In the heyday of neoliberalism, before Lehman Brothers, privatisation was a big thing.

At the time, it was the settled opinion that services are provided more efficiently by private companies. Parties of the left and the right signed up the neoliberal agenda, from Dublin to Sweden to South Korea. 

There were some big successes. It’s strange to think now but in 1985 the Irish state owned and managed hotels, creameries, sugar processors, ports, shippers, three banks, oil refineries, steel mills, fertiliser manufacturers, telecom companies and a life insurer (though what goes around comes around, and the neoliberal agenda arguably, ultimately, resulted in four banks and a life insurer back in public ownership).

The neoliberal project was never fully completed. In Ireland, the high water mark was the privatisation of the transport companies. Aer Lingus was privatised in 2006, taxis were deregulated in 2000, and intercity bus routes were deregulated starting in the mid-2000s. It’s the same story in Europe, where privatisation of transport was started but not completed. It’s common in Europe for state-owned and privately-owned transport companies to compete directly with each other.

Now Covid-19 has come along and smashed the transport industry. Thanks to social distancing, transport companies are being asked to cut their capacity by as much as 75 per cent. This will make many businesses unviable since buses, trains and planes come with massive fixed costs. 

The state-backed transport companies will be okay. Tens of billions have been made available to bail out state-backed European airlines, trains and buses. In Ireland, a bailout of CIE is expected to cost €200 million.  

Michael O’Leary has railed against the bailouts: “What’s clearly happening is we have the French and the Germans creating a huge fund — billions of state aid — that will allow them to either low-cost sell against the likes of Ryanair during the recovery period or allow them to engage in mergers and acquisitions and buy up all their weaker competitors when this is over. Instead of governments treating all airlines equally, they are massively subsidising the state aid junkies like Lufthansa and Air France.”

Ryanair is big enough to survive but many smaller privately-owned transport companies are not. One of Covid-19’s legacies could end up being a re-nationalisation of the European transport industry, from airlines to buses. Like the banks after 2008, state-backed transport companies are too important and politically powerful to be allowed to fail.

But just how much will it cost? And what will it do to the private competition?

CIE: dependent

CIE runs four businesses: Iarnród Eireann, Dublin Bus, Bus Eireann and CIE tours.

CIE is wholly state-owned and heavily dependent on state funding. In 2018 it got €310 million per year from the state. It made €1.05 billion from ticket sales and other revenue, for a total of €1.31 billion 

CIE’s operating costs in 2018 came to €1.285 billion. Its Ebitda margin was 2.2 per cent — by comparison, the average Ebitda margin of the eight listed US railroad companies is 47.8 per cent.

CIE’s depreciation charge of €42 million is 1.5 per cent of CIE’s €2778 million in fixed assets. On the cash flow statement, we see that it spent €120 million in capex in 2018. After interest, depreciation and taxes, CIE lost €34 million in 2018. 

The real damage comes from operating costs. CIE employs 10,046 people, and the payroll comes to €631 million. It has €653 million in material and service costs — fuel, materials, etc. 

Passenger numbers are way down. They’re down 90 per cent for Bus Eireann, 87 per cent for Dublin Bus. CIE Tours is completely suspended. Google data shows a 67 per cent decrease in traffic to public transport stations, which is a decent proxy for rail demand. 

After lockdown ends, things don’t look much better. “Running buses under current social distancing is expensive,” says Professor Sean Barrett, a transport economist at Trinity. “For example permitting only 14 passengers on a 55 seater bus will require fares to rise four-fold in order to maintain revenues.”

The question is how much of CIE’s operating costs can be cut as demand for CIE services falls. Cutting staff will not be easy. Dublin Bus has told its staff it has 582 more drivers than it needs, but the National Bus and Rail Union has said it will not under any circumstances “entertain the notion of job losses as a result of decisions made by faceless bureaucrats”. The wage bill stands at €631 million.

Not much of CIE’s €653 million material and service costs looks as though it would go away under social distancing. It will be expected to run full services. Costs could even go up, due to modifications for social distancing and higher hygiene standards across the board. Customers won’t continue to accept grimy toilets and dirty windows.

Excluded and ignored

CIE is Ireland’s biggest public transport company but not its only one. In fact, 85 per cent of Ireland’s bus fleet is privately owned by small operators like Wexford Bus, John McGinley, Matthews and JJ Kavanagh. The 2005 Goodbody report found that 43 per cent of all passenger revenue went to independent bus companies.

The independent buses have had to battle their way into the market. Against the wishes of the Department of Transport, they won the right to compete with CIE on a few routes in the courts, and with the help of the odd Minister. 

Bus competition has been a massive win for consumers. According to an analysis by Prof Barrett, in 1980 CIE ran seven buses per day in total between Dublin and Belfast, Cork, Limerick, Galway, Waterford and Wexford. In 2017, with independent companies permitted to operate on the same routes, the total number of buses per day rose to 286. And fares on CIE-only routes were found to be 66 per cent higher than those on contested routes.

All of which is to say that, against the wishes of the Department of Transport and CIE, the independent bus companies have established themselves as an important part of the Irish transport network. 

Like CIE, the independent buses are going to have to live with less capacity because of social distancing. The economics are punishing — 14 passengers on a 55 seater bus will mean fares will have to rise by 300 per cent to break even. And if 14 passengers aren’t willing to pay the four times the normal price, the route becomes unviable. 

