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Why government should not bail out airlines, by Akpareva

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Notwithstanding the norm in government cycles to bailout distress companies, extending such gesture to local airlines may be more of sentiment than strategic economic sense, an expert has said.

Expert in Insolvency Law, Dr. Wendy Akpareva, noted that government’s bailouts are often used to turnaround the fortunes of companies whose failure would have significant impacts on the economy and the society at large.

However, airlines like Arik Air, “cannot be said to be a company of strategic economic importance and therefore, isn’t ‘too big to fail’.”Akpareva, in a piece titled: “Arik Air: Too big to fail?” explained that generally, funding of corporate rescues such as is the case with Arik Air, is highly reliant on private investment/financial firms and individuals in the form of pre-existing creditors (and in some cases new lenders), nonetheless, it is not uncommon to see the government in some jurisdictions funding an insolvent company’s restructuring plans.

The last global economic crisis, she observed, is illustrative of how governments can get involved in the rescue of companies or institutions it considered “too big to fail”. A case in point is the bailout of banking institutions by the British government and the bailout of the automobile industry by the Obama administration.“The failure of a company may, in some situations and to some extent, impact socio-economically on the society and this may slow down the overall growth of the economy, and in the case of Nigeria, its recovery rate, as it makes progress from the recession.

“It, therefore, seems that in very dire situations where a failing company’s collapse would impact socially and economically on a country, governments should assist in ensuring that the company returns to viability.”Akpareva, however, added that government’s bailouts are much more than handing out money to distressed companies. Other factors have to be taken into consideration, which may range from the social to economic impact of allowing that company fail and the legal limitations faced which may exist to prevent an abuse of the process.

“A close analysis of institutions or companies that have benefitted from government bailouts worldwide shows that their function in the society makes it imperative for government to extend a helping hand.“Government bailouts are primarily aimed at saving the services provided by the distressed company rather than the company itself. In essence, the company is seen as too big to fail not because of its size but because of its function.

“Take for instance the bank bailouts in England, without government’s intervention in the crisis involving the banking industry in the United Kingdom; it is possible that the UK economy would have suffered a total collapse.

“Likewise the bailout of Chrysler and General Motors by the Obama administration; the city of Chicago is heavily reliant on the survival of the automobile industry and failure by the Obama government to bailout the industry at the time would have been catastrophic. It would seem that the objective behind government bailouts is to restore equilibrium to the economy.

“As it stands presently, is there really any tangible advantage to be had if the Nigerian government bails out Arik Air? Agreed, jobs would be lost directly or indirectly following the collapse of the airline and undue hardship would be suffered by 55 per cent of domestic air travel passengers.

“Nevertheless, it is doubtful if Arik Air’s collapse would impact the economy enough to slide the country back into another recession. While Arik Air provides an important service to members of the public, the function of its business is not necessarily fundamental to the country’s socio- economic survival. There certainly would be a vacuum left by the demise of Arik Air, but nature abhors vacuums and the marketplace has a way of resetting itself.”

Akpareva reasoned further that even if it were the case that the Nigerian government could bail out Arik Air, government bailouts appears to hold some inherent dangers and as such the framework supporting the government’s involvement needs to be carefully defined and government assistance should only be relied on, as a last resort option for a struggling company.

But as it is, she observed, the Nigerian government appears not to have a clearly defined bailout framework for situations such as this; adopting an ad-hoc approach would undermine the efficacy of a government bailout.Furthermore, research has shown that the most prominent of these dangers is the “moral hazard” effect bailouts have on firms.

“According to research, this principal incentive problem is a well-known concern that someone who is shielded from the consequences of a risk has less incentive to take precautions against the risk. It has been acknowledged that rescue loans provided by governments seem to increase uncertainty, increase the cost of moral hazard and discourage private actors from resolving distress before it becomes too late.

“It has also been stated that the possibility of subsidized taxpayer funding on the eve of bankruptcy encourages risky behaviour from both potential investors and the firm itself. Both of whom would be relying on a government bailout to underwrite any ensuing costs.

“Equally, the executives of the troubled firm may deliberately ignore the distress signs and neglect to take steps to prepare for bankruptcy since the firm’s chances for governmental aid become higher if bankruptcy is not a reasonable option.

“This creates a nonchalant attitude among management and firms may now be more disposed to taking risks they otherwise wouldn’t have taken, knowing that a buffer from the government probably exists. What this does is that, it sends a message that taxpayers are more or less there to indemnify distressed companies that cannot be allowed to fail.”


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Arik AirWendy Akpareva

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