Will the UK allow its aviation industry to take flight again?

So far the UK aviation industry has done a remarkable job of staying aloft despite facing travel restrictions which Prime Minister Boris Johnson likes to boast are amongst the most restrictive in the world. That is testament to the very strong financial position its airlines were in before the crisis.

UK travel industry workers are staging a protest today at Westminster, calling on the government to reopen international travel and “save the summer”. With only four weeks to go until schools break for the summer, time is running out. If their pleas fall on deaf ears, the government will be under pressure to provide proper levels of financial support for the industry. That is something it hasn’t done to date, despite claims to the contrary.

More countries to be added to the green list?

Changes to country classifications under the traffic light system are due to be announced tomorrow (24th June). There’s a possibility that Turkey might get moved from red to amber, since cases have come well down. I suspect Malaysia might get added to the red list, as it was one of the few amber list countries where the recent arrival testing figures showed high levels of positive tests (8.3%) and it has a high reported case rate. It is already on Germany’s list of countries flagged as a “High Incidence Area”.

Maybe we will get some additions to the green list, with plenty of amber list countries having low case rates, comparable to where the UK was before the Delta variant triggered the recent rise in cases. I’ve shown a few of them in the chart below. But there were several countries that ought to have been added at the last review based on their case rates, and none were. So whether the traffic lights will remain stuck on amber/red at the next review is anyone’s guess at this point.

Possible relaxation of quarantine restrictions

There are some promising signs that the government is considering allowing fully vaccinated people to avoid quarantine requirements when returning from amber list countries. With 60% of the UK’s adult population fully vaccinated, and government ministers hinting that children might get exempted, that could go a long way to getting travel moving again.

However, the government doesn’t seem to share the sense of urgency that the travel industry knows will be required if 2021 is not going to turn into an even worse disaster than 2020 was. Commenting on the proposals, Health Secretary Matt Hancock said:

"It is absolutely something we're working on, it's something I want to see. We're working on plans to allow the vaccine to bring back some of the freedoms that have had to be restricted to keep people safe. We'll get there when it's safe to do so. We want to do this right, we want to do this carefully and properly… When I'm in a position to be able to say something more concrete then we will do."

The government has repeatedly emphasised that the relaxation of domestic restrictions is a higher priority than reopening international travel. The travel industry would argue that the two objectives are not in conflict, with plenty of evidence that allowing fully vaccinated travellers from amber list countries to skip the requirement to quarantine would be very low risk. I wrote about that recently.

It seems that the earliest a change could come would be to coincide with the full “domestic unlock”, scheduled for 19th July. If they got on with announcing the change to allow travellers and airlines time to plan, it would coincide nicely with the start of the school holidays. To be perfectly honest, I believe that the short-term risk to UK case numbers from millions of UK holiday-makers cramming onto crowded UK beaches might be a lot higher than if they are allowed to jet off overseas.

However, there is a risk that implementation might even be further delayed. In the past, the government has wanted five-week gaps between successive relaxations, to give them time to properly judge what the effect of the previous relaxation has been. That might mean that changes won’t take effect until 23rd August, leaving just one week of school holidays before term begins again at the start of September. It would allow the government to claim that they are doing something, without really doing so. It would also mean another “lost summer” for the travel industry.

Will Brits be welcomed in other countries anyway?

“Saving the summer” may not even be in the gift of the UK government now. The rise of the Delta variant has caused other countries to start to impose restrictions on travellers from the UK. Angela Merkel is urging other European countries to force British travellers to quarantine, as Germany has already done.

There are signs that the recent rise in cases in the UK has begun to level off, and every day sees more people fully vaccinated. However, the “Euros” are apparently already triggering a noticeably higher incidence of cases amongst men compared to women. If England make it all the way to the final, just think how many super-spreader events will be taking place across the country over the next two and a half weeks. Fortunately for the country’s case rate, England will probably be facing Germany, France or Portugal in their next game. So that scenario seems a bit unlikely.

