Flag carriers increasingly pose a “too big to fail” problem for some finance ministries

ECONOMISTS HAVE long recognised that governments allow some firms to get too big, to the cost of the public purse. When they fail, governments must bail them out to avoid a big economic hit. That implicit guarantee, in turn, encourages firms to grow recklessly. They rake in the profits in good times; when things go wrong, the state foots the bill.

But the aviation sector most badly affected is Iceland’s. Icelandair and WOW, its biggest carriers, move five-sixths of the passengers flying to and from Iceland. Both are drowning in a sea of red ink. Last month Icelandair posted a loss of $56m for 2018. Meanwhile WOW, its low-cost rival, has almost run out of cash and is looking for a buyer.

The bankruptcy of WOW, which carries a third of Iceland’s passengers, would be a particular headache for Iceland. Its government reckons its collapse could wipe 3% from GDP and is making emergency plans in case it goes bust. The central bank has been buying up the country’s currency, which has fallen by a sixth over the past year due to worries about the health of its airlines. Speculation is rife that it could end up pumping money into WOW too.

Yet the reliance on building up hubs has resulted in airlines “putting all their eggs in one basket”, says Lee Ohanian, an economist at UCLA. The geographical advantage that Iceland and the Gulf states had as a place to connect flights once earned big profits. But this is no longer the case. New fuel-efficient jetliners, such as the Airbus A321neo and the Boeing 787, have made direct flights between smaller cities better value than connecting flights.

Unfortunately, South Africa's govt mistakenly believe that SAA should also be on this least. Flag carrier status can still happen without majority shareholder being the government. tito_mboweni please look at this bottomless money pit.

Use Ships, Iceland.

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