In the words of Virgin Air founder Richard Branson, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”.Now it seems, after months of being non-committal on the issue of airline bailouts, Prime Minister Justin Trudeau is about to charge up the Canadian Taxpayer Mastercard again – not a paltry Branson $1 billion though, but a whopping Liberal $7 billion, if carriers and unions have anything to say about it..Branson was warning that airlines are expensive and often lose money – and Branson should know. Virgin Atlantic applied for bankruptcy protection in New York on August 4th. They are attempting to negotiate a $1.6 billion rescue plan. Virgin Australia also filed for bankruptcy earlier in the year. .These are not the best of times. COVID-19 grounded most commercial flights globally in March, resulting in plummeting airline stock prices. Airlines have been losing millions of dollars every week, and billionaire “canary-in-the-mine” investor guru Warren Buffett has sold out his entire $4 billion airline portfolio. Buffett said, “Investors have poured their money into airlines … for 100 years with terrible results. … It’s been a death trap for investors.”.Airline failures however, predate COVID-19. Airline bankruptcies since 1980 include TWA, US Airways, United, Air Canada (in 2003), Delta, American and many others..The airline business model is problematic in a number of respects. First and foremost, it lacks scalability. This means that cost growth increases linearly with revenue growth, thereby making it very expensive for an airline to grow. A new A380 will set you back approximately $437 million USD. It costs about $83,000 for a fill-up at the pump, and a new set of 22 tires is a jaw-dropping $121,000. .As Buffett explained to Berkshire shareholders in 2007, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” .But, as history records, Orville made a safe landing that day in 1903..Another problem with airlines is a sensitive dependence upon price competition. The reality is that if one airline decides to cut fares, for whatever reason(s), competitors have little choice but to follow. This can have disastrous impact financially..Air Canada is Canada’s largest carrier. Privatized in 1989, its’ history includes layoffs, restructuring, mergers, previous bankruptcy and government bailouts. In May, Air Canada threatened to lay off 50-60 per cent of it’s 38,000 employees, saying that it is losing $20 million per day as a result of COVID-19. It is projecting a 75 per cent reduction in flight capacity during Q4 compared to 2019, and reported Q3 revenue of C$757 million, down 86 per cent from a year earlier, with an operating loss of $785 million CAD..It has since been taking advantage of the Canadian Emergency Wage Subsidy (CEWS) program..Now, as a result of COVID-19, Air Canada wants another bailout from the taxpayer..Transportation Minister Marc Garneau said, “To protect Canadians, the Government of Canada is developing a package of assistance to Canadian airlines, airports and the aerospace sector. As part of this package, we are ready to establish a process with major airlines regarding financial assistance which could include loans and potentially other support to secure important results for Canadians.”.But who exactly are taxpayers going to be bailing out?.The top 10 Air Canada shareholders are all investment management funds. Letko, Brosseau & Associates Inc., Fidelity (Canada) Asset Management ULC, Fidelity Management & Research Co. LLC, EdgePoint Investment Group Inc., US Global Investors Inc., RBC Global Asset Management Inc., Causeway Capital Management LLC, Mackenzie Financial Corp., APG Asset Management NV, and CI Investments, Inc.. .The irony of Canadian taxpayers ponying up $7 billion to bailout wealthy global investment funds would be amusing if it weren’t true. .Perhaps Trudeau will broker a loan from Air Canada’s shareholders. They can afford it..The likelihood of you getting an operating line of credit from your local bank because you had lost 90 per cent of your income and were billions in the red? Zero to none..According to Intergovernmental Affairs Minister Dominic Leblanc the government is “very much discussing” the possibility of nationalizing the airlines, as Germany has done..If the argument for deregulation and privatization is increased efficiency and cost benefit, then it follows that private sector enterprise must be prepared to bear the cost of failure. Trudeau is burdening Canadians with crippling debt as a result of COVID-19. The wealthy investment funds that own Air Canada should be prepared to do the same..Ken Grafton is freelance columnist for the Western Standard from Aylmer, Quebec
