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 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."
David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.
QF
11 Jul 2014
Total posts 1010
$1.4 Billion convertible notes worth 100% of shares value?
Qantas - Qantas Frequent Flyer
21 Jan 2014
Total posts 319
A reasonable request, not a handout, but a loan, many other businesses across many industries are eligible for Govt guaranteed loan facilities, Virgin should be extended the same consideration.
05 Mar 2015
Total posts 416
Very clever, Mr Scurrah. Bundle your $1.4bn loan into a bigger $5bn package for the entire aviation sector including Qantas. Stops anybody, eg Alan Joyce, complaining about a Virgin bail-out because Qantas stands to scoop up at least $1-2bn of this package as well, and no way will AJ turn that down.
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
If you do the math, it's a whole lot cheaper than the $100+ Billion High Speed Train between SYD-MEL. Only public servants spending our tax dollars will be happy to pay $1,500 for those return airfares. By gee, that Chairman's Lounge is sure working out well now for Qantas. I wonder how many of the decision makers in Government (Qantas' biggest customer) have or will get Chairman's Lounge access?
No conflict there, nothing to see, move on with your lives. (Chuckle Chuckle)
09 Aug 2015
Total posts 108
As this article says, VA has made a loss for the past seven years. It lost $88m in the first half of FY20. And it faces a long slump even after COVID19 is tucked away, probably won't be back to 'normal' for two years. So how on earth does anybody think VA can repay over one billion dollars in three years? To repay $1.4bn in three years it would need to make a $500m profit every year for the next three years. There is no way will that happen. Not a chance!
11 Sep 2015
Total posts 225
I was about to make the same point as Sparksy above, VA simply cannot repay this loan in 2-3 years. Even if we assume that coming out of this Scurrah drops Tiger, completely cuts NZ flying and doesn't re-open the base there, and does a few other things which he probably wanted to do anyway before COVID-19 hit, I just don't see a quick return to profitability, let alone $500m/yr of it. So VA will 'default' on the loan and the government will end up as a major stakeholder in VA. Then VA will be making business decisions through a lens of politics and social obligation, because MPs will be hammered by constituents wanting VA to re-open flights to all sorts of regional centres and country towns, and because the government will have a big share of VA in return for its $1.4bn, it will expect the airline to do what it says. I'm sorry but as much as I want to see Virgin keep flying because I like competition and it helps keep Qantas on its toes, this loan-for-equity is not the way to do it.
Virgin Australia - Velocity Rewards
24 Aug 2011
Total posts 780
Time to send your VA points over to SQ.
20 Jan 2017
Total posts 45
You'd have to ask yourself, if it was your money would you 'lend' it to an acquaintance who you knew was on shaky ground and would struggle to get your money back on time.
As consumers we need competition in Australia, there's no doubt about that. From a business point of view I don't see this as responsible lending.
The last few years Qantas has 'made hay whilst the sun shined' and that shows through its management strategies. It boggles the mind in a good way that they paid 'cash' for the Deamliners. The fact they had that much freed up cash is pretty significant as airlines would always be watching their cashflow. It has now allowed them a 'Plan B' for the rainy days and enabled them to free up cash by taking advantage of sale and leaseback.
From memory, Qantas' loan was 10 years at 2.75% whilst Virgin's was 3 years at 8%..
08 Feb 2018
Total posts 166
Do they need $1.4b if the government is paying their wages bill now?
08 Jan 2018
Total posts 5
If the government lets VA disappear this would give Qantas a monopoly on interstate travel. Fares be through the roofs with no competition. Not even any credible alternatives like fast rail between cities exists. Surely the government won't let that happen?
Should we transfer our VA frequent flyer points to Singapore to be safe?
QF
11 Jul 2014
Total posts 1010
What is the old parenting rule "Treat every kid the same", so it's amazing the Government can hand out that amount of cash to everyone and every business but people think Virgin should be excluded? There is a lot of business I won't feed and there getting the support and help.
17 Jul 2014
Total posts 5
Baffling and disgusting to see these airlines - some of which pay $0 in tax each and every year - now BEGGING for tax-payer cash.
Forget a bailout, let them fail or nationalise one. If a company which pays $0 in tax can't survive even a few months without a bailout, that's the board's fault.
It's just so unfortunate for the staff who, even if the airlines are bailed out, wouldn't see a cent and still have to go without.
Qantas - Qantas Frequent Flyer
21 Jun 2012
Total posts 5
Well they dont pay tax because they have amassed enough tax offsets from previous years of major losses (think Qantas 2014) or are still operating at a loss (i.e. Virgin). That's the tax system.
As for staff, i would call the company staying afloat and still being able to employ and pay them in the longer term a benefit?
