Should Airlines Be Bailed Out by Governments? Debating the Merits and Pitfalls

The question of whether airlines should be bailed out by governments during economic crises has been a contentious one. It is often polarizing, evoking strong emotions from both sides of the argument. This article seeks to explore the pros and cons of government intervention in the airline industry during times of distress, drawing lessons from historical precedents in India.

Historical Context: Government Bailouts in India

The concept of a government bailing out the airline industry is not unfamiliar. For instance, in 1953, the Indian government bailed out the airline industry, which had struggles that mirrored those of other sectors. About a decade later, in 1970, the government formed the National Textile Corporation (NTC) to bail out the struggling textiles industry. However, these initiatives did not yield the intended positive outcomes. The government became bankrupt by 1990-91, a scenario that was only turned around thanks to the leadership of Dr. MM S.

The question arises: will bailing out airlines lead to a similar outcome? Will other industries follow suit, demanding the same treatment? In India, there are numerous state transport corporations, such asual companies that continually report losses. Should the government prioritize one industry over another?

Reasons Against Bailouts

There are several compelling reasons why the government should not bail out the airlines. First, the money allocated for such bailouts is not the same as what is given to entities like Boeing. The money provided to airlines is a loan, not a bailout. Airlines are expected to repay this loan, ensuring their financial stability for the future.

Another key argument against bailouts is the principle that the market should function as intended. If an airline fails due to poor management or lack of foresight, it should face the consequences, just as any other business would. Similar to the speaker in the provided context, running a business responsibly means planning for potential failures.

The failure of airlines can often be attributed to poor management practices. Highly paid executives with MBAs from prestigious universities, coupled with lavish bonuses and share buybacks, reflect a misalignment of interests and priorities. These executives were responsible for ensuring the company had adequate cash reserves to weather market shocks. Instead, they prioritized personal gains over corporate stability—mistakes that can be rectified through market mechanisms without government intervention.

Proposed Solution: Using the GM Bailout Model

Those who favor government intervention argue for a more structured approach, such as the GM bailout model. Under this model, the government should purchase newly issued preferred dividend stocks, caps executive compensation, and restrict political contributions. This approach ensures the government can exit the investment when recovery is achieved, thereby minimizing losses.

The speaker, who identifies as liberal, proposes a pragmatic and capitalist approach. This approach includes:

Cap utive compensation for as long as the government owns any stock Prohibit airlines from making political contributions or advertising Allow the government to sell the stock at will and pocket the profits

This model aims to prevent what the speaker calls "socialism for rich capitalists" and to ensure that the industry is not politicized.

Conclusion

Whether airlines should be bailed out by governments is a complex issue. Historical precedents and the potential for future government bailout requests suggest a cautious approach. While market forces are often a better regulator in ensuring corporate responsibility, the near impossibility of predicting and planning for unexpected events like pandemics necessitates government intervention at times. A balanced approach, such as the GM bailout model, could provide a solution that strikes a fair and sustainable balance between market forces and government support.