UK Government Plans To Buy Stakes In Airlines

Advertisement:

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.

british-airways-a350
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.

Advertisement:

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.

british-airways-a350
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.

Advertisement:

“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.

Advertisement:
easyjet
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.

Advertisement:

18
Leave a Reply

newest oldest most voted
John

As it should be done. No government should throw money at any of these airlines without asking for something in return. Whether it be restrictions and regulations, or straight up equity in the company.

Russ

Buying airline shares is absolutely the way to do this. And especially if the airline has “treasury stock” – shares that are already authorized but currently owned by the airline. Value them at a reasonable per share price (not anywhere near their recent peak value, but perhaps not at their lowest either), and this approach can be a “win’win”. When we get past this epidemic (and we will), and as our airlines recover (most will with help such as this), then the shares can be sold again on the open market, and our governments can make some profit to help pay what will be staggering deficits and debts run up as we fight this crisis.

Louis

Economically sensible and certainly in the case of Lloyds during the financial crisis it proved beneficial to the exchequer – sure RBS will also pay off in the end. I think the government are going to need to be very careful expanding such a scheme beyond airlines as I think their could be a huge number of businesses with an inability to pay back loans and those industries aren’t necessarily all big businesses (e.g. restaurants).
Certainly with IAG I think support should come from both the UK and Spain, possibly Ireland, it is an International Airlines Group and shouldn’t purely be carried by the British tax payer.

Josh

COPY OF EMAIL TO THE PRIME MINISTER

Dear Boris,
Blue sky thinking on a cloudy day. In the light of British Airways (and many others), airport staff and support services all facing a bleak future here’s an idea.
These valuable resources can be quickly adapted to become hospital, mortuary and community support hubs. Our fleet of long haul planes with about 75% of the seat easily removed become frontline covid 19 treatment pods – there’s already oxygen masks in place! Cabin crews are already trained in emergency first aid and DBS checked. Logistics for patient care, food/drink toilet, etc also already in place.
Once converted this emergency fleet can be flown to any location with an airfield where the community NHS services are struggling. This could be for palliative care, routine consultation, and minor surgical work. Freeing the NHS to focus on the crisis.
The airline would benefit by maintaining staff, keeping its fleet in use and weathering the storm. we could even export the conversion ideas!

JAY1951

Buying up shares/equity whilst dirt cheap (from the Corporate Owners, not private investors), rebuilding an airline until it’s value increases and selling it at a profit, simply reverses the practice airlines worldwide employed to increase their equity stake, which is why so many are backs to the wall now.

An excellent plan that might help recover just a few of the £billions the UK government is spending to help other firms and preserve jobs.

If Mr Branson sold his island, that might help too.

Bryan Morris

Will this bail out guarantee flights will continue albeit on a limited basis?

Bob Thirde

Easily forgotten that When it was “privatised”, B.A. was GIVEN all its aircraft , including Concorde which made a huge difference to its commercial position Also EasyJet and Ryanair are both short haul airlines – a slightly different ballgame

Brian Lait

Have the financials of the airlines been examined to see exactly what they might need and when ? IAG’s finances look pretty good to me as they stand, and easyJet are paying out a dividend of over £170 million, so they obviously should not be looking for a handout.

BA pilots are being told they must have their salaries cut. Same goes for Cruz, Walsh, etc.??

I remember the same bleatings from airlines after 9/11 which happened very quickly. Coronavirus has only just started, so where do all these soothsayers come from who appear to know so much of the totally unknown ???

D Pascoe

One major airline and one short is more likely to go bust. We shld look to keep our national airline.
UK tour operator are going to struggle at this time. If people keep demand refund rather than accepting credit notes for the flights etc

Cahpek

I wonder if the British govt would buy stakes in Ryanair? It isn’t really British, after all, is it?

Jan Latusek

Will the government similarly invest in the biggest transport networks on land as well as in the air? Bus and train networks run by the likes of National Express (for example) are vital.

Alex

All of the large divedends paid out to the major stock holders of the airlines, on this occasion should also be returned to these airlines prior to any stock purchase by the government. If not we could have same scenario as Thomas Cook and recent airlines folding and the board members walking away with large payments and rest of staff left with no job or income.

Ademola Folarin

I think the government has chosen the right prescription. Buying equity through capital investment, rather than a loan it’s a win win scenario. The airlines won’t feel the added burden of a debt. And government can recover it’s investment by selling their equity at the appropriate time. Possibly with some profit. In the meantime, government would have saved an important industry from collapse.

Sid Lodi

Why not do a secondary offering and raise money overseas, India and china will gladly buy everything offered.

Jane Brooke

And as a shareholder, the Government must demand that airlines adopt targets and programes to reduce greenhouse gas emissions, And implement them!