Briefing Note
The economic response to Covid-19 must involve both unprecedented measures to support incomes and provide economic security for all in the short-term, as well as long-term steps to restructure the economy so that it emerges from the crisis geared toward justice and sustainability. With the Chancellor’s package of labour market measures and support for business set out on March 20th, an important, though not complete, step towards the first goal has been taken; the news that the UK Government is drawing up plans to buy into stricken airline companies, injecting cash in return for shares, presents an opportunity for the second.
The broad approach of significant state intervention amid the crisis is to be welcomed. The economic shock induced by the public health emergency and ensuing policy response is plunging the economic viability of many companies and sectors into doubt. With the pandemic radically reducing demand for flying, the aviation sector – both airline and airport companies - is particularly at risk of collapse, with many aviation companies having already requested state support.
Public support, though, should not be unconditional. A state bailout must not be a blank cheque, allowing the sector to return to business as normal as and when the crisis passes. On current trends, aviation is likely to be the largest emitting sector in the UK by 2050; emissions are forecast to grow both in real terms and as a proportion of total UK emissions. [1] Meeting the UK government’s net-zero 2050 target, let alone a more ambitious target necessary to combat climate crisis, will be difficult, if not impossible, absent deep shifts in the behaviour of the aviation sector. The Covid-19 emergency and the climate emergency together pose a monumental threat to a healthy, sustainable future for all and action now should wherever possible seek to address both together.
Nor is it just the sector’s environmental record and future trajectory that must improve. Our analysis demonstrates that airline companies and airports have prioritised the interests of external shareholders over the long-term success of the company or the interests of their workforce, the environment, and wider society. This includes favouring the distribution of retained earnings via dividends or share buybacks over increased investment in green technologies or higher wages; soaring executive pay; and a poor track record overall on alignment with the aims of the Paris Agreement.
Despite requesting a state bailout, EasyJet still intends to go ahead with its £174mn dividend payout for shareholders, which includes £60mn to its founder. [2] This is in keeping with a wider pattern over the past few years, with Easyjet and British Airways together paying out dividends in excess of £2.6 billion since 2014. [3] While the dividends are not the reason why the sector is in urgent need of support, it is indicative of a business that prioritises the interests of shareholders even real wages stagnant and business investment – vital to improve productivity and decarbonise the economy - has been sluggish.
Airlines not alone in this trend; over a five year period, the holding companies owning Heathrow, Gatwick and Manchester airports have paid out a staggering £4.4bn in dividends, of which £3.3bn was paid by Heathrow Airport Holdings alone. In fact, dividend payments by these companies were regularly in excess of 100% of the companies’ net income over this period.
In addition to these substantial dividend payments, several companies in the UK aviation industry are paying low effective tax rates. Most notably, Wizz Air maintained an effective tax rate averaging just 3.5% between 2015-2019.
The chart below shows the average effective tax rates paid by the six UK-domiciled aviation industry companies included in this analysis over the period 2015-2019. Though not an exact comparison, as a point of reference the average statutory corporation tax rate over the same period (19.4%) is also shown. [4]
Any public support must be conditional on ensuring these behaviours change permanently. It is vital a bailout takes the form of cash for equity that is used to effect deep structural change in the behaviour of airlines and airports receiving a substantial public cash injection. This should mark a departure from the strategy pursued by the UK government in the wake of the financial crisis, where banks were bailed out but major public stakes were not used to drive transformation in the operation or performance of publicly-owned banks. To that end, we recommend five broad conditions for public support:
[.num-list][.num-list-num]1[.num-list-num][.num-list-text]Ensure furloughing, no lay-offs[.num-list-text][.num-list]
As a condition of receiving public support, bailed out companies should guarantee no lay-offs for staff, using the newly announced Coronavirus Job Retention Scheme where necessary.
[.num-list][.num-list-num]2[.num-list-num][.num-list-text]Embed collective bargaining and worker representation in governance [.num-list-text][.num-list]
A public stake must be combined with democratising governance and the workplace. All bailouts should require as a condition the embedding of collective bargaining around pay and conditions as well as ensuring that a minimum of one-third of the company board should be elected from the workforce.
As part of the condition of bailouts, we support calls for the imposition of maximum pay ratios between the highest-paid and median employees of bailed-out companies at an initial ratio of 10:1, and the introduction of the real Living Wage, an independently accredited hourly wage level including to contracted staff. [5]
[.num-list][.num-list-num]3[.num-list-num][.num-list-text]Securing tax justice[.num-list-text][.num-list]
Our analysis shows that the effective taxation rate of many companies in the sector is strikingly low. This must change. To that end, as the High Pay Centre has argued, bailed out companies should be required to commit to Fair Tax Mark accreditation and pursue responsible tax practices more broadly.[6]
[.num-list][.num-list-num]4[.num-list-num][.num-list-text]Prioritise decarbonisation not dividend payouts[.num-list-text][.num-list]
Public ownership should be accompanied by the exercise of public control as reflects the public’s stake. In particular, as a major shareholder, the UK Government should require the companies it has a stake in to prioritise investment in decarbonising technologies, improving the quality of service, and increasing wages and conditions for employees, rather than the current focus on distributing retained earnings to shareholders in the form of dividends or share buybacks.
Of course, unlike in other sectors, which can and are shifting to renewable sources of power, there are currently few scalable options for ‘decarbonising’ aviation. Yet a coordinated industrial strategy matched to greater investment of retained earnings in green technologies and fuel sources combined with a coordinated, .rational planning of aviation so it accords with limiting warming to within 1.5 degrees would mark a vital step forward from the status quo.
[.num-list][.num-list-num]5[.num-list-num][.num-list-text]Retain the public stake for the long-term so we all have a share[.num-list-text][.num-list]
The bailouts should be structured as cash for equity. This stake should not be sold off post-crisis but instead held as a form of enduring public wealth. If the companies rise in value, the public will benefit from their investment today with a windfall in future, as well as exercising shareholder rights. The critical question is who controls the company and who has a claim on its surplus.
Today, the answer is a combination of elite shareholders, institutional investors and executive management; but it does not have to be that way. Through a new combination of ownership, governance and control, we can transform the company from an engine of wealth extraction into a purposeful, sustainable, inclusive form of enterprise. This might seem radical, yet we already intervene in the organisation of the company: with its privileges and property rights socially defined, the company is fundamentally a public institution. It is common sense to organise it to serve the public good, anchored in a new public stake.
This is an unprecedented moment that requires unprecedented action. These five steps should be a condition of any public support in the form of cash for equity – and should serve as a model for any wider public response to the unfolding crisis, anchored in extending democratic ownership, reducing inequality, and securing social and environmental justice.
With special thanks to Dr. Joseph Baines and Dr. Sandy Hager for compiling the data for this briefing.