The independent bus companies are not strong enough to absorb a sustained drop in passenger numbers. Matthews and JJ Kavanagh are two of the biggest. JJ Kavanagh’s most recent accounts show current liabilities 50% greater than current assets. Net current liabilities are €1.1 million and net assets are €974,000. So the company might find itself having to sell down assets — ie buses — in order to settle short term debts. Matthews Coach Hire’s net current liabilities come to €1.1 million also, albeit with a stronger base of fixed assets. Its net assets come to €5.1 million.

The difference between CIE and the independent operators is that Bus Éireann and Dublin Bus are likely to get what they need from the exchequer. Asked last month whether CIE would get a bailout, Minister for Transport Shane Ross said: “We will support them, and make sure the routes they are operating and public transport in this country keeps operating and operating effectively.”

If social distancing will cut bus capacity by 75 per cent, an obvious solution is to allow independent operators to share the load on the routes they’re currently not licensed to operate on. But that’s not on the cards. “For the Department of Transport to just sit around subsidising a state company, so that these guys go to the wall under the name of disease prevention is completely bizarre,” says Prof Barrett.

When push comes to shove

Ireland isn’t the only country bailing out its state-favoured transport companies. More than €78 billion has been committed to airline bailouts in the past three months. In Europe alone, more than €23 billion of state aid has been doled out: Air France-KLM has taken €11 billion, Alitalia is being nationalised, Lufthansa is taking €9 billion, EasyJet has taken €690 million in loans, IAG has taken €1.4 billion in loans, Norwegian and SAS have taken €1.4 billion of aid. 

Ryanair is one of the only airlines in the world not seeking a bailout, and it’s not best pleased. Of the German state’s bailout of Lufthansa, Michael O’Leary said it was “hoovering up state aid like a drunken uncle at a wedding”.

Ryanair went into the crisis with a stronger balance sheet than its competitors. It’s low in debt, with enough cash to see it through the lockdown period (having cut 3,000 jobs). 

But balance sheet strength only goes so far. Social distancing rules threaten to wreck the Ryanair business model. “There will be no social distancing,” says O’Leary. “You cannot have social distancing in an aluminium tube, whether it’s an aircraft, a train, or a London Underground. You cannot have it in the station, whether it’s a train station, an underground station, or an airport. What you can have is face masks, temperature-checked people entering the airport terminal.”

George Ferguson of Bloomberg looked at social distancing on Ryanair planes. The proposed plan is to remove the middle seat, which for Ryanair planes would amount to one-third of its capacity. He found that removing the middle seat would require a 50 to 60 per cent increase in fares, just to break even. 

The danger for Ryanair is that it doesn’t manage to fill to two-thirds capacity at the new higher prices. If not, prices for the remaining passengers would have to rise even more, and the whole model could break down. 

“It’s hard to make the model work,” says Ferguson. “The model is built around high load factors and low ticket prices.” 

“Everyone’s going to evolve their business models,” he adds. “Ryanair offers the lowest fares in the market. So I imagine they’ll find a way to boost fares more than the average airline, given that they’re starting so low.”

Ireland’s state-owned airports — Dublin and Cork through DAA, Shannon through the Shannon Group PLC — are in a similar position to the airlines. Passenger numbers dropped by more than 90 per cent during the lockdown and they’re only expected to recover slowly. Dublin Airport is expecting passenger numbers for 2020 to be down 41 per cent on 2019. 

The difference between CIE and the airports is that the airports started out stronger. CIE depends on subsidies for its survival, whereas DAA made €152 million net income in 2019, Shannon made €21 million, and the Irish Aviation Authority which oversees Irish airspace made €27 million. DAA paid the state a €40 million dividend in 2019, and the IAA paid €20 million. All three companies are financially secure. But the government will likely have to do without their dividends this year and perhaps next. 

The utility

Though not in the transport business, utilities are another half-completed neoliberal project. In Ireland the state owns Ervia, which owns and operates our gas and water networks. But private companies sell gas to the consumer.

Ervia is the biggest Irish utility company. It’s the operator of Irish Water and Gas Networks Ireland. Ervia is important, not because it’s been hit particularly hard by Covid-19, but because it’s so big.

Ervia pays a dividend to the state every year. Last year it paid €139 million, the year before it paid €148 million. Is the dividend at risk?

Utility companies are stable and boring. They generate dependable cash flows. But their stability hasn’t totally insulated them from Covid-19. The iShares Europe 600 Utilities ETF is down 17 per cent since late February. The S&P 500 Utilities Index is down 11 per cent. 

Why is the market marking down utilities? Either it’s because investors are forecasting lower cash flows from them (bad news for the Ervia dividend), or because they’re more pessimistic about the overall market, and they’re discounting all cash flows more heavily (not bad news for the Ervia dividend). 

To see which it is, I took a look at analysts’ dividend forecasts for the 11 biggest utilities companies. I found that their average dividend is forecast to go up by 2.6 per cent. Stripping out the effect of the biggest risers and fallers, the median dividend is forecast to go up by 8.5 per cent. So if Ervia is anything like its peers in the industry, the dividend should be safe this year. 

In a way it’s not surprising airlines and bus companies are struggling. Airlines and bus companies are easy to set up. That makes their industries competitive and tough to survive in. A big unexpected catastrophe like Covid-19 would be expected to bankrupt some of them.

It might be that lots of small, privately-owned bus companies and airlines fail. And, bus companies and airlines being easy to start, new ones might spring up in a few years’ time to fill the gap.

But as the Irish independent bus companies know, the problem isn’t just commercial – it’s political. When the government is invested, financially and otherwise, in one particular transport company, that company can be very hard to compete against.