The recent announcement by the US government that it is making US$25 billion of grants and a further US$25 billion of loans available to support the passenger airline industry in the United States contrasts sharply with the recent announcements from UK government. The UK government has announced that it is prepared to be “lender of last resort“ but, it would seem, not provide any support before the stage of “last resort“ is reached. Presumably this position has been influenced by multiple factors: before the extent of the travel restrictions was apparent, BA indicated it had US$8.5 billion of available liquidity, there has been unhelpful speculation as to the tax residence of the founder of Virgin Atlantic, and also around a recent payment of a dividend to easyJet’s shareholders. Politically helping the airlines – following criticism of the government’s efforts to help Flybe – might attract negative publicity for the Government. Nevertheless the crisis facing the airlines is unprecedented. And it is not only the airlines that are affected: airports, maintenance and repair organisations, manufacturers in the supply chain, other aviation service providers and, in each case, their employees are all also impacted. The US and many other countries have recognised this and acted to provide support, even though the airlines who may benefit have also paid dividends or had share buy-back programmes in recent times.
Aside from political challenges, the principal hurdle for the Government will be obtaining state aid clearance. During the Transitional Period until 31 December 2020, the UK remains subject to the EU state aid rules. The European Commission has reacted quickly to the current crisis by publishing a temporary framework for state aid measures to support the economy as a result of the COVID-19 crisis, alongside approving a number of national aid measures.
Whilst, to date, the Commission has not approved any measures to support airlines and has confirmed that aid to the transport sector will be made on a case-by-case basis, the temporary framework is helpful for the airlines’ position since it recognises COVID-19 as an “exceptional occurrence” under Article 107(2)(b). This allows Member States to implement measures to help sectors particularly hit by the outbreak, such as transport and tourism, but to clear such aid, the Commission will need to be satisfied, and thus Member States will need to justify, that there is a causal link between the exceptional occurrence and the aid, that the aid is proportionate to the damage caused and must not exceed what is necessary to make good the damage. The temporary framework further clarifies that the principle of “one time, last time” aid to rescue and restructure failing businesses does not prevent those businesses from receiving further aid which is notified to the Commission in response to COVID-19. For those airlines outside the UK that may have already received rescue and restructuring aid pre-crisis, this will be a helpful approach.
The stance of the government to act as lender of last resort may not be unreasonable, but there might be better ways of accomplishing it. Press reports indicate that the government of New Zealand has provided a standby facility to Air New Zealand which, it has been reported, can only be accessed once reserves dip below a set amount. If the UK government were to take a similar approach and provide a standby facility to be accessed after all fund raising avenues had been explored and when cash reserves reach a trigger, the very existence of the facility would assist airlines and other aviation companies in raising other finance and managing stakeholders. Shareholders may be willing to make a contribution but raising equity funding for companies with more than a handful of shareholders can be a time consuming and costly process. An alternative way that the government could provide support would be a bridging facility while equity fund raising is undertaken, with the government underwriting the issue to ensure repayment. If some shareholders cannot or do not wish to invest more, then they could be diluted.
Some have argued that if the government provides a loan facility to save an airline from insolvency, it should benefit from a shareholding of some kind because the equity would otherwise be wiped out in an insolvency. In the aftermath of the terrorist attacks in September 2001 there was a severe downturn in air traffic and the solvency of certain airline and other aviation companies was challenged. In one UK case, government support was part of the solution. It was, however, provided on a “matching” basis alongside participation from the existing bank lenders and the shareholders. Historically, this has been a typical structure adopted when the UK government finds policy reasons to help a failing business.
Without appropriate conditions, shareholders with other pressing liquidity demands on them, either in relation to their own business or to other investments which they hold, might refuse to contribute to a restructuring package. A potential dilution of their shareholding in the airline or aviation company would be a strong incentive to provide additional liquidity or at least not to use the Government support until it is the “last resort”. It is reported that the US package for airlines has such a provision as one of its conditions. The UK government could, for instance, require the issue of share warrants convertible to ordinary shares if government loans are not repaid on time, as a condition to support – this could be achieved quickly and would avoid an immediate shareholding dilution if the airline is able in due course to return to trading activity sufficient to repay the government loan.
If the UK government does decide to provide support, care needs to be taken to avoid abuse and minimise the anti-competitive effects. A bland statement of “last resort” support may well be insufficient and uncompetitive in the global market and the current circumstances challenging the aviation industry.