- The Australian airline sector faces three different fates as Virgin Australia goes through voluntary administration.
- If Virgin can convince private investors in the current climate, it could reemerge in a leaner, scaled-down form.
- If it can’t, it could collapse, either leaving a Qantas monopoly or allowing a foreign airline to enter the market.
- Visit Business Insider Australia’s homepage for more stories.
Virgin Australia’s entrance into voluntary administration could see it become the country’s first major casualty of the coronavirus shutdown.
As Deloitte administrators now pore over its books, the company will need to find some new investment if its to survive the year. If it can’t, Australia’s airspace may soon be dominated by a single carrier in the form of Qantas.
These are the fates the beleaguered airline – and Australia’s airline sector generally – now faces.
A slimmed-down Virgin Australia could exit administration
The best-case scenario for Virgin right now appears to be if the airline can get itself in the kind of shape it needs to fly again.
To do so it’ll need a few key things, the first of which is new investors. Virgin Australia is currently controlled by different foreign state-owned airlines, Ethihad and Singapore Airways, alongside Chinese aviation conglomerate HNA and Nanshan Group all retaining respective 20% stakes. Richard Branson’s Virgin Group holds another 10% stake, with none keen to stump up more money to keep Virgin in the air without a government handout.
The federal government meanwhile has stated in no uncertain terms that a $1.4 billion bailout is not on the cards. with Treasurer Josh Frydenberg repeating that sentiment on Tuesday.
It leaves Virgin with no choice but to court private investment, a prospect that looks quite likely according to Deloitte.
"We are calling for expressions of interest which we expect to receive over the next couple of weeks," says Strawbridge.
He says they expect to know what the position will be over the next two to three months.
— David Crowe (@CroweDM) April 21, 2020
To make a deal, there’s no doubt the airline will need to go through some significant restructuring to ensure its solvency. While Deloitte maintains there are enough cash reserves to see it through a restructure, the airline will need to have a solid plan to slash its debt levels and learn to operate on a far leaner basis.
If successful, the airline that emerges could look somewhat different to the one that went in, with significant cost-cutting likely to result in fewer routes, less flights per day and a whittled-down offering that could see perks like Velocity points devalued significantly.
Virgin could collapse entirely, leaving a Qantas monopoly
However, it should be noted that even before COVID-19, the company was in anything but top condition, having posted consecutive losses for the last seven financial years. While CEO Paul Scurrah had been cutting loss-making routes since coming aboard last year, the airline still had a long way to go.
If it can’t cut costs enough to satisfy the administrators and private investors that there is a sustainable business to be had, Virgin Australia could well collapse.
It’s certainly a risk that founder of Virgin International Richard Brandson has considered, calling the current crisis “the most challenging time we have ever faced” in a public letter.
“The brilliant Virgin Australia team is fighting to survive and need support to get through this catastrophic global crisis,” Branson said. “If Virgin Australia disappears, Qantas would effectively have a monopoly of the Australian skies. We all know what that would lead to.”
Scurrah and Strawbridge were decidedly more sanguine in a note to the ASX on Tuesday, saying administration is an opportunity to “recapitalise” the business and “securing the future” of the company.
Virgin could collapse, and another airline could take its place.
While the government has stated its objective is to maintain a two-airline market, it’s been explicit in saying Virgin doesn’t have to be one of them.
That leaves the field open to a new entrant. Given there’s unlikely to be any new ones born into this elephant’s graveyard in the next 12 months, that hole would need to be filled by an existing one in the region.
While it’s difficult to say, Singapore Airways might have an incentive given its proximity to the Australian market and the fact that its exposure to it would have just evaporated along with its 20% stake in Virgin.
Another likely entrant into the now empty airspace could come from across the Tasman in the shape of Air New Zealand. It would have lost some business from its codesharing deal with Virgin and could be keen to take advantage of its absence.
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