Too Big To Fail II: airline bail-outs today, who’s next in corporate triage?

by | Mar 18, 2020 | Finance

The Morrison government just bailed out Australia’s airlines with a $715 million relief package. This corporate welfare response is the harbinger of things to come from the emergency theatre which is called Federal Treasury. There will be more bail-outs and quick-fire takeovers approved to rescue private interests with public money. Michael West reports.

By the time the coronavirus and the inevitable recession are done – and the blast of subsidies – large corporations will dominate Australia’s democracy even more than they do now.

There is precedent. The “Mother Of All Bail-Outs” in the Global Financial Crisis delivered a slew of special deals for the banks. The lavish executive salaries continued but now the banks are backed by an explicit guarantee from the Reserve Bank. We own their risk.

Who else is Too Big To Fail? Who else a contender for public subsidies and special deals? Sydney Airport is a classic. A Macquarie Bank privatisation, now a byzantine stapled trust structure, doesn’t pay much tax either – like the airlines – but you can bet management will have their collective hands outstretched for taxpayer largesse.

Quickly perusing the accounts, Sydney Airport has a cool $10 billion worth of debt on its balance sheet. That’s just the debt you can see. Finance charges were $430 million last year alone.

Being extremely MacLeveraged, Sydney Airport has little margin for error. Of its $1.6 billion in revenue last year, $739 million was aeronautical (coming from airline charges), $375 million came from retail (rent on airport shops), $162 million was from the Airport’s notorious parking fees and $251 million came from property and car rental.

These revenue streams will be slaughtered for as long as the coronavirus lasts.

Another risk for Treasury is Challenger which provides annuities to thousands of Australian retirees. Again, plenty of debt and a labyrinthine financial structure. Yet Challenger faces a bigger challenge. It’s billions of dollars in annuities are like defined benefit payments; they are fixed. Its funding however depends on the vagaries of financial markets, which are being mercilessly shellacked.

AMP too faces armageddon if things get much worse. Although those in its funds, backed as they are by the prudential regulator APRA, should be protected in any event, the company is not so fortunate, its hopes hinge on the sale of its life insurance business, this country’s largest, to a financial operator called Resolution Life in the tax haven of Bermuda.

Privatise the profits, socialise the losses

Thousands of Australian companies already in distress. The Government is now playing triage, working out which to save and which to leave to the warm embrace of the insolvency profession. The GFC was a financial crisis. The present upheaval is a crisis of logistics, of both supply and demand. 

Still, financial leverage will play a big part in who survives and who fails – debt that is. Once again, those companies carrying a lot of debt will be hit harder on financial markets. And who owns the debt will also play a large part in Government decisions as to subsidies, takeovers and bail-outs.  

During the GFC, emergency measures allowed the likes of BankWest to fall to Commonwealth Bank with little attention from regulators. The stronger will again prey on the weaker, and be backed by government to assume the liabilities, and the profits, for a song. This all means the dominant institutions will become even more dominant and smaller businesses fall.

There is a fair argument that, should the airlines require further support, that government simply nationalise them or take equity stakes, perhaps to be floated on the sharemarket for a public profit when things recover. Surely, Australia cannot pass this crisis, the second in a dozen years, still under the apprehension that free markets have things under control, that private enterprise should be left to its own devices. If that were the case, there would be no bail-outs.

It is interesting to see the financial press and the big business lobby assiduously avoiding the subject of “moral hazard” in their coverage of government intervention, kowtowing to the old neo-liberal ideology of free markets and trickle down economics.

The best that can come of this is a new political and economic creed which recognises the realities of “free markets” and regulates accordingly.

ABOUT THE AUTHOR

Michael West

Michael West

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

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