UPDATE: 03/31/20 16:00 AEDT: Virgin Australia temporarily went into a trading halt on the Australian Stock Exchange this morning pending a market announcement. Trading has since resumed.
Australia’s second airline, Virgin Australia, has asked the Australian government for an AUD$1.4 billion (USD$860 million) bailout loan. This comes after a flurry of publicity by the airline’s CEO to assure the public that Virgin Australia was financially sound. However, this hasn’t stopped many pundits from raising concerns about the ongoing viability of Virgin Australia.
Virgin Australia confirms the request of a government bailout
A report in The Australian today suggests Virgin Australia CEO, Paul Scurrah, has approached the Australian government requesting the loan. The airline has since confirmed the report. The loan would be for three years and help guarantee Virgin Australia’s ongoing viability once it starts flying again.
If the airline cannot repay the loan within three years, the way would be open for the government to take an ownership stake in Virgin Australia. The social and political zeitgeist in Australia rarely favors nationalization with Australia’s Deputy Prime Minister ruling out nationalizing any airlines last weekend. But these are extraordinary times, and things change fast. Australia’s Treasurer, Josh Frydenberg, is now not ruling out Virgin’s proposed bailout.
Virgin Australia normally flies to a range of domestic and international destinations but has suspended its international services and reduced its domestic capacity by 90%. Some 8,000 employees are being stood down.
Airline boss remains resolutely upbeat
The airline has long been hampered by a series of financial losses, an unwieldy ownership structure, and a lack of strategic direction. This has put Virgin Australia in a financially vulnerable position as the current crisis bites.
Despite this, Paul Scurrah has been resolutely upbeat about Virgin Australia’s ongoing prospects. He told the ABC’s Radio National Breakfast program last week;
“We made some very hard decisions yesterday for that very purpose. It’ll allow us, to set us up to manage through the crisis and to make sure that we’re set up to recover when the virus is over.”
When asked if Virgin Australia had approached the government for a bailout, Mr Scurrah said;
“Right now my focus is on making sure we take the responsible action that is required to get us through this crisis. As I think every commentator in the world has said about airlines, if this goes for a long period of time, then yes, every airline in the world will need it – government support.
“As a responsible company, yeah, we have to make sure that we, if and when we need cash, that we explore every avenue that we possibly can. So, foreign ownership of airlines in our country is not unusual. There’s a large amount of foreign capital across all airlines in this country. So, I think one thing you’ll find me not doing is heading down to Canberra and advocating for support fort Virgin at the expense of other airlines.”
Pundits nervous about the future of Virgin Australia
Virgin Australia went into the crisis holding about USD$555 million in cash. Last week, Mr Scurrah said his aim was to conserve that cash to ensure Virgin Australia survived. But in a note to clients last week, Credit Suisse says Virgin Australia will burn through that cash reserve by June and will need additional funding to survive.
On the same day, Paul Scurrah was talking up Virgin Australia on Radio National, Standard & Poors downgraded the airline’s credit rating to CCC, added a 12-month credit watch alert and valued Virgin Australia’s debt at CCC-. The credit agency said;
“We estimate that up to half of Virgin Australia’s operating costs are fixed and that a reduction in variable costs will not offset the collapse in revenue.”
The uncertainty surrounding Virgin Australia is making many people nervous. The airline’s local competitor, Qantas, has ratcheted up its anti-bailout rhetoric just as Virgin Australia seeks assistance. Hoping we forget that he was prowling the corridors of Parliament House earlier this decade seeking financial help, Qantas CEO, Alan Joyce let fire last week, saying;
“Governments are not there to pick winners and losers and governments are definitely not there to support companies that have been badly managed for 10 years. A government is definitely not there to support a company that is owned by Singaporeans, Chinese, Abu Dhabi and a British billionaire. They have to do what’s right for the country.”
Australia needs two strong airlines
Mr Joyce aside, just about everyone agrees that Australia needs two strong airlines in the post-crisis era. Even rusted on Qantas loyalists generally agree that Qantas having ownership of local skies would not be ideal. This view is also held by a pro-competition Australian government.
While Virgin Australia may not emerge from these turbulent times the same airline as it was at the start, there is a growing consensus that Virgin Australia will not be allowed to fail. As Paul Scurrah said last week;
“We need a strong aviation sector that can provide competitive pricing. It’s in the public interest.”