What Are The Pros And Cons Of State-Owned Airlines?

There was a time when most airlines were backed by the state. These flag carriers paved the way for 21st-century aviation, but over the years, ownership has changed. Now, it’s less attractive for countries to own their own airlines, and many have privatized what were once their national carriers. But with COVID bailouts seeing governments becoming more heavily involved in their carriers, we could see a return of more state-owned airlines. Would this be a good thing?

UK government airline bailout
Flag carriers may still ‘fly the flag’ for their nations but are increasingly less state-owned. Photo: Getty Images

The fall of the flag carrier

The notion of a flag carrying airline is somewhat outdated today. Although the term is still used to describe the major airline of the given country, it no longer relates to the ownership of that business.

When aviation took off in the early part of the 20th century, world powers created their own, state-owned airlines. British Airways was established in 1974, South African Airways in 1934, and Emirates in 1985. The airlines were seen as an international calling card for the nations, literally flying the flag for their country around the world.

National airlines were seen to represent their countries on the global stage. Photo: Getty Images

But, as airlines matured and competition became a factor, privatization began to creep in. The explosion of low-cost carriers in the 1990s disadvantaged the old guard, encouraging some governments to step back into minority ownership or to give over the airline to the private sector entirely.

The UK and Spanish governments gave up ownership of British Airways and Iberia in 1987 and 2001, respectively. Those airlines merged into the IAG family in 2011. This mitigated the risk to the government and allowed executive management to make the decisions required without political interference.

Qantas was privatized in 1992. Photo: Getty Images

Many more big-name airlines have moved to the private sector. Qantas, Lufthansa, Turkish Airlines, Air Canada… the list goes on. And yet, many airlines have remained stoically attached to their national governments, and that number could be set to increase.

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The revival of state ownership

While some airlines never left the folds of their state mother’s dress, others have been privatized, only to now be risking renationalization. The crisis in the industry has led to unprecedented levels of government support being dished out, some of which has come with strings attached.

Noises have been made about the nationalization of a number of airlines, particularly in the European market. The Portuguese prime minister hasn’t yet ruled out nationalization of TAP Air Portugal, Etihad’s shares of Air Serbia are wanted by the Serbian government, struggling Condor could be taken over by Germany and, for a time, the State of Queensland was in the running to rescue Virgin Australia. Would this be a good thing for the airlines?

Tap Portugal express
Would renationalization be good for some airlines? Photo: Getty

Lufthansa thinks not. It almost walked away from its €9bn bailout deal over the government’s wish to be involved in the running of the airline. CEO Carsten Spohr even threatened to let it go insolvent rather than have Berlin interfering. In the end, he got his wish, with Germany agreeing to be a ‘silent partner’ in the airline.

On the flip side, there are other airlines that governments are desperate to get rid of. Air India has been attempting to find a private buyer, and Malaysia Airlines has been trying to get back into the private sector for some time. Yet, in the Middle East, India and Africa, governments cling to their ownership of their national airlines, regardless of whether they’re profitable or not.

So is state ownership a good thing? Or are nationalized carriers doomed to fail?

Pros and cons of state ownership

When considering the benefits and drawbacks of state-owned airlines, it’s important to look at the pros and cons of nationalization and privatization in general. Some of the key factors to consider include:

  • Motivation of the workforce: In a private company, owners and managers won’t make their salaries or bonuses if they don’t make a profit. State-owned enterprises have workers who get paid regardless and therefore, may not feel as motivated to achieve.
  • Efficiency: Private firms have an in-built incentive to be as efficient as possible and may be more inclined to invest in new technology to enhance the productivity of the workforce. State businesses tend to do things the same way they always have, and often struggle to sack surplus workers.
  • Ability: Private firms are able to headhunt the best talent for the job, employing the most skilled managers to run the business. Nationalized companies may have political motivations for who they put into positions of power.
  • Long term view: Governments tend to think in terms of one election cycle. This can sometimes mean they are less inclined to invest in infrastructure improvements that would take some time to see benefit from.
Air India 777 VIP
Some state-owned airlines have dropped the ball on competitiveness. Photo: Getty Images

Thinking about these points makes it sound like there is nothing going for state-owned airlines at all. However, in some situations, it works well, but not all. One recurring trend in state-owned airlines is their lack of ability to keep up with the times. Airlines run by governments tend to have a sub-par product, poor operational efficiency, and a lackadaisical attitude to PaxEx.

