COVID-19: Why we cannot justify bailing out airlines

The UK government is facing increasing pressure to spend billions of pounds to unconditionally bail out the aviation industry during the COVID-19 crisis. IF researcher Melissa Bui explains how refraining from offering such carbon-intensive industries a lifeline helps tackle both COVID-19 and climate change

The closure of borders across the globe has placed a huge economic toll on the aviation industry. The International Air Transport Association (IATA), a trade association representing 290 airlines worldwide, has been running a global campaign to urge governments to support the industry through bailouts and reductions in charges and taxes for a period of 6 to 12 months, which could cost a total of $1 trillion in public funds. IATA warns that without this financial support, the UK would witness widespread filings for bankruptcy in the aviation sector as well as thousands of job losses.

However, the government’s resources are already being drastically stretched. Critics have emphasised that now is the time to stop injecting money (at least unconditionally) into forms of travel that cost the taxpayer billions of pounds a year, is detrimental to the environment, and demand for which may diminish if working-from-home practices become commonplace.

Is the aviation industry in deep water?

Earlier last month the trade association estimated that the aviation industry in the UK would lose approximately £17.5 billion ($21.7 billion) in revenue if government aid was not forthcoming.

Travel agencies and tour operators are also struggling to refund customers for their cancelled holiday packages because airlines are failing to release the cash for these payments. According to ABTA, the leading trade association representing these agencies and operators, the closure of these travel businesses would lead to a £4.5 billion bill to be covered by the government (and inevitably the taxpayer) to cover the cost of these refunds.

Nevertheless, this does not take into account how the government already spends billions of pounds a year supporting the aviation sector through exempting aviation fuel from VAT and duty. In 2012, the Intergenerational Foundation estimated that this costs the government a total of £10.4 billion per year, which, if added onto other payment transfers such as VAT reclaims and duty-free retail, equates to an effective subsidy of £11.4 billion per year from the UK taxpayer to the aviation industry.

Our report also found that these subsidies enabled tickets to be sold at a much cheaper price; the average ticket was estimated to cost £100 less than it would have otherwise in 2012. The consequence of this has been an artificial surge in demand for flights, and a huge increase in the carbon footprint of British people. In 2018, Britons travelled abroad more often than any other nationality.

Another question that has been raised is whether these airlines truly are in desperate need of taxpayer money. While businesses in industries elsewhere have been forced to make adjustments to keep themselves afloat, airlines in the UK have been accused of trying to avoid making the necessary compromises. On 6 April, easyJet received a £600 million loan from the government, which has subsequently been used to help fulfil its order for 107 new planes from Airbus – a move that has been called “a misuse of taxpayers’ money” by easyJet founder and major shareholder Stelios Haji-Ioannou. According to Mr. Haji-Ioannou, easyJet would not have needed to borrow money from the government if their £4.5 billion order from Airbus had been cancelled.

Two birds, one stone

Pressure is also mounting on the government from external actors not to cave in to these demands. In an open letter to the government, more than 250 environment groups and trade unions have expressed their opposition to the government bailing out the aviation industry. The letter emphasises that any bailout should have two objectives: to protect job losses and to reduce the airlines’ carbon emissions.

It should not be forgotten that, after the worst of the COVID-19 crisis has passed, the government’s next challenge will be to form a robust plan of how they intend to meet their 2050 net zero carbon target, which will be scrutinised by world leaders at the COP 26 conference, now postponed to 2021. Airlines are already being bailed out unconditionally in other countries. As such, if the UK government forces airlines to commit to reducing their emissions or uses this money to fund low-carbon alternatives instead, they would be providing a world-leading example of how to turn the COVID-19 crisis into an opportunity to tackle an even bigger one.

Beyond the aviation sector

The current crisis has also provided a window of opportunity for change in areas other than the aviation industry. Many are realising that – in contrast to what was previously thought – it is possible to conduct business from home, calling into question whether demand for publicly-funded transport links across the country will return to normal after the lockdown measures are drawn back.

Although it is not yet clear how many businesses will allow employees to work from home post-COVID-19, there are signs that more employees and organisations are seeing the benefits of WFH. Professor Greg Marsden, who is a Professor in Transport governance at Leeds University, told BBC News that, contrary to previous government predictions, traffic is likely to fall after COVID-19: “The likely drop in traffic levels post the COVID-19 crisis means that we should delay the road expansion programme and focus instead on rebuilding public transport and switching more of our vehicles to zero emissions.”

In other words, if more people work from home and more meetings and conferences are hosted online, the government may need to reconsider investments in the expansion of current domestic transport links. For instance, the HS2 rail will link cost the government £5bn in property costs in 2019, far exceeding the estimated spend of £1.1bn. Given that billions of pounds have already been taken from the public purse to tackle COVID-19, this is the most opportune time to consider which types of investment will benefit the economy in the long term and in which areas it would make most sense to save money. Post-COVID-19, such uses of taxpayers’ money may no longer be justifiable.

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