The summer is not yet definitely lost, as long as the government moves quickly and case numbers start to move in the right direction. But there seems quite a risk of it being at least “mislaid”. UK airlines have managed to survive so far, but they have burnt through their cash reserves and taken on a mountain of debt to do so. They won’t be able to repeat the trick again and so the question of government support may be back on the table again shortly.

Hasn’t the UK government already done a lot?

When challenged about the lack of any sector specific support for the travel industry, Grant Shapps likes to respond with a statistic that the government has already provided “over £7 billion” of support to aviation. This figure emerged for the first time back on February 3rd at a Transport Committee meeting. You can find the transcript of the session here.

Grant Shapps said that the precise figure of how much government support had been given to UK aviation was £7.2 billion. He said that he “had just had a tot-up before coming to the Committee”, which doesn’t inspire much confidence that it is based on solid analysis. Anyway, he then went on to explain “how I get to it” as follows:

“We have provided, as the Committee knows, furlough to 55,000 aviation staff… Furlough is thought to be worth between £1 billion and £2 billion for those 55,000 staff during the period… Then there is money for the CCFF scheme of around £3 billion. There is money from UK Export Finance. Again, to be clear, that goes to the airlines that are in trouble, as you rightly point out, and that money has added up to £3.4 billion from UK Export Finance. The total is up to £7.2 billion.”

Let me firstly point out that £1-2 billion, plus £3 billion, plus £3.4 billion adds up to £7.4-8.4 billion, not “up to £7.2 billion”. I guess we shouldn't be that surprised that Grant Shapps’ sums don’t add up, based on experience to date.

But leaving that aside, let’s take a look at each of these components of government support, starting with the one where the figures are the most straightforward to track down.

UK Export Finance (UKEF) guarantees

The £3.4 billion of UKEF guarantees were provided to British Airways (£2 billion) and easyJet (£1.4 billion) to support future capital expenditure and general working capital requirements. Although this is the first time UK airlines have been beneficiaries, the UKEF has long provided guarantees to support the financing of aircraft investments by foreign airlines, at least when they use Rolls Royce engines or buy Airbus aircraft with components manufactured in the UK. Foreign airlines such as Turkish, Ethiopian, Emirates and Finnair have all been supported in the past. They’ve even guaranteed financings for Typhoon and Hawk military aircraft sold to the Qatari government by British Aerospace. Quite why the government of Qatar, one of the richest countries on the planet, needed financial support from the UK government is a bit puzzling, but there you go.

The easyJet deal was actually for $1.87 billion. At the exchange rates of January, when the deal was struck, that was worth £1.36 billion, so rounded up that agrees with the £1.4 billion figure. The financing facilities are provided by commercial banks on commercial terms and the UKEF’s role is to provide a guarantee for 80% of the principal. So I think the value of the guaranteed amount for the two companies was £2.7 billion. That’s already a lot less than £3.4 billion.

Is this £2.7 billion of government “assistance”? If you think so, I have a deal for you. You give me £100,000 of cash and in return I’ll agree to provide a guarantee to your mortgage provider. If you fail to make your mortgage payments on time, I’ll cover 80% of the shortfalls up to a maximum of £100,000. Oh yes, and you’ll also lose your house if you fail to pay on time.

So a government guarantee is not worth the amount guaranteed, but it is obviously worth something. The value depends on the creditworthiness of the company and both British Airways and easyJet are pretty good credits. Not as solid as pre-COVID, obviously, but pretty good. And the UKEF charges a premium for the “insurance policy” it is providing to lenders. It sets that premium at a rate that will allow it to breakeven “on average”, as it sets out in its annual report:

“To ensure we fulfil our mission to operate at no net cost to the taxpayer over time, we price risk to break even over business cycles – not on an annual basis. That means the premium we collect in good times when claims are low helps to cover the cost of claims over the long-term financial cycle.”

