ABSTRACT
Privatization offers the possibility of financing an airline’s capital expansion and improving efficiency. However, the airline industry is characterized by substantial and increasing capital costs, low profit margins, and periodic downturns. This has led to regular bankruptcies and mergers, and necessitated state subsidies and bail-outs because of the economic cost of failure. In this context, the benefits of private ownership are less clear cut as it does not necessarily provide a more credible promise for the state not to intervene. Furthermore, the substantial capital costs are often beyond the financial capacity of the private sector, necessitating some form of state financial assistance or implicit guarantee of commercial loans as has been the case historically. This potentially undermines incentives as risks are shared. Furthermore, national airlines are prestigious and usually created and maintained for political reasons. This introduces a moral hazard where the government has a vested interest in the viability of the airline, and privatization does not necessarily promote a more ‘arm’s length’ relationship between government and enterprise in this case.
