What Conditions Have Governments Placed On Bailout Funding?

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While virtually all airlines around the world are suffering due to coronavirus-related travel restrictions, not all of them are getting direct government assistance. For those that are getting ‘bailouts,’ there are various forms this financial assistance has taken, including grants, loans, and for some, even equity in the company. As with many things in life, there are strings attached to these monetary lifelines, and today we’ll go over what these conditions are.

KLM 3.4 billion euro rescue package
European carriers like KLM and Air France have had a fair number of conditions placed on their bailout funding. Photo: Getty Images

KLM and the Dutch government

At the end of June, Dutch flag-carrier KLM announced that it had secured €3.4 billion ($3.8 billion) in funding to see it through the COVID-19 crisis. The deal, reached following an agreement between the Dutch Government and France, comes with far-reaching conditions.

“The financing package is necessary to secure the long and difficult road of recovery in the coming period. This is a very important step and I express my gratitude on behalf of all KLM colleagues to the Dutch state and the banks for their confidence in our organisation and our future,” –Pieter Elbers, CEO, KLM

Condition #1: Board representation. It was agreed that a non-voting trustee would be appointed to the board. The purpose of this trustee is to ensure that the bailout money is reserved solely for KLM, sources familiar with the matter told Reuters.

As part of Dutch bailout conditions, KLM will need to reduce the number of flights coming in and out of Amsterdam Schiphol at night. Photo: Chris Loh/Simple Flying

Condition #2: Limits on pay and expenditures. The restructuring plan also includes job cuts, a freeze on bonuses, and salary reductions. For those earning over €110,000 per annum, cuts are as much as 20%. There will also be a freeze on paying out dividends. Overall, the company must reduce its costs by 15%.

Condition #3: A reduction in night flights. KLM will also be required to cut its night flights to Schiphol by 20% to lessen the noise that impacts residents close to the airport.

Condition #4: Carbon emission reduction. The carrier must also encourage train travel where applicable. It will also have to decrease its carbon emissions by 50% per passenger by 2030.

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Air France and the French government

Air France received €7 billion ($8.08 billion) from the French Government. Like the Dutch, the French Government has also applied some environmental conditions to its bailout money.

Condition #1: A reduction in carbon emissions. According to website Transport & Environment, Air France must improve the efficiency of its fleet (in CO2 per passenger-km) by 50% by 2030 compared to 2005 levels.

Condition #2: A reduction in domestic flights. Air France must also reduce 50% emissions from domestic flights by 2024. The current proposal limits this to where rail journeys under two and a half hours exist.

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We may see fewer flights by Air France’s regional carrier, HOP! Due to bailout conditions. Photo: HOP!

“As soon as there is a rail alternative to domestic flights with a duration of less than 2.5h, these domestic flights will have to be drastically reduced and limited to hub transfers,” -Bruno Le Maire, French finance minister via FlightGlobal

According to Bloomberg, the French short-haul network links regions with daily flights from 31 airports, including cities like Bordeaux and Lyon. This would be in almost direct competition with French high-speed trains.

Condition #3: A shift to alternative fuels. A proposal was included to add a requirement for the airline to burn a minimum of 2% alternative fuels in 2025.

Condition #4: An Airbus preference. Perhaps a policy that will ‘fly’ in the face of free trade and the open market, Bloomberg reports that there is a stipulation that Air France will be a “good customer” for European planemaker Airbus. Without a doubt, if adhered to, this will affect the airline’s fleet composition moving forward.

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Air France grounded planes
Conditions related to the environment were significant for French Government funding. Photo: Getty Images

Lufthansa and the German government

At the end of June, German carrier Lufthansa was approved for a €6 billion ($6.8 billion) loan from Germany’s economic stabilization fund for recapitalization. It received a further €3 billion ($3.4 billion) bailout as part of the state guarantee. Below are the conditions set by the government in order to receive the funds:

Condition #1: Surrendering landing slots. According to DW, Lufthansa will have to transfer up to 24 take-off and landing rights to a competitor. These slots are located at its bases in Munich and Frankfurt.

Lufthansa
Lufthansa’s bailout conditions have far less environmental stipulations than its French and Dutch counterparts. Photo: Getty Images

Condition #2: Partial State ownership. The German government will take a share of Lufthansa. However, an agreement has been made that it will remain a ”silent partner”, allowing the airline to manage itself without interference. “This bailout deal will prevent Lufthansa from being sold out,” said Peter Altmaier, German economy minister, via The Guardian. While the agreement is to be ‘silent,’ it’s been reported that the government would fill two seats on Lufthansa’s supervisory board, with one becoming a member of the audit committee.

Condition #3: Limits on pay. According to the Guardian, the airline will halt future dividend payments and place limits on management pay.

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US carriers and the Department of Transportation

The US Government passed the CARES Act at the end of March. This law provided relief funding to many industries as well as individual Americans. For the aviation industry specifically, $10 billion was allocated for airports, while $25 billion went to passenger carriers. $4 billion was set aside for cargo operators. Here are the conditions that came with this funding:

Condition #1: Job protection. One of the fundamental aspects of CARES Act funding was to protect airline jobs. According to View from the Wing, payroll grants required that airlines adhere to two conditions related to staffing:

  1. Do not furlough any employees through September 30
  2. Do not reduce the rates of pay of employees

United Airlines took some heat for finding a loophole in the rules. As it was unable to layoff employees, the airline was able to move its employees from full time to part-time, thereby reducing its staffing expenditures without technically decreasing their rates of pay.

Overall, many US carriers have convinced large portions of their staff to take temporary leaves or early retirements in order to reduce their cash burn.

Condition #2: Salary and expense limits. There were also restrictions placed on executive pay, share buybacks, and the issuance of dividends.

Condition #3: Minimum services and route protection. Another condition was that airlines had to serve the cities they flew to before the pandemic. This became a huge point of frustration as many airlines were virtually operating ghost flights to, from, and between remote communities where demand had evaporated to nearly nothing. The Department of Transportation granted specific exemptions and further relaxed its rules around this:

“The Show Cause Order also tentatively determined that, in cases where multiple airports serve the same point, covered carriers would not need to maintain service to all such airports, but would be able to consolidate operations at a single airport serving the point.” -US Department of Transportation

A mix of responses

As you can see, governments have delivered emergency financial assistance in different ways. Some are seeing it as an opportunity to shape environmental policy. Many have ensured that executive salaries are capped, and dividends are cut – something that would undoubtedly gain widespread support from citizens.

What do you think of the conditions listed above? Are some fair or unfair? Let us know your thoughts in the comments.

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