Originally Posted by
covec
I’m surprised that airlines (or any business) do not have “rainy day” contingency funds.
There is a limit to what a government (& ultimately the Tax Payer) can afford.
Here in the UK there is the laudable salary protection costs due CV-19, then the Boris Johnson spending pledges e.g. HS2. Then there’s Trident. And then there will likely be a whopping Benefits bill if more & more self-employed or small businesses go bust. E.g. BrightHouse.
The Tax Payer cannot bail everyone out - the UK is now AA- vice AAA due to these spending issues.
I see Easyjet is getting a kicking by commentators on the online BBC News: not much sympathy there and that may well influence politicians...
In other industries, a skilled workforce and unused assets can be used by new entrants to the market and economic activity can continue. Sometimes there are the wrong assets and the workforce has the wrong skills and you have long term depression, for example the South Wales Valleys.
In the airline industry you have mobile assets and a mobile workforce so you are not constrained geographically. However, there are high costs of entry to the industry and we do not have the new entrants to the business that we used to have. If you have the funds to pass financial fitness with the regulator, you then have to persuade a card processor that you have enough money to operate. The card processor will want to know that in 9 months time you can supply the flight or refund the money. Airlines carry large cash balances but this represents money paid in advance for flights that doesn’t really belong to the airline until the flight takes place. This leads to the tension between card processors and airlines when they get into financial difficulty because the airline wants this money to continue operations and the card processors want the money available to repay passengers if the airline fails.
When an airline is operating it is monitored on a going concern basis. You can assume that historic cash flow from routes will continue. You have large costs and large revenues and so long as there is at least a small positive margin, operations continue and shareholders get a return on their investment. However an interruption to operations causes a huge problem. Revenues cease, you have to repay money in the bank to passengers, fixed costs continue even if you are not flying. The suggestion that airlines should have enough capital in case of a six month shut down is not realistic. Those funds would not provide a return on investment so investors would not fund it, there would be more profitable opportunities elsewhere.
In theory the Government can keep funding as long as someone will lend them money. The problem is that we are already running high levels of debt from the financial crisis. At the moment interest levels are low but if buyers of governement debt lose confidence in the government’s ability to repay then interest rates could rise, the pound could fall as investors sell their off government debt and inflation could rise. At the moment the government is spending this money to try to preserve economic activity for when the crisis is over to preserve future governement income. At the moment we are looking at a very sharp, hopefully short recession. However, the government is walking a tightrope, if we have large numbers of company failures, large numbers of unemployed, falling government revenues and increased government spending then the medical crisis is going to be swiftly followed by a financial one.