Viewpoint

Aviation year zero – Green for grants
How governments, as the de facto next key stakeholders of the aviation industry, should support atransformation that serves customers, citizens and the planet

Governments around the world are pouring money into the aviation industry as never before. Regardless of the forms thesecash injections take (grants, loans, equity or tax deferrals), governments around the world are becoming de facto the next
key stakeholders of aviation. They must thus finance a transformation that serves both citizens and the planet. In exchange
for the financial support, governments should ask airlines to: (i) assure competitiveness through restructuring, and (ii)
implement transition programs into a “green” aviation model. The future of aviation is being reinvented by all parties,including governments, which must also redefine their role in the industry, learning from past mistakes.

Aviation is a “backbone sector”, which justifies
governmental bailout
Aviation connects people, businesses and cultures. It is also oneof the few “catalyst” industries, which support and facilitate
the growth of others, especially hospitality and tourism. For
instance, the aviation industry more than doubled the numberof international visitors around the globe, from 700m in 2000 toabout 1.5bn in 2019 (source: WTO). Globally, the aviation industry
accounts for US$2.7 trillion of GDP; it also directly and indirectly
supports 65 million jobs in various industries, such as travel &tourism – which includes 2.7 million jobs with various airlines(source: IATA).
Public support packages for the aviation industry are therefore
considered necessary to ensure the industry’s catalytic impact
on socio-economic development can be sustained. So far,governments have committed close to $80 billion around theworld, with possibly more to come in large countries such as
the UK, Indonesia, Thailand, Japan and Brazil; this does not
yet include China’s support to its state-owned aviation sector
because this information has not been disclosed to date.

Governmental support to the aviation industry per geography
Publicly announced or committed
measures (not taking into accountrumors and probable measures)144%

AfricaAsia
0%2%

Europe22%

North America
Oceania

79.9 BnUS$32%

Source: Arthur D. Little research, April 25th, 2020
Note 1: As of April 25th, 2020 – not exhaustive

The aviation community (more than just airlines)
needs government support like never before
All major crises for the aviation industry, as well as single
airlines, have been marked by highly visible governmental
intervention. But the COVID-19 crisis is unique because of its
depth and width.

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Unprecedented depth: Prior to COVID-19, the biggest
demand reduction in the aviation industry during any
recent crisis was 2–5 percent annually, but with COVID-19,
a 50 percent decline would be considered optimistic bymany analysts. For comparison, the automotive industry
experienced a 40 percent demand drop during the 2008
post-subprime crisis.
Extraordinary width: Airlines have long been the “weakestlink” in the ecosystem – but the COVID-19 crisis threatens
all parties: airports and air navigation service providers(ANSPs), for instance, can no longer be seen as risk-freebusinesses. The COVID-19 crisis calls for global support for
all parties of the aviation industry – not only airlines. To date,most governments have not considered this new paradigm.
The US is an exception, with a $10Bn grant allocated toairports through the Aeronautical Information Publication(AIP) program.

Thus, the main question for both the aviation industry andgovernments is: how to make the best use of this investment in
rescuing the industry?

Governments have four options for injecting money
into aviation, but none are perfect
Looking at the type of support governments have used to relieve
the aviation industry, (i) loans are the most commonly used, as
they are eventually convertible. Governments are also using (ii)equity injections, (iii) grants, and (iv) payment deferrals (taxes,
social security charges, etc.).
nLoans are hardly repaid if their maturity is short (e.g., fouror five years): in the short-term, the post-COVID aviationindustry will be more competitive than ever, and the already“weak” airlines’ economics may not have improved enoughto generate the necessary cashflow to pay back the loans;the massive loans may even create financial burdens that
could hamper the recovery of airlines. Ultimately, loans will
have to be converted to equity, with the associated pitfall ofsuch a scheme (see below).

nEquity injections put governments in an unsuitable role
unless they condition this support to strict managerial andstrategic collaterals.

nGrants have the major drawback of being mere subsidies,and government funds will never be recovered.

nPayment deferrals usually have limited effects on theindustry because the related amount is small compared tothe depth of the crisis for the industry.

The mix between those options varies across geographies; theUS is the only country that went for massive grants.

