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The impact of the coronavirus pandemic on the aviation sector Contents

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4. Government support and intervention

The financial impact of the pandemic on the aviation industry

35.As noted in Chapter 2, the dramatic decline in air passenger numbers has had a severe impact on aviation industry revenue: in the UK alone it is facing a potential loss of over £20 billion in 2020.54 At the same time, airports and airlines remain subject to high fixed costs. Airlines UK told us that “whilst revenue has been all but eliminated, substantial costs remain”, including for the leasing, insurance, maintenance and purchase of aircraft.55 Airports also have high fixed costs, such as policing and security, the maintenance of airfields and terminals, and pre-existing contracts.56 Heathrow Airport told us it was losing £200 million per month.57 Some UK airports have closed temporarily, but others have remained open or partially open to maintain transport links for communities, repatriate citizens and enable vital services to continue.58

36.Airports and airlines are part of a much wider aviation sector. As already noted, the UK is the third largest aviation market in the world, behind China and the USA.59 Airbus and Rolls-Royce are examples of two large companies with UK-based operations that provide thousands of jobs and rely on civil aviation and fleet renewal. The Centre for Cities warned that towns and cities in which a large share of the population work in the aviation industry, such as Crawley and Luton, are particularly vulnerable to the economic consequences of the pandemic .60 Some local authorities also own a large percentage of the shares in regional airports, up to 50% in some cases.61’ There have been reports that the loss of this income stream is exacerbating financial difficulties for some public authorities.62

State support for the aviation industry

UK Government support

37.There has been widespread public debate about the provision of government support for aviation, both in the UK and elsewhere, in response to the coronavirus pandemic. The debate has centred around whether and how governments should assist their aviation industries, especially airlines, through the crisis and the conditions under which governments should do so. More than 100,000 people have signed a parliamentary e-petition calling on the Government to support the British aviation industry during the coronavirus pandemic.63

38.On 17 March, the Chancellor of the Exchequer said that he was considering a
“specific potential support package for airlines and airports”.64 To date, however, the UK Government has not provided an industry-wide package for the aviation sector,65 although it has waived air traffic control charges for 14 months and the Civil Aviation Authority (CAA) has introduced a payment plan facility to cover the payment of annual charges.66 The Government’s focus has instead been to offer “bespoke” support to individual companies, and only once other sources of financial support have been exhausted.67 The Government rejected a bid for support from Virgin Atlantic on this basis.68 The Minister for Aviation told the House on 3 June that “a bail-out by the taxpayer or any other Government support would need to comply with state aid rules and require us to meet our legal obligations, particularly on climate change.”69

39.Companies in the aviation sector have primarily accessed generic Government support schemes to deal with the pandemic, such as the Job Retention Scheme (CJRS), VAT deferrals, the Covid-19 Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme (CBILS).70 The Minister for Aviation told the House on 3 June that the [CJRS] has had a “massive impact in the aviation sector in keeping people employed”.71 Airlines UK told us “the vast majority of carriers” have benefitted from the CJRS and VAT deferrals.72 Some airlines have accessed financial support through the CCFF or the CBILS.73 Ryanair and easyJet each accessed £600 million from the CCFF and British Airways and Wizz Air each accessed £300 million. The Civil Aviation Authority is also working with airlines, airports and ground handlers to provide flexibility within the regulatory framework.74

40.Despite the support available, several UK-based airlines—including British Airways, Ryanair,75 easyJet and Virgin Atlantic—have announced actual or potential large-scale redundancies, changes to staff terms and conditions, and cancelled or delayed orders for new aircraft.76 We discuss redundancies in more detail in Chapter 5.

Support in other countries

41.Other countries have provided financial support to their domestic aviation industries in different ways. Many governments across Europe, the US and Australia have supported their aviation sectors with industry-wide measures77 in addition to bailouts or state subsidies for individual companies.78 US airlines, for example, can access $58 billion (£46 billion) in loans and payroll grants, while US airports can share $10 billion (£8 billion) of support.79 Australia, France and Norway have provided industry-wide measures including deferrals or refunds of aviation taxes and charges.80 John Holland-Kaye, Chief Executive of Heathrow Airport, told us:

It is an indication that the French, the Germans, the Americans and others see aviation as fundamental to the success of their economy. They were the first to step in and make sure that their aviation sectors would do well out of this.81

42.The European Commission has relaxed its rules on state aid in light of the pandemic, although state aid requests still require approval. As of late May, IATA reported that $30 billion (£23.7 billion) of state aid to the aviation sector had been promised by European countries, including state support for individual airlines in Germany, France, Holland, Sweden, Denmark, Norway, Spain and Italy.82 For example:

• Air France-KLM has received €10 billion (£8.9 billion) from the French and Dutch governments;83
• Vueling and Iberia, two Spanish airlines owned by IAG—the owners of British Airways—received €1 billion (£890 million) in state-backed loans from five Spanish banks;84 and
• The German Government has agreed to a €9 billion (£8 billion) financial support package for Lufthansa, in which the German Government will take a 20% equity stake in the airline.85

43.Some support packages in other countries have received criticism for imposing conditions on airlines or being anti-competitive.86 For example, industry leaders have criticised the German Government’s support for Lufthansa as anti-competitive.8788 Witnesses told us that state support by other countries could put the UK industry at a competitive disadvantage.89

Types and conditions of further support within the UK

44.We heard evidence from representatives across the aviation industry calling for the Government to provide additional support, including specific sector-wide measures. Some have called for certain conditions to be placed on government support, including relating to environmental objectives and regional connectivity. We cover each of these in turn below.