In the words of Virgin Air founder Richard Branson, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”.Now it seems, after months of being non-committal on the issue of airline bailouts, Prime Minister Justin Trudeau is about to charge up the Canadian Taxpayer Mastercard again – not a paltry Branson $1 billion though, but a whopping Liberal $7 billion, if carriers and unions have anything to say about it..Branson was warning that airlines are expensive and often lose money – and Branson should know. Virgin Atlantic applied for bankruptcy protection in New York on August 4th. They are attempting to negotiate a $1.6 billion rescue plan. Virgin Australia also filed for bankruptcy earlier in the year. .These are not the best of times. COVID-19 grounded most commercial flights globally in March, resulting in plummeting airline stock prices. Airlines have been losing millions of dollars every week, and billionaire “canary-in-the-mine” investor guru Warren Buffett has sold out his entire $4 billion airline portfolio. Buffett said, “Investors have poured their money into airlines … for 100 years with terrible results. … It’s been a death trap for investors.”.Airline failures however, predate COVID-19. Airline bankruptcies since 1980 include TWA, US Airways, United, Air Canada (in 2003), Delta, American and many others..The airline business model is problematic in a number of respects. First and foremost, it lacks scalability. This means that cost growth increases linearly with revenue growth, thereby making it very expensive for an airline to grow. A new A380 will set you back approximately $437 million USD. It costs about $83,000 for a fill-up at the pump, and a new set of 22 tires is a jaw-dropping $121,000. .As Buffett explained to Berkshire shareholders in 2007, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” .But, as history records, Orville made a safe landing that day in 1903..Another problem with airlines is a sensitive dependence upon price competition. The reality is that if one airline decides to cut fares, for whatever reason(s), competitors have little choice but to follow. This can have disastrous impact financially..Air Canada is Canada’s largest carrier. Privatized in 1989, its’ history includes layoffs, restructuring, mergers, previous bankruptcy and government bailouts. In May, Air Canada threatened to lay off 50-60 per cent of it’s 38,000 employees, saying that it is losing $20 million per day as a result of COVID-19. It is projecting a 75 per cent reduction in flight capacity during Q4 compared to 2019, and reported Q3 revenue of C$757 million, down 86 per cent from a year earlier, with an operating loss of $785 million CAD..It has since been taking advantage of the Canadian Emergency Wage Subsidy (CEWS) program..Now, as a result of COVID-19, Air Canada wants another bailout from the taxpayer..Transportation Minister Marc Garneau said, “To protect Canadians, the Government of Canada is developing a package of assistance to Canadian airlines, airports and the aerospace sector. As part of this package, we are ready to establish a process with major airlines regarding financial assistance which could include loans and potentially other support to secure important results for Canadians.”.But who exactly are taxpayers going to be bailing out?.The top 10 Air Canada shareholders are all investment management funds. Letko, Brosseau & Associates Inc., Fidelity (Canada) Asset Management ULC, Fidelity Management & Research Co. LLC, EdgePoint Investment Group Inc., US Global Investors Inc., RBC Global Asset Management Inc., Causeway Capital Management LLC, Mackenzie Financial Corp., APG Asset Management NV, and CI Investments, Inc.. .The irony of Canadian taxpayers ponying up $7 billion to bailout wealthy global investment funds would be amusing if it weren’t true. .Perhaps Trudeau will broker a loan from Air Canada’s shareholders. They can afford it..The likelihood of you getting an operating line of credit from your local bank because you had lost 90 per cent of your income and were billions in the red? Zero to none..According to Intergovernmental Affairs Minister Dominic Leblanc the government is “very much discussing” the possibility of nationalizing the airlines, as Germany has done..If the argument for deregulation and privatization is increased efficiency and cost benefit, then it follows that private sector enterprise must be prepared to bear the cost of failure. Trudeau is burdening Canadians with crippling debt as a result of COVID-19. The wealthy investment funds that own Air Canada should be prepared to do the same..Ken Grafton is freelance columnist for the Western Standard from Aylmer, Quebec
