AIRLINES WINGING IT
Crisis is challenging entire industry
YOU know you are in totally new economic territory when it becomes apparent that nobody has a clue what is going to happen next with the coronavirus lockdown. ‘It will be a V-shaped recovery’ said most economic commentators about a month ago. ‘It will be the biggest economic fall since the Great Depression’ (IMF). ‘It will be bigger than the Great Depression but bounce back more quickly’ (Goldman Sachs).
‘It will be a slow recovery but it could lead to a second economic fall even bigger than the Great Depression’ (Economist Intelligence Unit).
Whatever about the dismal science of economics and predictions, people who know and understand their own industries somehow have to make intelligent decisions about how they will get back on track in the months ahead.
Yet there is total confusion here too. Take airlines, for example. EasyJet and Wizz Air have suggested they are open to keeping the middle seats free on planes when international travel resumes, in order to help with social distancing.
A “mad” proposal is how Ryanair’s Michael O’Leary described it, and he is right. How could people travel to an airport on trains with limited or no social distancing only to feel safe on a plane by not having somebody in the centre seat?
How could they get through airports and on to those buses that sometimes take you to the terminal on arrival while observing two metres of social distancing?
O’Leary said it would be better to follow the Asian model where they are taking the temperature of passengers and insisting they wear masks.
Other airlines have said they don’t expect a huge demand for international travel initially so they don’t think they will have full flights. So why not keep the middle seat empty, given there will be spare capacity on the plane anyway?
But supply and demand has to come into this somewhere. If the planes are going out half-empty, then surely the airlines would cut back on capacity and flights.
O’Leary also pointed out that airlines couldn’t afford to operate this way and therefore ticket prices would have to go up. In Ryanair’s case, it argues that the best way to get people back flying is to sell the seats at knockdown prices.
But people will either want to fly or not in large numbers. If by this autumn or winter, international travel has been deemed safe, there may well be millions of people desperate to go on a holiday to somewhere.
If this is true, then high demand will drive up prices for consumers — not drive them down.
Ryanair’s business model is based on cheap flights that are pretty much full as often as possible. Regulators who might insist on reducing the allowable passenger numbers on flights would punch a big hole in the low-cost operators’ business models.
That is why O’Leary had a go at them last week, suggesting authorities were “floundering” and regulators were “sitting in their bedrooms inventing restrictions”.
There is also the question of where we might all fly. There isn’t much joy in running the Covid-19 gauntlet of going through airports, planes and buses to go on a holiday where you can’t even enjoy a meal in a restaurant or visit a pub.
Different countries will open up at different times and with different restrictions in place.
Ryanair entered this crisis in one of the strongest financial positions in the industry. It owns its planes and had several billion in cash to see it through.
O’Leary might want to fall back on a price war as a way of finishing off some weaker competitors as travel gradually opens up.
And he may well succeed when the time comes. But for now, not even the best brains in aviation have a clue what is going to happen.
State may rue bank indecision
BACK in November, I said that Paschal Donohoe’s Exchequer cup was “overflowing”. An extra €2bn came in last year from sources that were completely outside the Government’s control: from additional corporation taxes, and IBRC, Central Bank and AIB dividends. This year will be a very different story.
It is clear that 2020 is a write-off. The debate is about what happens after that and how quickly the economy can recover.
A Great Depression-scale collapse will occur around the world, but given the unique nature of this crisis, the debate is about whether the recovery will come quickly, gradually or very slowly.
The Great Depression lasted about 11 years in the US. Central Bank Governor Gabriel Makhlouf has questioned the V-shaped rapid bounceback theory.
Others, such as the IMF and Goldman Sachs, see the downturn as rapid, deep and very serious, but there could be a relatively fast uptick even next year.
However, when you look at all the money that flowed into the Exchequer in 2019 that won’t be coming back, it makes you wonder about how the State could have saved itself a few billion along the way.
AIB and Bank of Ireland dividends won’t be happening this year. AIB’s plan to buy back some of the State’s shareholding won’t be happening either.
In fact, the value of the State’s shareholding in AIB has fallen from €11.5bn two years ago to just €1.8bn this week.
Back in 2018, when AIB shares were trading at €5.50, its chief executive at the time, Bernard Byrne, suggested that the State should sell down more of its 72pc holding. The stake was worth €11.5bn at the time.
Bank of Ireland, too, has seen its share price fall from €5.95 two years ago to €1.35 this week.
The State’s 15pc shareholding in the group has fallen in value from €1bn two years ago to €157m today.
With the future outlook not appearing particularly good for the sector, that boat has truly sailed.
Virus bill appears endless
A WORD of caution for the Government when thinking of providing free loans to small businesses.
It may end up being necessary, but it is likely to cost a lot of money. In the US, the Trump administration announced a $350bn (€323bn) loan package to small businesses.
Small firms could borrow the money from their local bank and as long as it was spent to cover costs associated with Covid-19, they didn’t have to pay the cash back. Their bank will be reimbursed by the state.
After only 12 days in operation, $300bn of these loans were given out. Now the scheme has run out of money and is closed, pending a package of an additional $250bn from Congress which has yet to be agreed.
The Republicans want to go ahead with the extra cash, as do the Democrats, but they also want the package to include several hundred billion extra to fund hospital care, help state and local government in the US, and provide more food stamps.
A deal will be done pretty soon, and small businesses will end up with a $600bn cash injection from the state. But the Covid-19 bill just keeps rising.