More bailouts needed: AFJ Asia-Pacific 2020 | News | Airfinance Journal

More bailouts needed: AFJ Asia-Pacific 2020

Government support for the aviation industry amid the ongoing Covid-19 is vital, no matter the cost, although state relief can take many forms, panellists at Airfinance Journal Asia-Pacific 2020 have agreed.

“It’s presently a matter of intense debate which airlines will survive the crisis. Many will not,” observes Pillsbury Winthrop Shaw Pittman managing partner Paul Jebely.

“As for those would-be survivors, the debate wages over who – the government or the private sector – will be their saviours and on what terms salvation will be granted. There’s an intriguing serendipity about the restructurings of airlines. The fortunes of airlines depend upon the fortunes of nations and the reverse also holds true. While the fortunes of airlines, aircraft lessors, financiers and investors largely depend on both. Although some are very careful of endorsing it, government intervention is desperately needed,” Jebely says.

Since the beginning of the year, governments around the world have granted more than $160 billion in financial support to airlines. This is not enough, however, according to the International Air Transport Association (IATA), which argues that $300 billion of additional support will be required in the next few months for the majority of airlines to survive the Covid-19 crisis.

“The way these funds come is very important: we have direct loan and liquidity support, for example, through government guarantees, or they can come from equity stakes, or wage subsidies. As of today, two thirds of the support has come from direct aid, which means subsidies, direct loans, cash injections. Most governments believe that aviation is an important part of their GDP growth,” says Natixis head of aviation finance, Asia-Pacific, Jean Chedeville.

“Equity support for airlines is mostly something we see for national, state-controlled carriers. That for me personally is the best way to support a struggling airline and to make sure the airline will be competitive going forward and making it more attractive to raise additional liquidity, if required,” adds Chedeville.

“Until now, most countries have injected less than 1% of their Covid relief funds into aviation, although there are huge differences between countries: Singapore injected close to 20% of the stimulus package into the aviation sector, Indonesia 7% and then there’s South Korea with just 1.6%,” Chedeville says.

“Working together with the private sectors, banks like us have been helping airlines and governments. We go to the consumer markets and raise liquidity. I’m confident aviation investors and banks will remain highly relevant in the coming months to help airlines survive,” he predicts.

Airlines and lessors have complained that although government support is being extended, often the relief packages exempt aircraft lease payments as they were designed to protect airline employees, not large cashed-up corporations.

Paul Ng, partner and head of Milbank Asia’s transport and space practice, provides the lawyer’s perspective: “The countries and governments that have implemented emergency legislations have limited that emergency legislation to mostly commercial leases like property leases but some, like Singapore, have actually passed complementary legislation to confirm that aviation assets are excluded from such relief. Some have not, however, including some countries in South America.”

Ng adds: “Thankfully we don’t see a lot of other countries doing this, that’s a good thing. As the industry recovers we expect that these emergency legislations will be terminated or clarified."

“Government support is essential, especially for cities like Singapore and Hong Kong. I think it’s most important to support aviation on the regulation side, e.g. deferral of taxes, but it would be even better if governments would work on meaningful travel bubbles to open things back up. I don’t understand why it takes so long. We are such a powerful industry and yet we could not get the travel bubbles earlier. This needs to change. China and Hong Kong have not even opened up to each other. That basically killed Dragonair. They should focus on opening up rather than just injecting money into airlines,” says Carine Truong, the Hong Kong-based director of aviation for NWS Holdings.

Despite the calls for more government relief, there are concerns that it will unduly distort competition, although the panellists think these can be mitigated.

“Competition in Asia has always been somewhat distorted due to the fact that there’s no real open-skies agreement like we have elsewhere. Aviation in Asia is often driven by government policies. A country like Singapore would benefit greatly from open skies while a bigger economy like Indonesia would not. Ultimately, government support distorts competition. There have to be parameters,” says Ng.

There is also a belief that bailouts should be accompanied by restructuring.

“That would be great, especially for us lawyers,” Jebely and Ng agree.

“It sounds logical. Having provided deep resources, they would want a stake in the success in the airlines. Governments can be a force for change but it’s obviously very complicated. For example, in Korea, if KDB converted all its shares then it would be the largest shareholder in Asiana. I’m not sure if government injections always foster restructurings,” says Ng.

“It also always depends on different countries, different cultures, different politics. Malaysia Airlines is another one. Change has been very difficult. Many divisions of the government are involved. Each country will have their own challenges but overall this is a great opportunity for change,” Ng states.

The expert panel had less to say about whether government support would ultimately lead to de facto nationalisations of airlines around the world, or about the differences in support for state-controlled carriers and privately run low-cost carriers.

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