THE Malaysian Aviation Commission (Mavcom) has reviewed several different types of relief instruments for airlines, following the slump in airline traffic due to the Covid-19 pandemic.
In the paper, the commission reviewed the types of relief instruments, the merits and challenges of each, and highlighted good governance principles of government assistance.
According to Mavcom, global passenger traffic had plunged an average of 67% in the week of April 27 year-on-year as a result of the Covid-19 pandemic, with a forecasted loss of US$411 bil in revenue. As such, governments around the world have increasingly stepped in to provide relief through various forms of instruments.
“Government assistance came mainly in the form of waivers or deferment of fees, subsidies, equity, debt, and route support,” said the commission.
Fee waivers, according to Mavcom, are short- to medium-term measures provided to alleviate cash flow problems. However, it also noted that, while waivers and deferment of fees as well as the imposition of subsidies are useful immediate steps, the cash flow of airline operators and governments may be disrupted if the relief is maintained in the long run.
“The commission is in favour of employee-focused subsidies, as it is targeted to safeguard employees. In this case, it is important to ensure that the funds would be deployed to its intended recipients,” it said.
On the other hand, equity or equity-related instruments allow for capital raising on commercial terms. Several airlines have already announced rights issues and private placements to draw new capital from shareholders and governments.
It was also noted that hybrid instruments, options, or warrants, which would enable governments to recoup capital in the future, have also been used in some packages.
However, these tend to come with conditions, as equity-related measures instituted by some governments often do, such as the requirement to maintain employment levels without pay and benefits reductions, as well as limits on stock buybacks, dividend payments and executive compensation.
Comparatively, equity stakes may raise public funds and are a moral hazard, as direct financial assistance to corporations are commonly regarded as bailouts by a government.
“If distributed without a clear framework, it may reduce competition or risk moral hazard, if given to industry players that were already in difficulty or would have inevitably faced declines in the business,” said Mavcom, adding that public funds may be put at risk, which would unnecessarily burden taxpayers and direct funds away from critical areas such as healthcare or education.
However, another option is for governments to provide guarantees on loans to airlines, whether it is a practical or full guarantee. This, according to Mavcom, is commonly provided in government relief plans as the borrower has a commitment to repay the funds with interest.
“Similar to equity funding, government-assisted lending should not be given out carte blanche and should be provided within a clear framework with predetermined principles,” added the commission.
Yet another means for governments to support airlines is by providing route support, to ensure the preservation of essential routes to maintain connectivity.
“In terms of route support, such assistance could be driven primarily by socioeconomic needs rather than profitability, particularly in geographically diverse and remote areas,” said Mavcom, adding that the government of Malaysia has continued its support for the Rural Air Services operations in Sabah and Sarawak throughout the movement control order to provide essential transport for remote communities.
To date, there have also been governments who have refused to provide specific aid to aviation players, including Malaysia, and instead have focused on providing aid to all sectors. This, according to Mavcom, minimises the risk of taxpayer losses and ensures no sectors are short-changed.
In terms of governance principles, any government financial assistance predicated on a clear framework with specific principles and well-targeted objectives would be good practice, according to Mavcom.
“Governments can ensure that any financial assistance provided is based on a clear framework, which should not only be non-discriminatory and provide clear objectives but must also be premised on accountability and transparency,” said Mavcom.
“The existence of such a framework of rules in Malaysia governing government financial assistance will facilitate this objective.” – July 3, 2020
