Virgin Australia looks at risk of collapsing. Photo / 123RF
Virgin Australia looks at risk of collapsing. Photo / 123RF
Opinion
COMMENT:
As Virgin Australia looks at risk of collapsing, Qantas boss Alan Joyce is probably hoping the nation's second carrier limps through the Covid-19 crisis more or less intact.
While the idea of a monopoly over Australia's skies for a few months or even years might on the face ofit look attractive to Joyce, it would ultimately be detrimental to Qantas.
Certainly the Australian government has made it clear Australia needs two major airlines.
But how it will ensure that will happen in the aftermath of the Covid-19 pandemic is a much more difficult question.
There are two options: provide Virgin with a government bailout, or let it go under in the expectation that a new second airline will emerge.
A second Australia carrier keeps Qantas in check. We saw after the collapse of Ansett what Qantas does when it has sole control over Australia's airways. Left to on its own, the flagship carrier will likely ratchet up airfares to make flying almost prohibitively expensive and service only the most profitable routes, leaving many regional centres on their own.
A second airline in Australia is also important for Air New Zealand. Ideally, the Kiwi carrier would align with the second carrier for feed traffic from Australian regional centres for its trans-Tasman routes, because a competitor like Qantas is unlikely to help.
Like other airlines around the world, Virgin Australia has essentially ground to a halt. Almost all of its aircraft are grounded and Virgin is hence is bringing in no income. And while it might yet survive the Covid-19 economic crisis, it's true that even before the pandemic struck it was in poor financial shape. On Saturday it confirmed it would close its New Zealand base with the loss of 550 cabin and flight crew jobs.
Virgin has a cash pile of about A$1 billion ($1.02b), which analysts at Credit Suisse say it will have largely burned through by June. Goldman Sachs analysts aren't quite so pessimistic, estimating its cash would last for eight months. By contrast, Qantas could last for a year, says Goldman Sachs.
So if Virgin really looks like going under, what would the government do?
Virgin has said it needs A$1.4b in help from the government to ensure its survival. It is suggesting a loan which would convert to a shareholding if Virgin defaulted. On current share prices that would leave the government holding about 70 per cent of the airline.
While the Government has said Australia needs two airlines, it has also said it doesn't want to own one. Additionally, while it is happy to provide broad economic support during the crisis and even support for particular industries, Prime Minister Scott Morrison and Treasurer Josh Frydenberg don't want to set the precedent of bailing out a single company.
NeedToKnow3
If having only one airline is bad for a nation, having none is a disaster, particularly for an economy reliant on tourism, and this is why the New Zealand government has taken a different approach and bailed out Air New Zealand. It had no choice.
Virgin is also facing a concerted campaign against a bailout from Qantas chief executive Alan Joyce.
Joyce believes the government shouldn't bail out a carrier which hasn't gone through the structural pain of bolstering its finances in the same way Qantas has over the past few years, by shedding excess staff and reining in expensive and inefficient work practices. He argues that if Virgin gets its requested government assistance, then Qantas should get an amount commensurate to its size, which would come to A$4.2b.
It would be easy to accuse Joyce of wanting a monopoly to cash in on, but that is probably only part of his objection.
With a government guarantee, Virgin could borrow money more cheaply than Qantas, a huge advantage in a capital-intensive industry like aviation. Joyce is a strategic thinker who won't want to compete against a government-backed airline.
Secondly, Joyce won't want a precedent set by the proposed deal. If worst comes to the worst and Qantas needs government assistance, it won't want to hand over a large equity stake that would slash current shareholders' holdings.
The other option the government has canvassed is allowing Virgin to go broke in the expectation that another player would emerge to pick up the pieces and quickly establish a second airline.
If Virgin did go under, much of the infrastructure required to support a second carrier, is already in place. It already has terminals, it owns some of its fleet, and there would be a ready-made workforce keen to start earning a wage again. Buying the airline on the cheap without its current debt burden would be an attractive option after the crisis.
As for who that might be, it's possible that a private equity consortium could come to the party. Buying a cheap airline, getting it back on its feet and floating it on the stock market in one of those brief windows when the stars align for the aviation sector could produce huge profits.
Otherwise, the government could relax foreign ownership restrictions, making way for a carrier such as Singapore Airlines to come in and aggressively compete against Qantas
A cashed-up second airline would be good for Australia but wouldn't be great for Qantas.
