UK Government Could Purchase Stakes In Airlines

The UK government has not yet presented its rescue plan for UK airlines. While talks have been ongoing for more than a week, the lack of clarity and direction is angering some in the industry, despite measures to protect employed workers announced last Friday. Speculation abounds that the government may be looking to take shares in some of its airlines as a means of getting cash to them quickly. But what does this mean for the sector?

british airways coronavirus
The UK government is under increasing pressure to come up with a solution for airlines. Photo: Getty

Low-cost carriers to stop flying today

The UK’s airlines and airports have sent a stark warning to the UK government today, saying that time is running out for it to issue measures of support for the industry. Last week, it was reported that the UK government was getting close to firming up plans for a rescue package, with talks held between transport minister Grant Shapps and a number of airline bosses.

Now, however, the situation is getting worse, with less than 5% of the normal passenger traffic expected to pass through the nation’s major airports this week. As a result, low-cost carriers Ryanair and easyJet are set to stop flying altogether by the end of today.

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Ryanair, easyjet, Peter Bellew
Ryanair and easyJet are reported to be halting flights today. Photo: Getty Images

Talks are expected to continue between the industry and government today. But the lack of concrete action on measures to help are beginning to frustrate those in the business. CEO of the Airport Operators Association Karen Dee told the Guardian,

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“While government has been receptive, it has not led to clear next steps and airports will now face making extremely difficult decisions.”

Until a decision has been made, the industry is holding off from making crucial decisions regarding how it moves forward. Already, many airports and airlines have begun the process of laying off staff, but many of the big decisions are still to be made, pending the outcome of the government’s current discussions.

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Could the UK take stakes in its airlines?

There are several options on the table for the UK government to consider in a bid to help airlines out. Firstly, it could offer a short term loan, to be repaid in just a matter of months. Secondly, it could offer a longer-term loan to be paid over several years. Thirdly, it could take shares in the airlines in return for cash, which would not be repaid but shares could be resold in the future.

Head For Points summarized the issues with these various outcomes, stating that a short term loan wouldn’t be enough to keep most airlines flying. A longer-term loan could inflate this to a more realistic amount for the airlines, but would be dependent on their existing level of debt as to whether it’s a realistic option.

Virgin coronavirus
Virgin is looking to the government to support it through this crisis. Photo: Getty

Increasingly, the speculation is that the UK will look to take a stake in airlines in return for a cash payment.  But how can the government own shares in different competing airlines, and would it work for everyone?

Head For Points states that, because easyJet is a UK quoted company, providing assistance in this manner will be more feasible. It also suggests that the company’s shareholders could be called upon to inject a sum equivalent to dividend payouts and share buybacks in order to trigger the funding, something easyJet has come under fire for recently.

The airline is currently going ahead with a dividend payout which will see £60m handed to its largest shareholder, Stelios Haji-Ioannou, alone. It says it is legally obliged to make the payout.

Other UK airlines British Airways and Virgin Atlantic present a more complicated scenario. Both are privately owned, with BA’s ownership under Spanish IAG further complicating the issue. HFP muses that the government would need to purchase a controlling stake in British Airways for the deal to be worth considering. If this was the case, we could see an end to IAG as we know it.

What do you think? Let us know in the comments.

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mohave

U.K. and U.S. government can buy a stake in the airlines likely to survive and sell the stock at a profit when the Covid recession is over.