Such export credit schemes, as long as a “market rate” premium is charged, are not even considered as “State Aid” by the European Commission. As far as the EU State Aid police are concerned, the value of such “aid” is nil.

British Airways and easyJet are both undoubtedly pleased that the government has acknowledged they are as worthy of UK government credit support as Emirates and the state of Qatar. I’m sure that the UKEF’s support was helpful in securing funding from commercial lenders at a difficult time. But £3.4 billion of government support this is not.

COVID Corporate Credit Facilities (CCFF)

The next item of government support on the list is the “around £3 billion” of CCFF scheme financing. This is essentially cheap financing, provided by the government to companies who had decent credit ratings, pre-crisis. It is not sector specific. For example, one of the biggest beneficiaries was Germany’s BASF who got £1 billion. The maximum amount available depended on the credit rating, so Ryanair and easyJet got £600m each and British Airways, Wizz and Jet2 got £300m each. Virgin didn’t have a good enough credit rating to qualify. They were “too poor” to deserve help.

I’ll leave aside the question as to what constitutes a “UK airline”. All these carriers have aircraft registered in the UK and significant operations here, which I think is what it took to qualify. But the amounts made available to support UK airlines through the CCFF add up to only £2.1 billion, which even using “Shapps maths” is not “around £3 billion”. The only way I can get to anything like that amount is to include the £300m that was approved for Gatwick Airport, £600m for Airbus and £300m for Rolls Royce. If you include those, you’d get to £3.3 billion.

These facilities are strictly time limited. They were meant to provide short-term liquidity to fundamentally credit-worthy companies, during a period where the crisis was causing market dislocations. They all required repayment within a year, although I think there was some facility to extend for a short period.

In any event, the day that Grant Shapps gave the £3 billion figure to MPs, the total amount drawn by UK airlines under the facility was £1.8 billion, less than the £2.1 billion figure we calculated earlier since Jet2 had not yet drawn anything under the facility. If you include Airbus, Rolls Royce and Gatwick Airport, the figure was £2.95 billion. That’s “around £3 billion”, even using “Boyle maths”, so I assume that is how this figure was calculated.

Since then, British Airways has repaid its £300m, easyJet has repaid half of its £600m and both Airbus and Rolls Royce have repaid in full. Jet2 has drawn £200m and Gatwick airport has drawn another £25m. So the equivalent figure today is £1.7 billion.

easyJet will repay the second half of its £600m before September 2021. Wizz will repay its £300m in February 2022 and Ryanair in March 2022. I’m not quite sure how these last two carriers, who claim to be in the best positioned financially of all the airlines, have managed to negotiate the longest repayment terms. But in any event, the amount of financing extended to UK airlines by the government will have fallen to zero by March 2022.

Once again, I hope you can see that the headline of “around £3 billion” of government support is both out of date now and highly misleading at the time.

Furlough support

The final category is the one that everyone agrees was real money and was really helpful. British Airways went so far as to thank the Chancellor in its 2020 accounts:

“The Government’s Coronavirus Job Retention Scheme has helped the airline retain many jobs through the crisis. We received £258 million from the scheme in 2020 for which we are very grateful.”

Virgin Atlantic also declared how much they had received under the scheme in their 2020 Annual Report. As with BA, this covered the first nine months of the crisis:

"During the year, the Group made use of the Coronavirus Job Retention Scheme implemented by the UK government, where those employees designated as being "furloughed workers" are eligible to have 80% of their salary costs paid up to a maximum of £2,500 per month. The total amount of such relief received by the Group amounted to £69.8m"

In Its results for the half year ending March 2021, easyJet also disclosed as follows:

"During the period, easyJet Airline Company Limited utilised the Coronavirus Job Retention Scheme implemented by the United Kingdom government, where those employees designated as being 'furloughed workers' are eligible to have 80 per cent of their wage costs paid up to a maximum amount of £2,500 per month. in the same period, easyJet Group (companies) utilised similar schemes provided by governments in Portugal, Germany, Netherlands, France, Italy and Switzerland. The total amount of such relief received by the Group amounted to £73 million."

