BUSINESS: Airlines need bailout to keep them aloft,
Canada’s airlines need a federal bailout, which most of their peers worldwide long ago received.
The alternative is that Air Canada and WestJet Airlines Ltd., which account for most of Canada’s air traffic, become insolvent as early as next year.
That, in turn, would stall Canada’s economic recovery, and cut Canadians off from each other as hundreds of communities lose their air service.
That doomsday scenario might seem impossible.
After all, Ottawa has rushed to provide individual Canadians and businesses with hundreds of billions of dollars in pandemic assistance.
With their spending, unprecedented in its speed, enormity and thorough coverage of every sector of the economy, the feds are determined to prepare Canada for a coiled-spring economic boom once the pandemic has passed.
Well, almost every sector. Ottawa has overlooked the airlines.
Airlines worldwide have received about $123 billion in government pandemic assistance. Canadian airlines have received next to nothing.
When Canadian airlines, through their trade association, made their umpteenth request for urgent assistance this week, Ottawa responded by calling attention to the more than $1 billion the airlines have received in federal wage subsidies.
That response entirely misses the point.
The feds’ payroll assistance is welcome, to be sure, but woefully insufficient to keep these enterprises in operation.
Airlines are burdened with notori
ously high fixed costs, which must be paid whether the airlines are generating revenues or not.
True, the airlines’ fuel and payroll costs have fallen as demand has cratered. But airlines’ fixed costs for debt servicing, aircraft lease payments and airport landing rights outweigh their meagre revenues. That accounts for the huge quarterly losses that the world’s biggest carriers are continuing to post.
Air Canada, for instance, has recorded losses of $2 billion so far this year. And in reporting its 2020 second-quarter results, Air Canada forecast that it will lose as much as $1.6 billion in the third quarter, or $17 million per day.
As a private company, WestJet does not report its financial performance. But its owner, Toronto merchant banker Onex Corp., recorded a firstquarter loss of $1.1 billion related to the pandemic. Most of the loss was attributable to WestJet, which Onex acquired late last year.
In its 2020 second quarter, its most recent reporting period, Air Canada carried just 4 per cent of the passengers it flew in the same period in 2019.
As a result, Air Canada has permanently retired 79 aircraft, or about 30 per cent of its fleet. And by the end of the airline’s second quarter, AC had reduced its total workforce by more than half, or 20,000 positions, through layoffs, attrition and early retirement.
And yet AC’s second-quarter operating costs fell by just 64 per cent, compared with an 89-per-cent plunge in revenues.
The airlines’ success in wringing costs out of their operations is some experts’ best guess on why Ottawa has failed to help the industry.
WestJet CEO Ed Sims wonders if Ottawa said, “Well, (the airlines) didn’t go bust, they’re still here, therefore we are vindicated in not giving them specific sector relief.”
But because of the industry’s high fixed costs, it can’t costcut its way to viability.
That’s why Porter Airlines, the Toronto regional carrier, grounded itself March 21, at the outset of the pandemic, and hasn’t flown since. With the second wave of the pandemic upon us, Porter announced last week that it is extending its suspension of operations to Dec. 15.
As essential-service providers from coast to coast, Air Canada and WestJet didn’t have that option of total shutdown.
(As of last week, WestJet no longer flies coast to coast. On Oct. 14, WestJet suspended its flights across Atlantic Canada
— more than 100 in all — and to Quebec City.)
And with that, industry experts warn, begins a great unravelling of the airlines’ route networks, as the two major Canadian carriers keep dropping routes on which their losses are heaviest to stave off insolvency.
An unnoticed consequence of that unravelling is a loss of market share by Canadian carriers to international rivals. This week, WestJet’s Sims estimated that his airline has lost between 10 per and 15 per cent of its business to offshore carriers. He blames Canadian federal and interprovincial restrictions on air travel.
Unions representing thousands of airline workers have called on Ottawa to provide some $7 billion in assistance to the industry. Some of them appeared this week on Parliament Hill with signs reading “Save Canadian aviation.”
That $7-billion sum seems to be a reasonable amount, though depending on the duration of the pandemic, it might not be sufficient.
Last spring, the U.S. government provided about $22 billion (U.S.) in assistance to American carriers — almost $16 billion in grants and $6.5 billion in low-interest loans.
But the U.S. airlines have already burned through most of that cash. They are now seeking an additional $25 billion in federal assistance.
It looks like that plea will be answered, given the support for it on Capitol Hill and at the White House.
That will maintain the U.S. carriers’ competitive advantage over Air Canada and WestJet.
The first phase of airline bailouts has proved insufficient in Europe, as well.
Last month, Air France-KLM said its $11.7-billion state bailout will only sustain the airline into next year.
A Canadian government bailout of the airlines should be contingent on carriers offering immediate cash refunds for flights and travel packages cancelled by COVID-19.
It was perhaps in anticipation of substantial federal assistance that WestJet this week became the first Canadian airline to offer refunds rather than credits to passengers who apply. Air Canada is sure to follow suit.
Ottawa could take an equity share in the airlines it bails out, as Germany did in acquiring a 20 per cent stake in Lufthansa AG as part of a $10.1-billion bailout of Europe’s largest airline.
Along with resolving the long-standing refund grievance, partial public ownership of the bailed-out airlines might make the rescue more politically palatable. It might even be a profitable investment.
In the long term, the airline industry has bright prospects. Just before the pandemic, the International Air Transport Association, the global industry’s trade group, forecast a doubling in annual flights worldwide by mid-century, to about 8 billion flights per year.
But even with a government lifeline, Canadian airlines will not quickly bounce back postpandemic, as the rest of the economy is expected to do.
The work-from-home movement and fear of aircraft-borne COVID-19 will keep air-travel demand from recovering to pre-pandemic levels for an estimated five years.
But a bailout will at least keep the airlines flying. For MPs, that beats walking home to a Beaches-East York riding.