Australian Government Rules Out Virgin Australia Bailout

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UPDATE: 04/02/20 @14:20 AEDT: Australian Prime Minister Scott Morrison said in a press conference held a short time ago that the Government has not yet made a decision on the loan request by Virgin Australia.

The news for Virgin Australia gets worse by the day. There are reports today that the Australian government will refuse the airline’s request for a bailout loan. It reportedly prefers to let the airline fail and then facilitate the entry of a new carrier.

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The Australian government is poised to decline Virgin Australia’s bailout request. Photo: Andrew Curran / Simple Flying

Earlier this week, Simple Flying reported that Virgin Australia had approached the Australian government for a USD$860 million loan. The loan was to help it keep flying in the post-crisis era. The early indications were that the government was sympathetic to the request.

Virgin Australia has powerful owners with deep pockets

Today, the Australian Financial Review is reporting that the government will refuse the request. The report suggests that the government would prefer Virgin Australia to survive. But the airline is owned by a variety of foreign investors whose own backing entities have deep pockets.

Between them, Etihad Airlines, Singapore Airlines, HNA Group, the Nanshan Group, and the Virgin Group own about 91% of Virgin Australia. Each of these entities is under pressure right now and not necessarily inclined to bail out a struggling airline from Down Under. Nonetheless, the government’s view is that while Virgin Australia has access to alternative avenues to raise funds, it is not the role of the government to bail out the airline.

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Etihad owns 20.94% of Virgin Australia. The Government believes Virgin Australia should tap its owners for a bailout. Photo: Sergey Kustov via Wikimedia Commons.

Virgin Australia went into the present crisis with around USD$555 million in cash reserves. It has grounded all of its international fleet and most of its domestic fleet to help conserve cash. However, Virgin Australia has a high level of fixed costs.

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The airline has 133 aircraft across its fleet. Sixty-seven of those aircraft are leased, at an annual cost of USD$243 million. Unless the airline gets a payment holiday from its lessors, it will burn through that cash reserve fairly quickly.

Relief is targeted at the airline industry rather than specific carriers

Besides the owners with deep pockets factor, the Australian government keen appears to be taking a pro-market position. It is not to prop up individual businesses. To date, the Australian government has announced approximately USD$131 billion in relief. That relief is targeted at household and industry-wide levels rather than at the individual business level.

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The Australian government is offering financial relief at the industry rather than at an individual business level. Photo: Andrew Curran / Simple Flying.

Despite the growing uncertainty surrounding Virgin Australia, there is wide consensus that Australia needs two strong full-service airlines. Federal Treasurer, Josh Frydenberg, has said;

“We do support a viable, sustainable aviation sector. That is why we have already announced more than $700 million of support for that sector, including for Virgin and Qantas. And we do want to see major companies like that continue to operate.”

The Opposition to open to Virgin’s request

Shadow Transport Minister Catherine King told Simple Flying today;

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“Labor is open to the Government working with the aviation sector to extend or guarantee lines of credit, or taking an equity stake in these Australian companies to ensure that Government can recoup its investment.”

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Shadow Transport Minister Catherine King says the Opposition is open to extending credit or taking equity in struggling businesses like Virgin Australia. Photo: Hamer Radshaw via Wikimedia Commons.

Simple Flying approached Virgin Australia about their loan request. In response, the airline directed us to a statement made to the Australian Stock Exchange earlier this week;

“It (the loan request) is a preliminary proposal and remains subject to approval by the Virgin Australia Holdings Board and the Australian Government and may or may not include conversion to equity in certain circumstances.

“Companies like the Virgin Australia Group are taking a range of measures to respond and manage the financial impact. However, support will be necessary for the industry if this crisis continues indefinitely.”

Nervousness around Virgin Australia seeing loyalists defect

The nervousness surrounding Virgin Australia is filtering down to the passenger level. Akin to pulling cash out of a shaky bank, many Virgin Australia loyalists are transferring their Velocity points across to Krisflyer. They prefer to lose some points in an unfavorable exchange rate rather than all their points should the ship sink. Everyone has memories of what happened with Ansett Australia.

For the time being, I’m leaving my swag of points with Virgin Australia. I like the airline and don’t want it to fail. Leaving my points where they are is my own little symbolic show of support.

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