Governments have again stepped in to keep national airlines flying, but bailouts might not be t he long-term answer for the industry
THAT THE WORLD has changed forever is one certainty for a commercial airline industry that has just suffered a crippling body blow. In a matter of days following the terrorist attacks in the United States, airlines were pushed to the point of financial ruin and into the arms of governments.
Governments rightly moved to indemnify airlines against terrorist attacks after shell-shocked insurers effectively claimed air-travel risks could not be insured at any price. That Cathay Pacific so quickly secured an agreement with a private insurer has raised intriguing suggestions of a behind-the-scenes deal with Beijing.
Governments stepped in because the costs of letting national carriers close was unthinkable. Modern economies would collapse without well-connected air links. Between 1996 and 1999 the number of scheduled flights worldwide soared from 960 million to 1.6 billion. Dedicated air-cargo flights have grown even faster and been a prime driver in the globalisation of business.
The principle of 'too important to fail' was shown by the emergency US$15 billion (about HK$117 billion) bailout given to US airlines in the shape of a $5 billion cash-infusion and $10 billion in federal loan guarantees. Airlines are capital intensive and incredibly vulnerable to the kind of plunge in patronage that followed the September 11 terrorist attacks. With passenger numbers collapsing, bank credit lines being pulled and share prices in free-fall, US airlines last week threatened to seek bankruptcy protection. They immediately announced 80,000 job cuts (about 10 per cent of the industry payroll) and slashed up to 20 per cent of routes with predictions of a permanent drop in air travel.
US airlines were never state-owned and have long moaned about subsidised foreign flag-carriers that are protected from full competition. But now the boot will be switched to the other foot as recently privatised European airlines fighting in a newly de-regulated market struggle to compete. The choice for many governments is stark: either pile on the subsidies - US-style - or face airline bankruptcies.
In the past, the response would have been to nationalise embattled carriers. Not only is flying a life-and-death business, but the industry critically impacts on an entire economy. Recent events have only reinforced that truth and will up the ante for governments to bail out carriers.
Fortunately, it will not happen, because the process of privatisation is sufficiently advanced and the advantages of deregulation have been shown. Taxpayers have voted against big subsidies and passengers love the benefits of low-cost competitive travel. The bet must be that air travel will recover; that the desire for business people to look a client in the eye is undiminished and the wanderlust of tourists remains. Increased insurance due to the terrorist threat will ultimately be worked out. The finance industry has spent 20 years slicing and dicing risk and is unlikely to stop now. If it fails, governments can assume the contingent liabilities for an appropriate premium.
