‘Govt assistance to aviation industry should be last resort’

KUALA LUMPUR: As airlines worldwide, including in Malaysia, are reported to have sought financial support from their respective governments due to the Covid-19 pandemic, the Malaysian Aviation Commission (Mavcom) has recommended that as the Malaysian government considers these requests, it should bear in mind that its main policy objectives should be to maintain essential air connectivity and protect vulnerable parties such as the 50,000 employees in the aviation sector and Malaysian consumers more broadly.

According to Mavcom in its commentary, the government’s fiscal resources are under considerable pressure given the expenditure required to fund the public health system and assist financially distressed households and small businesses.

Hence, Mavcom recommended that the government acts only as the lender of last resort to the aviation industry players, similar to how Bank Negara Malaysia is to Malaysian financial institutions.

As such, the government should carefully evaluate whether industry players, including airlines, have genuinely sought government assistance only as a last resort after exhausting all the other alternatives before deciding to offer financial assistance.

In doing so, the government must also be aware of the tradeoffs inherent in the decision to offer financial assistance or otherwise. Offering financial assistance, if done haphazardly, may risk moral hazard and prolong inefficiencies by shielding the industry players from taking difficult but necessary measures.

Given that the government, via its investment companies, has already expended significant resources in supporting Malaysia Airlines for the last 20 years, and that any assistance is not likely to yield positive returns, there may be little appetite to further do so for Malaysian carriers in general.

Conversely, allowing failing players to collapse will also have negative consequences such as the loss of jobs (passenger airlines employ over 20,000 staff), reduced international connectivity (the reduction or loss of air services to key aviation markets such as China, Indonesia, and India), and disrupted supply chains (air cargo accounts for around 30 per cent of Malaysia’s international trade by value).

Any decision to provide financial assistance must be accompanied by rigorous costbenefit analysis to ensure that an optimal solution is reached.

Given this backdrop, Mavcom viewed that any financial assistance should be carefully structured to ensure that it is not treated as windfall gains for airline shareholders.

In deciding the form of financial assistance, the government must focus on its primary policy objectives. Mavcom suggested that the government prioritise measures that mitigate the loss of employment, minimise consumer losses, and support the continuation of essential air connectivity.

Other policy requirements, such as those on slot usage, may also be temporarily loosened to reduce the burden of compliance on the airlines.