Canada Unusual in Delay in Offering Bailout for Airlines

Conditional low-interest loans and easing of regulations favoured over ownership stakes
November 11, 2020 Updated: November 11, 2020

News Analysis

Canada stands out for not yet having offered any substantial industry-specific financial support to its airlines some eight months into the pandemic.

The United States, Australia, and some larger European countries extended significant financial support to their struggling carriers months ago.

The reasons for the delay in helping the industry are unclear, since even with a record budget deficit, Canada’s fiscal watchdog, the Parliamentary Budget Officer, said Ottawa still has enough spending room left before finances become unsustainable.

“The argument I have made is that before anybody else got bailed [out], they [the airlines] should have been at the beginning of the list, the top of the list,” Carleton University business professor Ian Lee told The Epoch Times.

The nature of an essential service like the airlines, Lee said, is that just because demand for it is down, the government shouldn’t neglect it. 

He added that in a country as geographically large and spread out as Canada, airlines are vital—their importance to the functioning of the nation’s economy makes them a special case compared with other industries such as the energy or automotive sector.

Transport Minister Marc Garneau said in a Nov. 9 statement that the government is ready to embark on discussions with the major airlines. The backing “could include loans and potentially other support,” he said, but it would come with the caveats that the airlines refund customers for cancelled flights and air service to regional communities are retained.

“Before we spend one penny of taxpayer money on airlines, we will ensure Canadians get their refunds … Any assistance the Government of Canada provides will come with strict conditions to protect Canadians and the public interest,” he said.

European and U.S. authorities have also required traveller reimbursement in addition to a mix of other conditions such as limiting how much an airline company can pay out in dividends and executive bonuses and requiring pay cuts for pilots and reductions in carbon emissions.

Troubles With Ownership Stakes

Lee said the feds can support the airlines meaningfully without taking ownership stakes, as Germany did as part of its bailout of Lufthansa AG. Intergovernmental Affairs Minister Dominic LeBlanc told CTV on Oct. 20 that this idea was being discussed, but it’s unclear if it’s still on the table.

In Lee’s view, less regulation and low-interest loans with appropriate caveats are the way to go.

“There’s many ways to ensure that the money is spent in the way that they [the feds] want.”

Lee said the feds should examine the problem through the lens of public good—to ensure any aid is in the greater national good rather than for the benefit of some narrow interest group that tends to be the most vocal.

Ownership stakes are fraught with conflicts of interest, he said, and a government can avoid having to deal with all the challenges a company faces by simply avoiding owning the company.

“It’s sort of the equivalent of nepotism,” Lee said.

“Using loan agreements and loan covenants and loan promises … you can, I think, much more surgically control the airline without becoming involved in internal disputes between one group and the company and another group.”

In terms of less regulation, Lee suggested tax, fee, and rent holidays for the already heavily regulated industry.

Targeted Support

The feds instituted the LEEFF (Large Employer Emergency Financing Facility) to tide over large companies with loans of a minimum size of $60 million. However, due to the high interest rates on the loans—starting at 5 percent and increasing to 8 percent after the first year and then by 2 percent each year thereafter—and other restrictions, the facility has not come close to meeting the demands of the airlines. The government can currently borrow money for 10 years for about 0.75 percent interest annually.

The Air Transportation Association of Canada (ATAC) on Oct. 22 sent a letter to Garneau laying out its demands. They include $2 billion in interest-free loans for commercial operators offering regional air services, along with rebates on payroll taxes, suspension of the federal aviation fuel excise tax, and grants to cover airport charges and ground handling fees.

“This vital government financial aid package would also avoid greater economic damage by ensuring that operators can respond rapidly to scaled-up operations when travel restrictions are lifted and will effectively contribute to ‘jump-starting’ the Canadian economy,” wrote ATAC president & CEO John McKenna.

The heads of two pilots’ unions and Unifor have asked for a total of $7 billion in loans to the airline industry at an interest rate of 1 percent, according to BNN Bloomberg.

Garneau said Nov. 6 in response to a question from Conservative shadow minister for transport Stephanie Kusie that the airlines have used $1.3 billion in federal subsidies to pay wages. The feds have given about $192 million to northern and remote air carriers and waived ground lease rents until December for 21 airports.

Hard Hit

Air Canada just reported third-quarter numbers that showed the significant hit from carrying 88 percent fewer passengers compared to a year ago. Its excess of operating expenses over revenues or “net cash burn” for the quarter totalled $818 million—about $9 million per day.

WestJet cancelled most flights to Atlantic Canada, effective Nov. 2. 

Grounding of flights to smaller, distant communities could soon happen, according to the airline industry. Thousands of aviation workers have already been laid off or furloughed. 

The National Airlines Council of Canada said on Oct. 1 that flight capacity in the market has been cut by about 85 percent. Representing Canada’s largest passenger air carriers—Air Canada, WestJet, Jazz, and Air Transat—it called on the feds to immediately provide industry-specific support.

Airlines in Canada are not a luxury—they’re a necessity, Lee said. They’re like the postal service, which long ago represented the internet, the airlines, radio, television, and social media all in one package, he added.

“Governments realized—even back to the origins of governments emerging in the Middle Ages—that this [postal service] was really really critical to national security and national interest,” Lee said.

Follow Rahul on Twitter: @RV_ETBiz