April 14, 2020 14:53:50
Virgin Australia has gone into a trading halt ahead of an expected announcement.
Virgin Australia may not get a Government bailout but is considering other financial options to surviveThe Government says it is working with Qantas and Virgin to ensure their key domestic routes get subsidisedAviation experts fear Virgin will struggle to survive beyond six months at most
The Federal Government has been under pressure to help the struggling airline, which has grounded its aircraft and stood down thousands of workers because of the coronavirus pandemic.
Virgin Australia chief executive Paul Scurrah has urged the Federal Government to help it stay afloat with a $1.4 billion loan.
Without that cash, aviation industry experts have predicted the airline will struggle to survive beyond September.
There are also suggestions that the airline is considering an alternative which could involve restructuring its debt if the Government does not step in with financial assistance.
“Virgin Australia has requested a trading halt as it continues to consider ongoing issues with respect to financial assistance and restructuring alternatives,” a spokesman for Virgin Australia said.
“This has arisen due to the unprecedented COVID-19 crisis which has particularly impacted the aviation sector.
“Virgin Australia has been keeping the air fair in Australia for 20 years and we want to continue to provide a valuable service to all Australians, the 16,000 people employed directly and indirectly, and enable the broader economy to restart quickly once we emerge from this crisis.”
McCormack in talks with airline bosses
Last week Virgin announced it had suspended all its domestic flights except for a single Sydney to Melbourne return service, which is running once per day, except for Saturdays.
This came after a previous announcement that it had cut domestic capacity by 90 per cent and temporarily stood down 8,000 of its 10,000 staff.
Treasurer Josh Frydenberg on Tuesday said the Government was “absolutely committed to the aviation sector”, which had been “very badly hit by the impact of the coronavirus”.
But when asked about a potential collapse of Virgin and whether Australia could be left with just one airline, he did not indicate there might be a bailout for Virgin alone.
“We look at all these issues on an objective basis and again there is still quite a way to go in terms of the aviation sector and some of the challenges that those particular companies you are referring to are working through,” he said.
“We’ve been very consistent in that message that we will support the aviation sector, but we’re doing so with a sector-wide approach and you’ve seen that in the announcements to date.”
Deputy Prime Minister Michael McCormack has been working directly with Qantas and Virgin on ways to subsidise their key domestic routes.
The Government had also announced a $715 million package to help airlines cover fees and charges associated with flying planes, but since both Qantas and Virgin have grounded most of their flights, this measure is not enough to help Virgin, which desperately needs a cash injection.
Mr McCormack told the ABC he spent the weekend speaking with the bosses of both airlines.
While the Government has been reluctant to step in with a bailout, it wants to ensure that flights into and around Australia continue.
This would include helping people returning from overseas to get home after serving their mandatory 14 days of quarantine, as well as people flying in between capital cities.
Mr McCormack would not say how much money could be on the table to help subsidise flights, only saying that “discussions are taking place” and that he wouldn’t “rule anything in or out”.
He also said Virgin was in talks with its shareholders about how it could raise capital.
It is understood that Virgin has appointed advisory firm Houlihan Lokey to help canvass several options. One of those would be a possible restructuring of its $5 billion debt load.
Transport Workers’ Union national secretary Michael Kaine said the Government needed to “make a bold, aggressive move, like it did on the wage subsidy, and ensure the survival of Virgin and the thousands of jobs that depend on it”.
“It is clear that subsidising a handful of flights a day won’t cut it in terms of helping the situation,” Mr Kaine said.
But he said strict conditions should be set on any form of a bailout, including the Government taking an equity stake in the airline and placing caps on executive pay and bonuses.
Australian Services Union assistant national secretary Linda White said an industry support package was vital to protect jobs.
“It is critical that the Federal Government intervene quickly and decisively to protect the jobs of around 16,000 Virgin Australia workers,” she said.
“The collapse of the company would be catastrophic for Virgin staff and their families, and disastrous for Australia’s aviation sector.”
Virgin’s days limited as its debt mounts
Aviation experts agree that without a bailout, the airline’s days are limited.
“Unless Virgin is bailed out, like pretty much every other airline in the world, it would not last any longer than say, six months max,” the Centre for Asia Pacific Aviation’s Peter Harbison said.
With just one flight a day, 129 of Virgin’s 130 planes are sitting on the ground.
While no-one doubts the much bigger and financially stronger Qantas will survive, there is precedent for the Government allowing Australia’s second carrier to fall over.
In September 2001, mounting losses, ironically helped by the arrival of new upstart in Virgin, saw Ansett Airlines, then owned by Air New Zealand, go to the wall.
Ansett had been flying the Australian skies for 65 years, but the Howard Government refused to step in and save it.
“Ansett had been deteriorating for a whole decade,” explained Mr Harbison.
“It was clearly an airline that wasn’t able to adjust to a new era and whatever happened after that, it would have collapsed some time.”
Ms White said after the collapse of Ansett, many of its former employees had difficulty returning to the workforce, and many never returned to the aviation industry.
“The economic damage extended beyond Ansett itself, to the businesses that supplied the company and to the tourism sector of regional economies that Ansett served,” Ms White said.
Some argue that Virgin Australia is in an equally dire financial position.
Over the past decade, it’s made a full year profit just twice, racking up total losses of $2 billion.
According to its latest accounts, at the end of 2019 Virgin had borrowings of $5.3 billion.
That’s virtually the same as Qantas, except that Qantas has three times the revenue of Virgin.
Total liabilities exceeded total assets by $1.6 billion, which means for shareholders the company is worthless.
Qantas has been able to borrow $1 billion, and could also raise cash from shareholders, but Virgin has both hands tied behind its back.
Foreign carrier could take Virgin’s place
More than 90 per cent of Virgin is owned by just five shareholders.
Four of them are foreign government-controlled companies with airlines of their own, and the fifth is a company owned by one of Virgin’s founders, Richard Branson.
“Those airlines that have part ownership in Virgin, they’re in financial difficulty themselves and so it’s going to be very, very hard for them to provide liquidity to Virgin in this situation,” said former Qantas chief economist Tony Webber.
Having already given the airline industry $1 billion dollars, if the Government does not provide more to keep Virgin alive, it may yet go the way of Ansett.
If that happens, whoever took Virgin’s place would be up against an entrenched, dominant player in Qantas, ready to make life as hard as it can.
“You’d be in a market which is dominated probably 100 per cent by Qantas,” Mr Harbison said.
“That’s equivalent to coming into a competitive situation where, to use retail as an example, you’re competing with a combination of Coles, Woolies, Aldi, Amazon, you name it.
“That’s a difficult place to be making an investment.”
Some believe Singapore Airlines may have the clout to take on the Flying Kangaroo. Other carriers are also being touted.
“We’ve seen Air Asia show a bit of interest,” Mr Webber said.
“We’ve seen the Indonesian carrier, Lion Air, but I also think that Air New Zealand would probably be interested as well particularly as they have formed a code share arrangement with Qantas on domestic services in Australia.”
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