Should governments bail out pandemic-hit airlines and hotels?


Should governments come to the aid of major airlines, especially those which have had a good run before the pandemic, what with dropping oil prices and super profits? Photo: AFP

As airlines and hotels with backs to the Covid-19 wall plead with governments for help, it is not unusual for nationalist fervour to override economics in the search for quick fixes with demonstrations of muscular resolve. In many cases, though, this would be folly.

When PanAm’s overreach caused the serial flag-planting airline to collapse under the sheer weight of its network (with slowing passenger demand, rising fuel cost, deregulation, and the haunting tragedy of the 1988 Lockerbie bombing) the American airline was allowed to go under.

The Gulf War sounded the death knell for this spirited campaigner that had pioneered passenger air travel in the United States as well as transatlantic and transpacific routes, and made round-the-world flight a household aspiration. By December 1991 the airline was no more. It filed for bankruptcy.

United Airlines had already bought the transpacific network along with the Narita hub, and Delta Airlines acquired some choice transatlantic morsels. No knickers were in a twist.

The US government did not step in to save the floundering beast, which had had a remarkable run since its historic 1927 mail hop linking Key West, Florida, with Havana in Cuba.

In many ways, former US President Jimmy Carter’s Airline Deregulation Act of 1978 simply hastened the end as competition for a slice of the sky mushroomed.

That was Keynesian capitalism at its most ruthless: the survival of the fittest, the most efficient, the most in tune with consumers and with a price and product to match.

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Fast-forward to 2020 and suddenly airlines (and even hotels) are lining up for bottomless government largesse.

Why should governments come to the aid of capitalist behemoths that have simply worked in their own interests from inception?

One answer could be that governments and airlines share common ground – and national pride – in the establishment and maintenance of air routes that encourage economic activity and tourism.

In several Asian countries there is usually one dominant airline that has grabbed the mantle of “national” carrier and it is this appellation that drives the noisiest bailout clamour.

Air routes look impressive on a world map with all the red lines neatly converging on your capital city.

Small wonder a country might feel like a ninny if after all that chest beating there’s no national airline to fly you to the G20 meet.

There is a profound difference between Japan Air Lines and Air Koryo. Yet, if it’s a toss-up between prestige and profit, the latter must prevail. Or should it?

The Asian landscape is riddled with scenes of feebly flapping national carriers from Air India and Thai Airways International to former powerhouses Cathay Pacific and Singapore Airlines.

The Thai government is stepping in with a 24 billion baht (RM3.2bil) bailout for Thai Airways and Bangkok Airways (as well as several low cost carriers including Thai AirAsia), and the Hong Kong government pledged US$3.87bil (RM16.1) for Cathay.

The Singapore Airlines Covid-19 rescue entails a monstrous US$13.27bil (RM55.2bil) while in the subcontinent, Air India, once the pride of Asia with its iconic moustache-twirling maharajah, is up for sale though buyers remain coy.

But trumping all is the lobbying by seven major US airlines to secure US$50bil (RM208bil) in aid before December lest they go out of business entirely.

This is as much as the government marshalled for the General Motors rescue in 2009 earning the company the blushing sobriquet, “Government Motors”.

GM repaid most of the money and now the carmakers are back praying for a US$2tril (RM8.32tril) lifeline. The numbers are staggering.

Do bailouts make sense? Airlines have had a good long run pre-coronavirus with dropping oil prices and super profits.

A few years ago American Airlines CEO Doug Parker chirruped, “I don’t think we’re ever going to lose money again.” Where has all the money gone? Profits did not equate to lower fares or better service for air passengers who for the most part had to make do with slimmer seats, more crammed rows, fewer exits, smaller toilets, less food selection, trimmed coffee-tea service, and reduced carry-on privileges.

In November 2018, The Washington Post jocularly noted: “On some of the newer planes flown by American, Delta and United airlines, the bathrooms in coach are just 24 inches (61cm) wide. For comparison, that’s roughly the width of the average dishwasher or the size of Kim Kardashian’s waist.”

Cathay Pacific’s Oct 21 announcement to kill Cathay Dragon (apportioning China and Asian routes to CX and its low-cost HK Express) has provoked much hair pulling but, despite the human tragedy inherent in any such epic closure, this was inevitable.

It had never been a tidy marriage. Hong Kong street protests over 2019 made Mainland operations increasingly sticky and Covid-19 was the final straw. Cathay’s excision of almost a quarter of its workforce and the slashing of inventory could be the way of the future.

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Emirates, with a US$2bil (RM8.32bil) bailout from the Dubai government, is also considering massive job cuts that could well exceed Cathay’s.

The airline has pressed its costly A380s back into service and is offering free Covid-19 treatment guarantees to passengers. All this adds up. Bailouts come with several problems.

They do not stop systemic haemorrhaging if the management style and company structure is inadequate and careworn or when the environment abruptly changes, as with Covid-19. Cathay might get to operate less than 50% of its fleet during 2021.

This is not the stuff of sanguine revenue projections. Government grants simply encourage dysfunction.

It is argued, and rightly, that firms must go through the bankruptcy process to emerge lighter, chastened and willing to restructure in an efficient manner.

Thai Airways has been wallowing in the slough of despond for a long while and has been repeatedly bailed out yet cured of none of its bad habits or poor service.

This is the airline that in the eighties set new benchmarks for in-flight pampering with its “Smooth as silk” tagline and for a while even ventured to fry eggs aloft for business class passengers in the days of the mercurial airlines’ president, Chatrachai Bunya-Ananta.

Air India has been a classic case of politicisation, interference, and internal rot, simultaneously propped up and ruined by the government. Its accumulated debt and the 2007 merger with the domestic Indian Airlines have created an unwieldy and inefficient combine.

Hotels are hard hit too but lack the “national” cachet to attract sufficient government interest which, when engaged, is focused more on preserving jobs than the brand.

While Marriott looks to the US for a domestic recovery, Accor is focusing on Europe (with its strong train network, travel bubbles, and a concerted approach to Covid-19) and everyone is intently watching China, where domestic travel has all but filled once-empty hotel rooms.

Hotel Cinemagraph - GIF on Imgur

For Marriott, well over 90% of its business in China (as well as the US) comes through the domestic market. That buoyancy may just tilt the balance one way or the other.

After astronomical buyouts and mergers (remember, Marriott splashed out US$13bil/RM54bil to acquire Starwood), hotel behemoths are at full stretch.

There is enormous vulnerability but flexibility too. Larger groups can shuffle reticent guests down from luxury rooms to cheaper digs and keep business within the family.

Smaller independent hotels do not have this facility and many are up for sale. No bailouts are coming their way yet in many respects, these are the products that deserve to succeed with their innovative approach, design innovation, local flavour, and friendly service.

These are the hotels that actually give something back to the community and reinvest locally rather than scoot off to the Virgin Islands for a tax holiday.

As hotel investment companies decide on a future course, managing real estate or growing franchises (something Hilton thrives on), InterContinental appears poised to join the Accor fold (a seemingly good fit with IHG’s strengths in North America and Accor’s hold on Asia).

Such a merger would create the world’s biggest hotel chain with a combined value of almost US$18bil (RM75bil) and over 1.6 million rooms. Is bigger better? Or are we simply headed for more bailouts?

Vijay Verghese is a Hongkong-based journalist, columnist and the editor of AsianConversations.com and SmartTravelAsia.com. The views expressed are entirely the writer’s own.

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airlines , Covid-19 , aviation , hotel

   

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