Published: Sun, March 22, 2020
Markets | By Otis Pena

Virus Outbreak: Governments offer financial help to airlines, at a price

Virus Outbreak: Governments offer financial help to airlines, at a price

In addition to the dividend conditions, the government has the ability to seek repayment of the loan through a capital raise by the airline or by converting it to equity, the airline said.

Following further government restrictions for travel into New Caledonia and French Polynesia, Air New Zealand is suspending its Noumea and Tahiti routes until 30 June.

New Zealand on Friday offered its national carrier a New Zealand dollar 900 million ($510m) lifeline, which Finance Minister Grant Robertson said would help it survive after the government banned all non-resident arrivals to the country.

"The loan facility ensures that Air New Zealand can continue to play a vital role in connecting New Zealanders and our businesses with each other here at home and around the world". Also, the Government owns 52% of the company, which means we have a responsibility towards it. The facility will be provided in two tranches - a tranche of $600,000,000 with an effective interest rate initially expected to be between 7% and 8% per annum and a second tranche of $300,000,000 with an effective interest rate initially expected to be in the order of 9% per annum.

As part of the agreement, the government will provide Air New Zealand with NZ$900 million.

"While today's action means the company can continue to operate, given the unprecedented shock to the global aviation industry caused by COVID-19, Air New Zealand has advised that there will unfortunately be job losses as capacity is cut".

The agreement also safeguards the domestic network, with flights assured to all current destinations, he said.

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"Those services will be provided for under separate commercial arrangements to be negotiated in the future on an arms' length basis between the airline and the Government", Mr Robertson said.

Air New Zealand recently brought forward the planned closure of its Heathrow base and is suspending the majority of its worldwide flights as well as cutting back domestic services as part of its response to the coronavirus outbreak.

Air New Zealand shares, which had been in a four-day trading halt, slumped as much as 45.45 per cent before recovering slightly to be down 32.47 per cent at NZ$1.04 mid-afternoon. "We would expect the airline industry will look different at the end of this". Overall flight numbers had decreased from 3,600 a week to less than 1,500 a week. "Instead, we are allowing the Treasury Secretary to make or guarantee collateralised loans to industries whose operations the coronavirus outbreak has jeopardised".

There are now 39 confirmed cases of COVID-19 in New Zealand.

Conditions include provisions that loans may convert to government equity stakes, while U.S. airlines can not increase executive pay or provide "golden parachutes" for two years.

The airline is flying out of the U.S. and Australia. "This will happen if they are forced to go overseas and work for airlines in recovering offshore markets if there is no employment incentive to stay", Ridling said.

Lufthansa has already held talks with the German government about providing special loans and has grounded 700 planes.

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