UK Government Plans To Buy Stakes In Airlines

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Amid a worldwide drop in the number of people flying due to the coronavirus, the government of the United Kingdom is considering buying a stake in British Airways and other UK based airlines.

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The UK government may buy airline shares due to the coronavirus’ impact on airlines. Photo: BA

According to reports in the Financial Times, the UK government is drawing up contingency plans to buy equity stakes in the countries’ airlines and other businesses hardest hit by the coronavirus pandemic. This latest news comes after warnings that the economic packages that the government has announced so far to help UK businesses weather the storm will not be enough to save the airlines.

Billions of pounds will be used to buy shares

In its plan, the United Kingdom would see billions of pounds of taxpayer money being used to purchase airline shares, which will then later be sold back to private investors according to people familiar with the idea.

Of the people in the know, two of them told the FT that the government was contemplating the move after being warned by senior bankers that the support for businesses that it had unveiled last week would not be enough to save the airline industry.

So far, Prime Minister Boris Johnson’s Chancellor of the Exchequer, Rishi Sunak, has promised UK businesses £330 billion worth of loan guarantees and promised to pay 80% of employee’s salaries up to the amount of £2,500 per month. This alone would not be enough to save the airline industry after they have been forced to ground flights, while at the same time seeing virtually all revenue dry up.

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Airlines are struggling to survive with virtually no revenue. Photo: BA

“They are coming up with a Tarp-like program for certain industries like the airlines,” said one of the people, referencing the US troubled asset relief program that the American government came up with when it bailed out the banks following the 2008 financial crisis.

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“There are certain industries where there will need to be an infusion of capital in exchange for equity…The challenge with a loan is, if you make a loan to a company with no revenues, then accounting will say it’s impaired.” They added: “For those companies that are really virtually shut down because of this virus a loan in many ways is not going to work.”

The person commenting on the proposed plan went on to say that in addition to the airlines, “at some point the government will need to think about all the industries and businesses that might be severely impaired”. “The airlines are obvious, but there will be others,” they said.

The government proposal is very complex

The other person speaking on the proposal was keen to point out that some of the companies now in trouble had entered the pandemic with too much debt- a restriction which would limit how much more borrowing they would be able to take on.

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easyJet would welcome help from the government. Photo: easyJet

They said: “The key is to address the companies that will require some equity capital on top of loans, as the financial structure of each company has limits to accommodate more debt, depending on their sector and existing financial structure.” Another person familiar with the issue warned that the government’s proposal was extremely complex and may never see the light of day.

IAG refused to comment

When British Airways parent company, IAG, was asked if they would like to comment on their discussions with the government regarding financial aid, they declined to comment on the situation. Low-cost Luton-based easyJet was more forthcoming with its opinions saying:

“We fully support and welcome the government’s commitment to support airlines during these unprecedented times. Our focus is on measures to help with short-term liquidity and protect jobs, but we can’t comment on the finances of other airlines or what action they might require.”

What do you think about the government bailing out the airline industry? Please let us know your thoughts in the comments section.

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