The equivalent figure disclosed by easyJet for the second half of the of previous year (April to September 2020) was £116 million, taking the total since the beginning of the crisis to £189m. But remember that this included amounts received from six other governments, many of which had more generous schemes than the UK. In the same twelve month period, Ryanair received €84m, again from multiple governments.

But hang on a minute. Furlough support for “aviation staff” is “thought to be worth between £1 billion and £2 billion”, according to the Secretary of State for Transport. Assuming BA and Virgin continued to receive money at the same rate as they did in the April -December 2020 period during January - March 2021, and half of the total money received by easyJet and Ryanair came from the UK, these four companies received about £0.5 billion in the twelve months to March 2021. They are by far the biggest employers in UK aviation.

So where is the rest of the £1-2 billion? We are missing at least £0.5 billion and up to £1.5 billion.

Maybe it went to the airports? Heathrow got £36m for nine months, so about £48m for the full 12 month period. In 2019, that airport represented about 31% of total UK passenger numbers. They did operate a bit more than some other airports, but they certainly employ more people per passenger than the others. So maybe there was £150m or so of furlough support payments for all the UK airport employees combined.

Perhaps Grant Shapps is including Rolls Royce and Airbus again? We know Rolls got £47m in the nine months to December, so maybe £62m in the 12 months to March 2021.

Yes, there are many other aviation related businesses in the UK, ranging from handling and catering companies to travel agencies and IT suppliers. But even using a very broad definition of “aviation”, I think I would struggle to get to £1 billion. Sticking purely to UK registered airlines, the real figure looks like only about half of the lower end of the range cited by Grand Shapps. £2 billion is pure fantasy.

Has the government done enough already?

I think that in total, the UK government has provided to its airlines about £0.5 billion of furlough support, plus some short-term loans which are about to be or have already been repaid, plus some loan guarantees that are very unlikely to be called and for which the UKEF is being paid a market-based risk premium and expects to at least break-even.

That is for what they acknowledge to be one of the hardest hit parts of the economy and one which the government seems determined to ensure will be the last sector to see restrictions relaxed.

By comparison, the Dutch government provided payroll support just to KLM of €290m in a single quarter of 2020. The US government has just signed off another $14 billion of payroll support for its airlines, to add to the $40 billion it has already provided. And remember that these are non-refundable grants, not loans. This is despite the fact that domestic travel in the US is already back to close to pre-pandemic levels.

Even when it comes to something like testing, the UK has been remarkably unhelpful. In most other countries, travel related COVID tests are provided free of charge by the government. That’s true of almost all of the 6.5 million tests carried out in the UK each week. But the 24,000 people arriving each week into the UK need to pay for their own tests. Helping to make travel safe is not something that the government thinks worth funding.

Where do we go from here?

If the government genuinely wants to save aviation related jobs, it needs to gets going with urgency on restarting travel and to stop trying to put people off with statements like this from Boris Johnson:

"I want to stress that this is going to be - whatever happens - a difficult year for travel. There will be hassle, there will be delays, I am afraid, because the priority has got to be to keep the country safe and stop the virus coming back in."

Of course, prioritising domestic reopening and taking a “zero risk” approach to overseas travel is a perfectly valid political choice to make. It is probably supported by many if not most in the country. But in making the decision to throw the travel industry under one of Boris’ famous “red buses”, the government also needs to start facing up to consequences of that decision in terms of lost jobs and company failures. The financial resiliency of the industry so far has made politicians very complacent. Even more worryingly, they may actually believe their own sound-bites about having provided over £7 billion of support.

So far, UK politicians haven’t been that open to listening to reasoned arguments from the aviation industry. Perhaps they will listen to the angry shouts of aviation workers who are about to lose their jobs.

Let’s hope they don’t wait until those jobs have already gone.