Coronavirus has seen a nation of travellers grounded — business travel has collapsed, a ban on overseas trips means holidaymakers are going nowhere for now and Australia’s two major carriers have stood down thousands of staff.
- Virgin Australia has requested $1.4 billion in financial assistance from the Federal Government
- Airline bailouts aren’t uncommon around the world, particularly in countries with state-owned carriers
- UTS industry professor Warren Hogan says the Government is unlikely to let Virgin fail due to its strategic importance
The Federal Government has already committed $715 million in relief for the airline industry, waiving taxes and charges and providing assistance for regional airports and carriers.
Last week, Qantas secured $1.05 billion in additional funding to boost its available cash, with an up to 10-year loan secured against seven of its Boeing aircraft.
Virgin Australia is calling for more help, in the order of $1.4 billion. And if the Government obliges, Qantas wants an even bigger piece of the pie.
Just how big is the beef between Qantas and Virgin?
Qantas chief executive Alan Joyce has said Qantas is not seeking a bailout, but has warned that if Virgin gets government aid, the Federal Government needs to “level the playing field” to avoid distorting the market.
Qantas argues that given the airline’s revenue is three times higher than Virgin’s, if Virgin gets a $1.4 billion loan, it should get a $4.2 billion loan.
But Mr Joyce has repeatedly warned against Federal Government assistance for Virgin Australia, saying help should not be offered to businesses that have been “badly managed”.
Mr Joyce has said airlines are facing a “survival of the fittest” scenario as the coronavirus pandemic has grounded thousands of planes and resulted in 20,000 workers being stood down at Qantas and 8,000 workers being stood down at Virgin.
Comments like this prompted Virgin chief executive Paul Scurrah to recently write to Australian Competition and Consumer Commission (ACCC) chairman Rod Sims, alleging Qantas was engaging in anti-competitive conduct designed to damage Virgin.
Mr Sims has urged restraint and cooperation, arguing, “we really need companies working together during this crisis and talking about the survival of the fittest could be seen as quite unhelpful”.
“Every airline around the world needs help, it’s not just Qantas and it’s not just Virgin, they will run out of cash eventually,” Tony Webber, the former chief economist of Qantas, told The Business, estimating the Australian airlines have about six to 12 months’ worth of cash reserves.
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What’s the historical context of bailouts?
Sydney-based aviation consultant Peter Harbison says bailouts often happen for government-owned airlines.
“Air India gets a billion to half a billion each year to keep going,” Mr Harbison said.
“Air Italia has been bailed out many times.”
However, the majority of airlines today are publicly listed companies and the last major significant bailout, apart from those of government-owned airlines, came after the September 11 terrorist attacks when the large airlines were saved by the United States government.
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Now, in the midst of the coronavirus crisis, airlines around the world are crying out for bailouts.
The UK Government has so far proven unwilling to give special assistance to the airline industry, but the US Senate has handed down a $50 billion rescue package for airlines.
This includes $25 billion in direct grants, as long as they agree not to stand down workers or discontinue service at any airports they now serve until at least the end of September.
Another $25 billion is available for loan guarantees.
Closer to home, New Zealand’s Government has committed to bail out its only major carrier, Air New Zealand, to the tune of $NZ900 million ($873 million).
The “standby loan facility” will allow Air New Zealand to draw on the funds if its cash reserves get too low.
The airline agreed to suspend its dividend for the duration of the loan and the NZ Government has the option to convert the loan to an equity stake in Air New Zealand under certain circumstances.
Back in the early 2000s, Air New Zealand gained control of Australian airline Ansett.
When Ansett faced financial collapse, the NZ government agreed to bail out Air New Zealand but not Ansett, which was placed into administration, leading to mass job losses.
The Australian government was also not prepared to bail out Ansett, which at the time was the major competitor to Qantas.
It was the collapse of Ansett that saw Virgin Blue, now Virgin Australia, emerge as the second carrier in the Australian market.
How likely is a government bailout?
The Treasurer and Finance Minister had left the door open to Virgin’s request earlier this week, but Mathias Cormann has indicated the Government isn’t considering buying a chunk of Virgin.