2Aviation year zero – Green for grants

Type of governmental support to the aviation industry
EquityPublicly announced or committed
measures (not taking into accountrumors and probable measures)1

Grant
Loan

2%
18%

45%

Tax deferral

79.9 BnUS$35%

Source: Arthur D. Little research, April 25th, 2020
Note 1: As of April 25th, 2020 – not exhaustive

Governments should opt for long-term loans or rapid
return to private shareholding structures
Some countries consider the ability to control their air
connectivity critical to ensuring their legal and businesssovereignty, as well as feeding their people and economies(sometimes literally). Some other countries see airline
ownership as a legacy from the past.
However, government ownership of airlines has, in most
historical and recent cases, been a failure from both strategicand economic perspectives: substantial amounts of government
money, as well as businesses’ and citizens’ connectivity, havebeen lost. Few exceptions have proved to be successful (director indirect) for publicly owned airlines – for example, Singapore
Airlines and the turnaround of Japan Airlines between 2010 and2012.
Public support cannot reinforce the previously inefficientand unsustainable business models of the airline industry.
Ultimately, in most cases, governments should encourage their“flag carriers” to be part of multinational airline groups, whichare “government agnostic” by nature.
Why so? In our view, governments cannot help airlines facebusiness challenges, for reasons explained below.

Airlines must be agile, with few constraints otherthan for safety, security and corporate social
responsibility
The aviation industry is hyper-competitive: airlines are multiniche businesses; most routes are “dog fights” operated bytwo, three, or even more players; and the market is congested.
To survive and eventually thrive in such an environment, airlines
must be hyper-agile and able to quickly make tough choices
so they can adjust their networks and organizations to remain
profitable.

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In addition, governments sometimes consider airlines“flagships”, and ask them to keep operating some routes (orfrequencies) to sustain the “prestige” or “image” of the country,
even if this deteriorates their businesses. Governments may
also – for good reasons – impose specific pricing that may serve
the consumer well but prevent the airline from fully benefitingfrom the profit pool it may tap into. For example, governments
may require airlines to charge low fares for certain routes, suchas those to remote destinations, to stop airlines from making
excess profits on these routes.

Transformations due to the wide government support
must serve both citizens and the planet
Citizens worldwide are becoming de facto the next key
shareholders of the airline industry, and possibly the rest of theaviation industry. Their investment must then help the industry
face not only its short-term liquidity problem, but also thegreatest challenges that already exist, as well as those that willremain after COVID-19. These challenges are:nTransforming the airline industry into a fully commercial
business: This will enable it to cope with its intrinsic
nature and get rid of the stratification of rigid internal rules
and external regulation without undermining the strictest
imperative of safety and security.

nAchieving the long-promoted vision for a green aviationindustry in the air and on the ground: This will facilitatesustainable growth in the industry, whose fundamentals(globalization of exchanges and travels) are currently being
challenged because of environmental concerns.

Governments should have high expectations of airlines in termsof safe and secure travel and CSR, but they should lower any
other business constraints.

An airline’s profitability is driven by the productivityof its (i) aircraft, (ii) crews, and (iii) customer base
Aircraft: If the government owns the airline, there tends
to be stronger political influence in building up the fleet,which outweighs “technical and business considerations”
that should prevail when acquiring ad hoc aircraft. Improper
aircraft types could lead to revenue loss (non-optimized cabinsize and density, insufficient cargo-load capacity, etc.) or
higher costs (maintenance, repair and operations serve as aclassic example, as well as leasing cost if their residual value
is lower).

For the aviation industry, succeeding in those two dimensions
will serve citizens and the planet. This is what government
support of aviation should aim for – no more and no less.

nCrews (cockpit and cabin): The annual productivity (flight
hours versus wages) of their crews is a critical profit driver
for airlines. State-owned airlines are typically less productive
than private airlines: their crews’ annual flying hours are
10–20 percent below those of their private counterparts,
they usually have more perks (although their salaries are notnecessarily higher), and staff bargaining power is usuallystronger – which is classically demonstrated during strikes.