Case in point, a paper published in the Journal of Air Transport Management found that state-owned airlines offer lower satisfaction levels than private airlines and mixed ownership carriers. That’s clear evidence of a lack of ambition, and the lower pressure to offer a truly competitive product.

alitalia funds
Regular bailouts are one plus side of state ownership. Photo: Alitalia

On the other hand, there are times when being a state-owned airline can be an advantage. No airline in the world has been bailed out quite so much as Alitalia, which was nationalized, the privatized, then nationalized again. South African Airways too has had injection after injection of capital. No private enterprise could hope for such a helping hand.

However, there is something to be said for national pride, and the nations where state-owned carriers flourish are those where national identity tends to be strongest. In China, for example, the dominant carriers are all controlled by Beijing. This is good, because it means they are strictly regulated, operated in the interests of the people, not profit and yet are still listed on the stock market. It’s a model that works well there.

Is it better to privatize a failing airline?

When airlines fail to make money under the state control, often the first reaction is to try and privatize the entity. However, in PPP Knowledge Lab’s Handshake Issue 6, the publication stated that,

“Most state-owned or legacy carriers that face financial troubles should not be considered for restructuring and/or privatization. They often have a complex history with many legal and moral obligations toward staff, clients, the host country, or passengers. Liquidation is usually a better solution.”

South African Airways SAA Practitioners
South Africans want the airline to stay in state hands. Photo: South African Airways

That notion wouldn’t go down well in India, or indeed in South Africa, where stakeholders are fighting tooth and nail to keep their national carrier. But, in some cases, it could be a healthier course of action to allow a national airline to fold, paving the way for something else to take its place.

Lessons could be learned from Swissair, which, following the post-9/11 economic crash, was allowed to enter bankruptcy rather than undergo restructuring. What emerged from the ashes was the SWISS we know today, a powerful private airline with enough ties to its predecessor to make the Swiss proud, but enough business acumen to become a profitable airline too.

Emerging from the ashes of Swissair, SWISS has become an international powerhouse. Photo: SWISS

The proof is in the pudding

There are plenty of pros and cons of taking an airline in or out of the private sector. While there seems to be no hard and fast rule on whether it will work or not, there are case studies on both sides of the fence.

Many of the large, well-established airlines that were privatized in the past have flourished. Qantas, Turkish, Lufthansa – all have been allowed to grow and become competitive global businesses on the back of privatization.

Malaysia Airlines grounded
MAS has seen both sides of the fence over the years. Photo: Getty Images

Others, however, didn’t fare so well. Malaysia Airlines’ experience of privatization has been mixed, with the carrier returning eventually to the government in 2000. In Latin America, Aerolineas Argentinas was sold to a consortium in 1990 but entered bankruptcy protection in 2001. When it came out of that, the government took back full control in 2008, although it remains a troubled airline.

Of course, some airlines have excelled under state ownership, not least the Middle East’s ‘big three.’ Others, such as AirBaltic, Ethiopian Airlines, Fiji Airways, and LOT Polish, have similarly flourished.

In conclusion, there are lots of reasons to privatize an airline, or to keep it state-owned. The crucial differentiator is the quality of that airline’s management. An airline that is owned by the government but allowed to operate as an efficient, profit-focused entity can do very well, but those that are too encumbered by politics are unlikely to succeed.

Which do you think is the best model for airlines? Let us know in the comments.