Best way to bail out airlines hit by the coronavirus impact on their business is still up in the air – Financial Post

Policymakers around the world are grappling with the question of how to save their airline industries as travel grinds to a halt in the face of the novel coronavirus pandemic.

While there is consensus that some kind of assistance will be required in Canada, where Air Canada has already announced a temporary layoff of workers and both it and WestJet have grounded international routes, the form that help will take has not yet been announced.

This week, Prime Minister Justin Trudeau said the Canada Account — a financial vehicle managed by Export Development Canada that makes large loans and guarantees backed directly by the federal government — could be tapped to support the more “vulnerable” sectors battling economic impacts of the COVID-19 pandemic, without mentioning airlines directly.

While the Canada Account was instrumental in the 2009 auto sector bailout during the financial crisis, Karl Moore, an associate professor at McGill University’s Desautels Faculty of Management, said it’s not clear that the government would tap it this time.

There are key differences between the automobile and airline industries, he said, which include their capital structure and the composition of the workforce. The performance of industry players is also far less inter-dependent than in the North American auto industry.

A more likely scenario for assistance would mirror what is already under way in other countries such as the United States and New Zealand, industry watchers say, where special government loans are being negotiated in exchange for caps on executive pay and restrictions around returning cash to shareholders through dividends and share buybacks.

Such a move would not be without precedent in Canada. In 2013, the federal government gave relief and extensions to allow Air Canada to manage a pension deficit that had ballooned to over $4 billion. In exchange, the airline had to agree to strict limits on executive pay, dividends and stock buybacks.

Another reason a direct repeat of the auto bailout may be unlikely is that the lifeline thrown to the Canadian divisions of U.S. automakers by Stephen Harper’s Conservative government at the height of the financial crisis wound up being politically controversial.

The taxpayer burden was a thorny issue for years and in 2018, a $2.6 billion loan (including interest) made to Chrysler was quietly written off by the subsequent Liberal government.

Meanwhile, the auto bailout ultimately did little to maintain the industry in Canada. General Motors has now closed what was at one time an economy-sustaining operation in Oshawa, Ont.

At the time of the auto bailout, Canada was under pressure to act because the fortunes of the Canadian companies and U.S. operations of Ford, General Motors and Chrysler were closely tied, and huge aid packages were being extended to the sector by Canada’s biggest trading partner.

Though many air carriers are suffering now, their fortunes are far less connected. And Canada’s airlines are in relatively good financial shape, led by Air Canada, the largest player.

Fitch Ratings reported that Air Canada’s updated credit rating is at BB, and WestJet’s at BB-

Fitch Ratings issued an updated report on Air Canada’s credit Thursday, and while the outlook was changed to negative from stable in light of the pandemic, the rating itself — at BB — was unchanged.

The outlook was similarly revised for WestJet Airlines, and the credit rating also maintained by Fitch — at BB-, a notch below Air Canada’s.

One wild card industry watchers point to regarding WestJet is that the airline, which was initially launched as a low-cost alternative to Air Canada, was recently purchased by private equity firm Onex Corp. in a deal that just closed in December. Private equity purchases tend to be heavily leveraged, and one observer who spoke on condition he would not be identified because of work he does in the sector, said Onex might be tempted to step away from the airline at some point to cut its losses.

Even Fitch warned that none of the airlines is impervious to a prolonged downturn. If the impact of the pandemic hits airlines for longer than a couple of quarters, it could lead to a downgrade of the Canadian carriers’ credit, the ratings agency said.

Still, the rated Canadian airlines appear to be doing better than many of their international counterparts. On Friday, Moody’s Investors Service suggested global airline capacity could fall by up to 35 per cent in 2020 due to the pandemic, and that weaker carriers could be pushed into default.

Despite the relative strength of Canada’s major airlines, what happens in the United States could very well play into Ottawa decision, according to a veteran Bay Street lawyer who has had dealings with the industry and government in the past.

Air Canada’s decision to put some 5,000 employees on temporary layoff until at least April 30, a move publicized early Friday by their union, the Canadian Union of Public Employees (CUPE), could also prompt political action, driven by the Liberals’ desire to protect working Canadians, he said.

The situation in the United States looks dire, and the U.S. Senate was considering a rescue package Friday. Delta Air Lines Inc. had said it expects second-quarter revenue to decline by $10 billion, and United Airlines Holdings Inc. said it would begin shedding its workforce in step with an expected decline in its schedule if sufficient government aid is not announced by the end of this month.

American Airlines PLC, meanwhile, banded together with unions Friday to demand cash in addition to loans from the U.S. government — which could be converted at some point into equity stakes — to help protect their workforce.

McGill’s Moore considers it very unlikely that Canadian airlines will wind up in government hands, particularly Air Canada, a former Crown corporation has performed well recently after emerging from government ownership in the late 1980s.

“It’s one of the better run airlines in the world,” Moore said, adding that it makes sense to “leave it to private sector rather than bring (it) under the government remit.”

It makes sense to leave (Air Canada) to the private sector rather than bring it under government remit

Karl Moore, associate professor, Desautels/McGill

If assistance comes to Canada’s airline industry, a rescue package can be expected to come with strings attached in whatever form it takes, at least for Air Canada.

The pension relief granted in 2013 marked a rare case in which the government stepped in to aid Canada’s largest airline, and, again, it was Stephen Harper’s government that did so. But that aid came with an intrusion into the company’s affairs that are usually left to executives and directors in the boardroom.

Other times when the airline could have used a helping hand, the government wasn’t there at all. In 2003, when the Liberals were in power, Air Canada’s business tumbled in the aftermath of the 9/11 terrorist attacks and the SARS health scare, and the carrier was forced to file for bankruptcy protection under the Canada Creditors Arrangement Act.

It emerged a stronger company, and industry watchers point out that it may well be able to weather the current crisis without a government bailout.

Nevertheless, the Air Transport Association of Canada, whose members include Porter Airlines as well as SunWing Airlines, said the expectation is that “any financial aid package for the transport industry would be made available to all carriers.”

“This is the only acceptable way to maintain a level playing field in such a difficult time,” John McKenna, the association’s chief executive, said in a letter to federal officials including the prime minister and finance minister Bill Morneau this week.

In the letter, he implored Ottawa to step in to ensure the domestic industry’s survival, insisting “government financial assistance is urgently needed to avert a crisis in the aviation industry.”

“The consequences of the crisis and of measures taken to contain the virus are having an immediate catastrophic economic impact on our industry,” McKenna wrote.