Virgin Australia seeks $1.4 billion Government bailout

Virgin has pitched a $1.4bn loan as part of a broader $5bn aviation industry rescue package.

By David Flynn, March 31 2020

Virgin Australia seeks $1.4 billion Government bailout

Virgin Australia has confirmed it is seeking a $1.4 billion loan from the Federal Government to survive a prolonged coronavirus grounding.

It's reported that under the plan, if the airline was unable to repay the loan in full within two to three years, the government would take an equity stake in the company.

However, Virgin isn't asking for the money right away: according to The Australian, CEO Paul Scurrah has "told the government that Virgin was not in need of an immediate cash injection," with sufficient cash at hand to weather up to six months in a COVID-19 scenario.

Mindful of potential criticism over the Government bailing out Virgin alone – including recent comments by Qantas CEO Alan Joyce that the Government "can’t pick winners and losers" and that any aid should be shared across the sector – Scurrah is said to have suggested that rescue package "not be exclusive to Virgin and should be part of a broader aviation industry package of up to $5 billion".

In a statement issued today, Virgin Australia said "it continues to explore a range of options to manage through the COVID-19 crisis, including requesting financial support from the Australian Government in the order of $1.4bn as part of a broader industry support package to prepare for a prolonged crisis."

"It 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."

A $5.6 billion cash splash?

But if Virgin is to receive $1.4bn, then it's suggested Qantas would ask for $4.2bn if the Government support would be proportional to the size of each business.

"Qantas has told the government that it does not want further financial support and is confident of seeing out the crisis on its own, according to a well-placed source with knowledge of discussions between the airline and government," The Sydney Morning Herald reports.

"However, the airline is insisting that if the government helps Virgin it wants to receive a similar package to avoid distorting the market and to 'level the playing field'. Qantas’ revenue is three-times higher than Virgin’s, meaning it would want a $4.2 billion loan, the source said."

Such stratospheric numbers may have seemed a flight of fancy before Prime Minister Scott Morrison launched a $130 billion wage subsidy to pause business layoffs and rehire workers, warning that the current restrictions – which have pared air travel to the bone – could last for six months.

"There has never been a travel environment in Australia as restricted as the one we see today," Scurrah said recently. "We are now facing what will be the biggest grounding of aircraft in this country's history."

A Virgin Australia spokesperson said today that "companies like ours are taking a range of measures to respond and manage the financial impact."

"However, the support we've proposed will be necessary for the industry if this crisis continues indefinitely, to protect jobs and ensure Australia retains a strong, competitive aviation and tourism sector once this crisis is over."

Cash reserves

While Virgin had an estimated $1.1 billion of cash on hand at the end of 2019, Credit Suisse analyst Paul Butler has advised clients that Virgin could burn $860 million of that cash stash by June and could need a further $829 million next financial year.

The airline has suffered through seven straight years of losses, with an $88m loss for the most-recent half-year of July-December 2019.

In comparison, Qantas can fall back on reserves of $2.95 billion – with an additional $1 billion if needed – following a 10-year 'debt funding' loan worth $1 billion against seven of its Boeing 787-9 Dreamliners.

No nationalisation plans

The Federal Government has already committed over $1 billion in support for Australia's aviation sector, although Deputy Prime Minister and Transport Minister Michael McCormack says "it is not the government's intention to nationalise airlines."

"We want them to continue to be commercial operations," McCormack noted at the weekend unveilling of a new $298m package for regional carriers. "We want the aviation sector to come out the other side as best it can."

Finance Minister Mathias Cormann said today that while the government did not intend to bail out Virgin, it was committed to ensuring that Australia had two airlines competing for travellers.

“It’s not our plan to take a stake in an airline,” he told ABC Radio. “But let me also say that on the other side of all of this, of course, we are committed to ensuring that through our policy settings and the like that on the other side, that we have two competitive airlines and that we’ve got an aviation sector with two major airlines competing with each other.”

Virgin Australia stakeholder Singapore Airlines was last week granted an $15bn emergency investment from state-owned Temasek Holdings to not only ride out the short-term financial challenges but "position it for growth beyond the pandemic", said Temasek CEO Dilhan Pillay Sandrasegara.

"The delivery of a new generation aircraft over the next few years will provide better fuel efficiencies as well as meet its capacity expansion strategy."