Analysis | The era of airline buccaneers may be ending

Aviation has always carried a whiff of the pirate ship about it. Richard Branson, founder of Virgin Atlantic Airways Ltd., likes to describe himself as an “adventurer and troublemaker,” and once claimed to have found buried treasure on his private Caribbean island as a prank.
Right now, the buccaneering executives who have driven the airline industry since the 1980s, when the era of state-owned flag carriers started to break down, are facing their appointment with the gallows.
Branson’s Australian affiliate, Virgin Australia Holdings Ltd., was taken into administration Tuesday after years of losses. Virgin Atlantic will go the same way if it doesn’t receive a government loan, Branson wrote in a letter to employees Monday.
Other carriers may be heading in the same direction. South African Airways is planning to lay off its entire workforce after years of losses, Bloomberg News reported last week; Norwegian Air Shuttle ASA’s debt-for-equity workout is heading down to the wire; bonds issued by Colombia’s Avianca Holdings SA due in 2023 are trading at 20 cents on the dollar, while PT Garuda Indonesia sukuk due in June are at 48 cents.
The major American players aren’t immune, either. Five-year credit default swaps protecting against non-payment of American Airlines Group Inc.’s debt have soared to 2,883 basis points, with United Airlines Holdings Inc. on 960 basis points and Delta Air Lines Inc. at 694 basis points. These are fear-and-loathing levels: Lehman Brothers Holdings Inc.’s swaps peaked at 707 basis points on the eve of its 2008 collapse.
There are plenty of national champions among that group of walking wounded. Still, the differing experiences of Virgin Australia and its 20% shareholder Singapore Airlines Ltd. suggest that robust state ownership, for so long considered a millstone for ambitious airline companies, is turning into a life-raft.
Singapore’s $10.5 billion capital raising last month — backed by its largest shareholder, state-owned investment company Temasek Holdings Pte. — is the most striking instance of support offered to an airline in the current crisis. Less than a tenth of that sum would have been sufficient to provide the A$1.4 billion ($882 million) rescue loan that Virgin had sought from the Australian government. There’s no legal barrier to Singapore buying out the remaining 80% of the company. Consolidating control would have given it a stronger foothold in a domestic aviation market that it once coveted, at a time when only within-country flights are likely to be operating in significant numbers for some time. It’s telling, then, that the company turned down this option.
Since the dawn of commercial flying, aviation businesses have had a complicated relationship with nation states. After an initial flurry of private enterprise, most of the global industry was nationalized during World War II and remained that way until the deregulation of the 1980s.
In recent decades, former flag carriers such as British Airways have been privatized and at times amalgamated into cross-border giants, while budget airlines have swallowed up short-haul market share to become some of the most profitable businesses in the global industry. The only state-owned airlines that have prospered have been those, like Singapore Air and Emirates, that have been able to count on the traffic of busy hub airports and the unquestioning backing of their governments.
For all that, aviation is anything but a free market. Most of the world’s airline routes are oligopolies where only a handful of carriers compete. The number of seats available between countries is still decided in government-to-government treaty talks, which often limit the ability of commercial carriers to operate. Airlines remain a vital piece of national infrastructure, and can throw themselves on the mercy of governments if things get tight.
We may be on the brink of a realignment as dramatic as the 1980s privatizations. The Austrian, Swiss and Belgian governments are all in talks with Lufthansa AG about support for the former flag-carriers that it absorbed in recent decades. Air France-KLM’s state shareholders in Paris and The Hague are looking to do the same. In most cases, it’s doubtful whether these attempts will be sufficient to survive an extended crisis. It’s hard for governments to argue that full-service airlines are a national interest as vital for European nations as they are for an island-state like Singapore, especially when rail travel causes so much less carbon pollution.
The result is likely to be a hollowing out of the middle ground. Budget airlines such as Southwest Airlines Co., Ryanair Holdings Plc and Interglobe Aviation Ltd. have always known that they had no hope of government support. As a result, their more conservative balance sheets, lower costs and smaller shares of long-haul traffic given them the best chances of survival. True state champions such as Singapore Air and Emirates can count on the indulgence of their shareholders, too.
The hybrid carriers that remain, however, will find the going tough. Neither lean enough to survive on their own, nor politically connected enough to count on unlimited support, they may find the implicit backing of their governments less forthcoming than they’d hoped. David Fickling, Bloomberg