March 24, 2020 / 2:39 AM / 6 days ago

Breakingviews - New Zealand airline rescue puts taxpayers in first

An Air New Zealand Boeing 787-9 Dreamliner plane taxis at O'Hare International Airport in Chicago, Illinois, U.S. November 30, 2018. REUTERS/Kamil Krzaczynski

LONDON (Reuters Breakingviews) - New Zealand has shown the world how to rescue an airline. The government on Monday gave Air New Zealand a stand-by loan of NZ$900 million ($514 million), striking a balance between the Kiwi national carrier’s survival while ensuring shareholders share in the pain.

The coronavirus pandemic has sparked an unprecedented global shutdown of the skies, with airlines grounding all but a handful of their planes. The International Air Transport Association reckons the industry needs up to $200 billion of support. U.S. carriers alone say they need a quarter of that.

Authorities can help by easing regulations such as those governing regular use of landing slots. They can also defer charges, including air traffic control fees. That can be as much as 10% of operating costs. Relaxing labour laws makes it easier for workers to take reduced-pay leave, while letting airlines refund cancelled flights in vouchers also helps them preserve cash.

Self help is also important. British Airways-owner IAG had 4.8 billion euros in the bank at the end of December, equivalent to 21% of last year’s operating expenses. That could enable it to survive in suspended animation for more than half a year. The same cannot be said of American counterparts like Delta Air Lines, which has spent more than $10 billion in the last five years buying back its own stock. Its cash reserves of $2.8 billion are just 7% of its 2019 operating expenses.

Taxpayers are understandably wary of handing over a blank cheque. That may explain why the British government is considering taking equity stakes in airlines, according to the Financial Times.

New Zealand shows that’s not necessary, though. By charging an interest rate of up to 9%, Wellington is ensuring Air New Zealand will only use the facility – roughly the same as last year’s EBITDA – if it has no better source of financing. The carrier must suspend dividend payments while any loan is outstanding. The government can also push Air New Zealand to raise capital to repay the debt and, in a worst-case scenario, convert it into equity in the company, whose market value has shrivelled to just $513 million.

It’s a model for other countries considering bailouts to follow. If taxpayers have to fly, governments can at least make sure they’re in first class.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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