An Investigation of Financial distress, Economic distress and State aid: The European Airline Industry 2000-2005

Abstract: Almost half of the members of the European Airline Association, 14 airlines, experienced financial distress at some point between 2000 and 2005. Among these financially distressed airlines, 79 percent were in economic distress at least once in the same time period. The correlation between financial and economic distress is statistically significant at the 5% level. Out of the 14 companies in financial distress 7 received state aid. Whereas the limited sample size prevents results to be strongly statistically significant, we find that airlines that received state aid on average showed lower operating result/revenue in all years, prior as well as subsequent to the state aid. The economic significance of the results is strong, with the state aid group reporting operating losses of up to 6% of revenue, and the no state aid group reporting operating profits in the same order of magnitude. Moreover, the annual percentage point improvement in operating result/revenue was lower for the group of airlines that received state aid. The correlation between economic distress and state aid is strongly statistically significant. Our study cannot establish a relationship between unemployment levels and state aid, however our findings suggest that airlines having their headquarters in countries where investor protection rights are low were more likely to receive state aid. This suggests that state aid, while targeting operatively inefficient companies, is given more frequently in countries where it is, from a theoretical general equilibrium perspective, more likely to be efficient than it would be in the other countries. An alternative explanation to the result could be that airlines involve in regulatory capturing.