The airline industry proves state ownership doesn’t work
Over the course of the pandemic, both the French and German governments invested billions of euros in their state airlines. It was supposed to provide the capital for long-term decisions. It would make sure the market was stable. And it would help relaunch the Continent’s economic competitiveness.
But how’s that going? Last week, we found out. And as it turns out, not so well.
We’re frequently lectured about how the state needs to be more active in industry, and be willing to take strategic stakes in leading players – and yet the aviation sector has just reminded us that it never works. All that happens is that you end up carrying huge losses for uncompetitive, inefficient companies.
It has been a turbulent few days for anyone who follows the European aviation sector. IAG, the company that owns British Airways and Iberia, reported on Thursday that operating profit rose to €3.5bn (£3bn) last year, its highest ever level, and easily beating the last record set before the pandemic in 2019. Luis Gallego, IAG’s chief executive, said he was “optimistic” about the year ahead, as both tourist and business travel returns to normal levels.
BA may not have quite the same levels of service it used to have, and the computers have an unfortunate tendency to go haywire, but it is only a small part of the operation. By any reasonable standards, IAG is a decent business doing pretty well.
At Air France-KLM, however, the outlook is not so good. While it also reported healthy levels of demand, it posted a €256m fourth-quarter loss, which it blamed on rising costs, as well as geopolitical uncertainty impacting routes to the Middle East and elsewhere.
The shares fell 10pc on the results, as investors noticed that despite its highest ever revues, it was also starting to lose money heavily. Its shares are now down by 40pc over the last year.
Lufthansa, the German flag-carrier airline, is not expected to be much better. Reuters reported last week that analysts and investors expect the company to miss its profits targets as it was hit by prolonged strikes, which had forced it to cancel many of its flights, while staff are demanding higher wages. Its shares are now down by 27pc over the last year.
Company results vary all the time of course, even within the same industry, with some doing well while rivals perform poorly. And yet, one point surely jumps out: both Air France and Lufthansa have heavy state involvement.
The French government now owns 28.6pc of Air France-KLM, while the Dutch government owns another 9.3pc. It is not quite government-owned, but it is so close to it that it does not make much practical difference.
France’s President Emmanuel Macron, first took a stake in the airline as finance minister, and then increased it after the Dutch government annoyed him by taking a matching shareholding in the airline, and then again as part of a recapitalisation after its planes were grounded during the pandemic.
The president has made it clear that he sees it as a vital strategic interest, even though it is facing heavy losses on the shareholding, losing almost €1bn in value over the last 12 months (but heck, it’s taxpayers’ money, and French presidents don’t need to bother themselves with details like that).
The German government took a 20pc stake in Lufthansa during the pandemic, and although it has now sold off the last of its shares, government influence may well remain. Neither company could be described as completely private in the usual sense of the word.
It is not hard to see the contrast with IAG, or indeed with the booming budget airlines such as Ryanair, with its shares up by over 20pc over the last year, or easyJet, with its shares up by 13pc over the last 12 months. In truth, state ownership, whether it is outright, or just creeping control, never works out well in practice.
First, it creates companies that indulge their unions, and prioritise them over the business itself, and certainly over the customers. The unions have votes and political influence, and that means that airline bosses may well concede higher rates of pay, or easier working conditions, because that is what their government shareholder wants.
Next, the subsidies, and the cheap capital the state can provide, mean that there is no real incentive to maintain efficiency. The airline industry is brutally competitive, and margins are often wafer-thin, and that means that you have to stay very lean to afford all the planes and landing slots that you have to pay for. Cheap capital is great for a while, but if it makes you flabby it can damage a company as well.
Finally, if you know the state will always bail you out there is no discipline. In the end, it is the terrible knowledge that the receivers might be called in that keeps the board on their toes, stops them from ever letting up on cost control, and drives them to keep the balance sheet in a healthy state. Take that away and standards inevitably start to slip. In the worst-case scenario, the government will just bail you out all over again.
France, and to a lesser extent Germany, will now be weighed down by huge, uncompetitive airlines. If history is any guide, those losses will just grow and grow until someone decides to bite the bullet, and put them back on a sound commercial footing.
During the pandemic there were endless calls for Britain and others to match the “ambition” of France and Germany and offer state support to their airlines. One point is now clear, however. The UK and Spain had a very lucky escape – because privately owned airlines will always perform better in the medium term.