Governments will provide the aviation industry withunprecedented grants or equity imminently. (Ultimately,loans will be converted – unless they have long maturity
or competition in the aviation industry ceases and triggers
higher profit, which is unlikely). Airlines must enhance theircompetitiveness by restructuring if they have not already done
so. In exchange for loans, governments must request specificplans, and only support those that are credible.

nCustomer base and frequent-flyer program: Customer
ownership and data are increasingly valuable for any
business in today’s digital age. Airlines enjoy the advantageof owning this valuable asset. Firstly, their direct distribution
channels usually attract many visitors: Approximately 50
percent of air tickets worldwide are now sold directly byairlines; the billions of annual transactions generate asmany more site visits and enquiries. Secondly, air travel
passengers are “valuable” customers because they
are typically more affluent and have some discretionary
purchasing power. The downside to government ownershipis a conflict of interest: they are able to foster “sweating”
of customer data, when they are typically keen on
regulating and protecting those customers from such data
monetization. How can governments find a “sweet spot” inthis dimension?

nGovernment support should require restructuring forcompetitiveness and “green” aviation modelsn

If private shareholders are not incentivized to implement
these plans (for example, government becomes thecontrolling shareholder of the business), governments
must ensure successful transformation of aviation into acommercial business by providing it with the right agility andcapabilities to leverage its strategic assets.

nGovernments must avoid replicating the past mistakes
outlined earlier. They should be strict with (i) applying
adequate decision-making processes and rationale, (ii)supporting adoption of business and commercial culture,and (iii) managing the potential conflicts of interest that (will)
exist between their roles as regulators (for safety, security oreconomics) and shareholders. These commitments should
be clearly announced early in the process of supporting anyplayer.

Aviation year zero – Green for grants

3Viewpoint

To ensure a sustainable future for aviation by reducing its
emissions, four main measures should be activated as(preferably binding) collateral to government support:
nnnn

Contacts
Austria

Middle East

Rejuvenating the fleet of airlines may enable significant
environmental (and economic!) gains, with the most recentaircraft burning 10–15 percent less fuel per available seatkilometer.

BelgiumThe Netherlands

ChinaNorway

Incentivizing (if not enforcing) the use of sustainable aviationfuel (or financing the emergence of the associated valuechain) may increase the fuel bill in the short term but would
significantly contribute to lowering emissions.

Czech Republic

vylupek.lukas@adlittle.com

PolandFrance

Russian Federation

Germany

Singapore

India

Spain

Implementing environmentally friendly approaches andoptimal in-flight trajectories by mobilizing state-controlled air
navigation service providers will adapt their processes andreorganize the air space to reduce fuel consumption by afurther 5–10 percent.
Fostering “green” CAPEX more than capacity CAPEX at
airports: Specifically through new economic regulation orconcession contracts to (i) enforce emission neutrality of
airports (e.g., auxiliary power unit-off policies, energy-neutral
buildings, emission-free fleet vehicles) and (ii) smart use ofexisting capacity through process automation and digitallyenabled resource management.

taga.karim@adlittle.com
vanaudenhove.f@adlittle.com
lee.waiduen@adlittle.com

blondel.mathieu@adlittle.com
baron.ralf@adlittle.com
maitra.barnik@adlittle.com

Italymarsella.francesco@adlittle.com

Japan

fujita.akitake@adlittle.com

Korea

lee.kevin@adlittle.com

Latin America

fernandezbosch.josemanuel@adlittle.com

berguiga.morsi@adlittle.com
eikelenboom.martijn@adlittle.com
kilefors.petter@adlittle.com
ostrowski.jacek@adlittle.com
ovanesov.alexander@adlittle.com
fujita.akitake@adlittle.com
fernandezbosch.josemanuel@adlittle.com

Swedenkilefors.petter@adlittle.com

Switzerlandbaron.ralf@adlittle.com

Turkeybaban.coskun@adlittle.com

UKblondel.mathieu@adlittle.com

USAwylie.craig@adlittle.com“Aviation year zero” is 2020 . The future is reinvention – for bothaviation and the role of governments investing in the industry.

Authors
Mathieu Blondel, Jose-Manuel Fernandez Bosch, Akitake Fujita,
Wai-Duen Lee, Jan Heile

Arthur D. Little
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