Hardly a week goes by without a major funding commitment from Ottawa.
This week, we learned that Porter Airlines had been approved for a $125-million government loan, and Flair Airlines for a $76-million loan. This puts Porter and Flair in the same camp as Air Transat, which received a $150-million loan approval in July.
With multi-billion dollar government pledges now commonplace, these loans may feel like small potatoes.
But they are a form of corporate charity, and an unjustified one at that.
The government first rolled out its airline loan program, known as the Liquidity for Airline Sector Resilience (LASR) Facility, in June, when the Iran war was entering its four month.
The program exists to “help eligible Canadian passenger airlines address temporary liquidity pressures caused by elevated operating costs, particularly aviation fuel price volatility,” a government explainer says.
At first blush, this program may seem reasonable. Jet fuel prices — a key airline input cost — have roughly doubled since the Iran war began.
And some airlines are clearly feeling the pinch. Air Transat reported a $106-million loss in its third quarter.
The government’s aim, it seems, is to prevent Canadian airlines from going under. (Last year, Ottawa also wrote off hundreds of millions of dollars in pandemic-era loans to Air Transat, while taking an equity stake in the airline.)
But Ottawa has not explained why preventing the bankruptcy of commercial airlines is its concern.
Older readers may recall that, two decades ago, airline bankruptcies were a relatively routine affair. Canadian Airlines, Canada’s second-largest carrier, effectively collapsed in 1999. Canada 3000, Canada’s largest leisure carrier, went bankrupt in 2001. Air Canada filed for bankruptcy protection in 2003.
These events didn’t bring air traffic to a halt. Canadian Airlines was absorbed into Air Canada. And Air Canada continued flying throughout an 18-month restructuring process.
During such a restructuring process, company owners generally see their stakes wiped out, while corporate lenders become the new owners. These creditors will often seek new lenders to provide the money needed to get the company out of bankruptcy. If the company is not seen as salvageable, the creditors eat the losses too.
When the government steps in as the lender — as Ottawa has done with its airline loan program — it assumes the risk of the airline going bankrupt. Put another way, it puts hundreds of millions of taxpayers’ dollars at risk, in the interests of protecting investors.
In this respect, the program recalls the Carney government’s much-panned pledge in June to purchase vacant condos from Vancouver property developers.
“They don’t want to sell at a loss,” Carney said at the time — a comment that left many Canadians scratching their heads.
Of course investors never want to lose money, but it is not the government’s job to protect them from losses. After all, investors enjoy the upsides of their risk-taking when their bets do pay off.
To be sure, there can be instances where government support for companies may be justified.
The pandemic, for example, was a once-in-a-century event that forced many businesses to temporarily stop operating. This is not a risk that most companies can hedge against. It was appropriate for the government to provide corporate support then.
But the risk that airlines now face — of elevated jet fuel prices from a conflict in the Middle East — is hardly unforeseeable. Nor is it unmanageable.
Indeed, swings in oil prices are closer to the rule than the exception. Most airlines therefore make hedging oil prices a key part of their business planning.
For a commodity as easily traded as oil, this can be done quite simply, either by using standard futures contracts or by buying insurance from an investment bank.
In short, there is no clear case for protecting airlines in this instance (even those that help transport Canadians to warmer climes during our winters!).
Yes, we are in the midst of a trade war, and the government is busy rushing out aid to a whole host of businesses.
But this makes the need for spending discipline more pressing, not less.
Government largesse ought to be strictly justified. Bailing out publicly traded corporations like Air Transat, or privately owned ones like Porter and Flair, is not taxpayer money well spent.
