Both Delta and United, those are the two most critical airlines for our country. So, they are too big to fail.”
Currently, the US government is looking at plans to provide financial support to its aviation industry. It’s an act that United Airlines CEO Oscar Munoz is particularly grateful for.
In a statement to customers, Oscar Munoz said:
“…it is so important our government acted on a comprehensive relief act to ensure our airline – and our industry – are ready and able to serve you again when this crisis abates…This support will save jobs in our business and many others. And it allows us time to make decisions about the future of our airline to ensure that we can offer you the service you deserve and have come to expect as our customers…”
This imminent government bailout in itself demonstrates that these airlines are far too valuable a commodity to forsake. However, should that government bailout not be enough or not be used in the right way, some airlines in the US could face their demise.
Unlike some smaller carriers, Delta and United have a distinct advantage: their name. When it comes to flying domestically or internationally from the US, United and Delta are in the top four airlines that passengers will look to. That’s alongside Southwest and American Airlines. It’s because of their precedent in the industry which ensures passengers that they will receive a reliable service for a competitive price.
By the token of consistent customers, these two airlines are able to continue developing their networks and fleets in order to provide travelers with the best experience possible. That is something that other, smaller airlines, would have to work hard to replicate if they survived and United and Delta did not.
Put simply, yes, Delta and United are too big to fail. They are instrumental in providing for the US economy and are key components for what American commercial aviation looks like today.
Do you agree? Let us know your thoughts in the comments.