Specific industry-wide measures

45.To help airlines bring prices down and encourage people to go on holiday and take business trips, industry representatives have called for temporary suspensions of aviation-specific taxes and charges, including the suspension of Air Passenger Duty (APD) payments.90Airlines UK and BALPA called for APD payments to be suspended for six months.91 Airports also supported suspending APD particularly to help incentivise domestic flights.92

46.We also heard that business rates were a substantial cost for both large and small airports.93 The Airport Operators Association told us that business rates relief in England has been introduced for the tourism, retail and hospitality industries, but not for airports.94 The aviation sector has been able to apply to local authorities for support, but we heard that local authorities often lack the funding needed to refund airports.95In contrast, the Scottish Government and the Northern Ireland Executive have both provided temporary relief of business rates to the sector.96 Airports and airlines have called for UK-wide relief of business rates for 12 months, as is currently the case in Scotland.97

47.Given the gravity of the crisis in the aviation sector, we recommend that the UK Government implements support measures aimed specifically at the aviation sector in order to stimulate demand and protect businesses. In particular, we recommend that the UK Government and the devolved administrations (where they have not already done so) introduce a 12-month business rates relief for airlines and airports and a six-month temporary suspension of Air Passenger Duty payments.

Environmental conditions

48.There have been suggestions that national governments should desist from providing financial support to the aviation industry given its carbon footprint or impose environmental conditions in exchange for such support. Environmental conditions could include linking government support to taxes, climate change targets, or investments in greener fuels and aircraft. Greenpeace has said that state financial support for airlines must be subject to environmental conditions.98 John Holland-Kaye of Heathrow Airport also supported the inclusion of environmental objectives as a condition for financial support.99 Others, such as Airlines UK and the Airport Operators Association (AOA), opposed the suggestion.100 The AOA argued that the UK aviation industry has already committed to meet the Government’s net-zero carbon emissions target by 2050 and has plans in place to achieve it.101

49.Governments in other countries have adopted different approaches. In France, for example, the government has imposed environmental conditions on Air France-KLM, including a requirement that the airline can no longer offer domestic routes where there is a viable rail alternative.102 However, the German Government has not placed environmental conditions on Lufthansa as part of its bailout package.103

Regional connectivity

50.Regional airports are crucial to local economies. These airports connect parts of the UK together but also provide international connections between UK regions and the rest of world, which are critical for enabling the growth of regional economies. Domestic flights are vital to some parts of the UK providing connections across water channels and to hub airports.

51.Flybe’s collapse on 6 March has had significant implications for regional connectivity in some parts of the country. At the time of its collapse the airline operated around 40% of all UK domestic flights and operated over half the departure flights from Southampton, Exeter, Belfast George Best, Durham, Jersey and Cardiff airports.104 Flybe’s network included flights within the UK as well as from the UK to Ireland, the Channel Islands and Europe. It was the only provider on the majority of its network and thus the only viable option for people in some remote parts of the UK. The airline suffered losses, despite little competition from other airlines.105

52.Some of Flybe’s domestic flights were in competition with surface transport alternatives, namely road and rail. The Centre for Aviation—a market intelligence company—has predicted that such competition will only increase, with High Speed Two and other rail improvements.106 The French Government has used its financial support to Air France-KLM to encourage a modal shift from domestic flights to rail (by preventing the airline from competing where there is a viable rail alternative).107

53.Many witnesses lamented the loss of Flybe and argued that the Government should step in should other companies face a similar predicament.108 Others, however, made a clear distinction between government support for viable businesses and support for ones that were failing before the pandemic. Willie Walsh, Chief Executive of IAG, disapproved of government support to failed or failing companies but not when companies were suffering through no fault of their own due to the pandemic.109

54.In January 2020 the Government announced plans to conduct a review of regional connectivity, “to ensure all nations and regions of the UK have the domestic transport connections local communities rely on—including regional services from local airports”.110 We understand that the review has been delayed due to the coronavirus pandemic. The airports we heard from stressed the importance of the review and urged that the work be completed and published as soon as possible.111 They told us that the Government should incentivise airlines, who will have limited liquidity after the crisis, to invest in regional routes. Regional routes often have tight margins and airlines may otherwise be reluctant to adopt them.112

55.Regional airports are vital to connect distant parts of the United Kingdom where no effective rail routes exist: Northern Ireland to Great Britain, and the UK’s nations and regions directly to other countries. The collapse of Flybe in March has unfortunately severely contracted regional air options across the UK. The sector-specific support we have recommended in respect of taxes on the aviation industry could help insulate regional airports from cost pressures.

56.We recommend the Department for Transport resume as a matter of urgency its review of regional connectivity with a view to publication by the end of 2020.

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