“We have provided $1 billion worth of support to the aviation industry. That was one of the very early decisions that we made in terms of sectoral support. Beyond that, we will continue to make judgements in relation to specific matters if and as appropriate,” he told RN Breakfast on Tuesday.
“It is not our plan to take a stake in an airline.”
Economist Warren Hogan, an industry professor at the University of Technology Sydney, says it’s unlikely the Government will let Virgin fail.
“It is a strategically important firm, in a strategically important industry,” he said.
Senator Cormann said competition in the sector was crucial.
“We are committed to ensuring that through our policy settings and the like, that on the other side we have two competitive airlines. That we have an aviation sector with two major airlines competing with each other,” Senator Cormann said on Tuesday.
Professor Hogan argues it would be politically unpalatable for the Government to simply bail Virgin out by providing funds with nothing in return for taxpayers.
“The example where you provide money to an airline with very few conditions around it and no visibility on how that money is returned to the taxpayer is going to be quite controversial,” he said.
“What you want to avoid is a situation where … the shareholders and the senior management get all the upside when times are good but then when times are bad, the taxpayer bails them out. That’s not, I think, tolerable to the broader community.”
The Australian Financial Review has reported that Virgin won’t be bailed out and the Government would instead facilitate a new carrier entering the domestic market if the airline fails.
What could a bailout look like?
Professor Hogan says the Government should consider setting up a facility to provide funds to distressed companies in return for equity in the firms, which could be sold at a later date when business has recovered.
“It effectively means existing [shareholders] pay for some of the cost, because the value of existing equity goes down … then you use government money to take an equity stake, and that’s the way they inject money into the firm in order for it to pay the bills during the period of distress.
“The public sector, the taxpayer can get their money out in the future when things normalise, they can sell those shares back into the market.”
He likens the idea to Troubled Asset Relief Program (TARP) set up in the US during the global financial crisis, to purchase troubled assets from financial firms.
He says the Government’s response to the airlines will set a precedent for how it deals with other big firms during the coronavirus crisis and it should act now to get such a facility in place.
“I don’t think the Government can assume that this will be the only industry or the only example of large firms that may need public money to support them through the difficult economic times ahead,” Professor Hogan said.
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While former federal Liberal leader John Hewson agrees that a bailout of the airlines could set a precedent, he says the Government has a responsibility to help the airline industry in particular.
“In the circumstances of the virus and given that government policy has actually led to the position these airlines are in … then I think there is a case for saying we can provide some short-term debt assistance,” Dr Hewson, an honorary fellow at the Australian National University, told The Business.
He argues for something similar to an overdraft facility, allowing the airlines to draw on a certain amount of money once they’ve exhausted a portion of their own cash reserves, and repay the amount when their revenues return.
However, Dr Hewson cautions that there should be measures in place to stop any of Virgin Australia’s foreign owners, which include Singapore Airlines, Etihad, Chinese groups Nanshan and HNA and Sir Richard Branson’s Virgin Group, taking advantage of the situation and taking over the company entirely.
Where to next? And what if Virgin fails?
The Government is yet to issue a formal public response to Virgin’s request and Virgin has not updated the market since Tuesday, when it confirmed the request had been made.
“Support 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,” the airline said.
In a note published in mid-March, Boston Consulting Group mulled what would happen if Virgin Australia were to collapse.
It said the likely outcomes include a government bailout resulting in a scaled-back Virgin operation with higher debt, a foreign competitor acquiring Virgin and continuing operations, or a low-cost carrier buying Virgin assets and entering the domestic market to compete with Jetstar.
Interestingly, Boston Consulting Group says the most favourable outcome for Qantas would actually be the survival of Virgin as it is, allowing it to maintain its position in the market and not facing a new foreign competitor, such as Singapore Airlines.
Airline analyst Tony Webber agrees.
“I actually don’t think Qantas wants Virgin to leave the market. I think Qantas would prefer a two-player market, but a weak second player in the market,” he said.
“Because if it resorts to a one-player market, an effective monopoly, then I think they would be worried about the regulatory scrutiny [on airfares].”
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