01 Nov 2018
Total posts 81
Very simple solution as I've said before, allow foreign airlines eg Singapore Airlines, Qatar, Emirates, Malaysia Airlines etc to fly our domestic routes and watch them clean up both Qantas and Virgin
Qantas - Qantas Frequent Flyer
04 Nov 2017
Total posts 348
@Albinonil967, the foreign airlines are already permitted to and can set up a domestic carrier here in Australia by applying for a AOC.
They can even use their existing names under a "franchise agreement", like how AirAsia does it with "AirAsia Thailand, AirAsia Japan, etc".
29 Jan 2020
Total posts 36
If the Credit Suisse guy is correct, and he thinks Virgin will burn around 860 million between now and end of June.....with most aircraft grounded, most staff laid off, how do they still spend nearly 10 million per day?
Qantas - Qantas Frequent Flyer
12 Jun 2011
Total posts 148
Because most of VA's costs are fixed, it doesn't matter if they are flying or not. eg Aircraft leases. Unlike QF where a much larger portion of their costs aren't fixed VA don't benefit much from not flying like QF does.
Qantas - Qantas Frequent Flyer
29 Nov 2013
Total posts 475
Why not suggest to Virgin and Qantas that there's support available BUT only if Qantas spins out Jetstar and lets that (Jetstar (AU, NZ, Asia)) merge with Virgin so as to become an effective competitor to Qantas?
A duopoly will always be better than a monopoly...
Qantas - Qantas Frequent Flyer
04 Nov 2017
Total posts 348
Jetstar Asia is a separate Singapore-based AOC and is 51% owned by Singapore Investors.
AU/NZ Jetstar are both on the Australian AOC, and JQ are in the process of winding down their NZ domestic operations anyway.
Etihad - Etihad Guest
19 Mar 2018
Total posts 68
Qantas' best bet right now, is actually Jetstar. Thanks to Jetstar Pacific, Jetstar Japan, Jetstar Asia, Qantas is basically an essential player in the world's busiest route COVID19 considered: HAN SGN; as well as the emerging Philippines-Japan, Philippines-ASEAN market. Essentially, it helps distributes risk from the Aussie market, which OAG says, will eventually be as big as Taiwan's aviation market.
05 Oct 2011
Total posts 195
QUESTION I have booked for January, a business class ticket with SQ to UK paid for with VA points (plus the cash of course). Does anyone know FOR SURE what the status of this ticket is. Is it paid and I am relying on SQ to come good or is it , "not paid" and I am hoping that VA makes it so they can pay SQ in January?
11 Sep 2015
Total posts 225
10 Jul 2018
Total posts 104
Generally speaking, the operating carrier (SQ) only gets paid by the ticketing carrier (VA) when you take the flights.
Qantas - Qantas Frequent Flyer
26 May 2014
Total posts 464
How is that VA can't even provide an email to confirm that a booking has been cancelled for a voucher? Does anyone have experience with how long it actually takes for a voucher to be issued after a domestic booking is cancelled?
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
Do if Virgin goes under, and Singapore Airlines comes in (Virgin-2, what ever), there must be not support for Qantas in its battles with Singapore Airlines (a battle of UFC proportion that QANTAS won't win).
Qantas - Qantas Frequent Flyer
04 Nov 2017
Total posts 348
Singapore won't be coming into the Australian Market anytime soon for the foreseeable future. SQ also had 2 goes at the Australian market (through equity) before Virgin and both failed dismally.
In addition, SIA just got a $10B funded bailout from their own government to service their own COVID-19 related debts. The Australian Market in general would be the last thing on SIA's mind as they'll be using their government funded bailout money to fight for their own survival.
Etihad - Etihad Guest
19 Mar 2018
Total posts 68
Virgin Australia has very good prospects actually. It'll be an asset, potentially more than Qantas.
Just imagine, if Delta orders partners to switch. In one shot, Qantas will lose LATAM, China Eastern, China Southern, Vietnam Airlines, Thai AirAsia X, Virgin Atlantic, Korean Air, Air France KLM, Aeroflot etc overnight. If Singapore ever gets enough clout, and orders all Star to switch, Qantas will go belly up. I actually think SQ will sell, and partner Qantas instead eventually.
Anyways, I'm calling it. Lion Air will use eventually own Virgin Australia, replacing their hybrid service Batik Air/ Malindo Air/ (I suspect Bamboo is really Lion in bamboo clothing), and taking Virgin into the new world. I've a feeling Virgin could really be a marketing win in Asia. Virgin is all across Asia, in odd bits and pieces.
Qantas - Qantas Frequent Flyer
12 Jun 2011
Total posts 148
Are we being Punk'ed?
This has been a massive laugh! Thanks Levinn
Qantas - Qantas Frequent Flyer
04 Nov 2017
Total posts 348
You're about a day late on the April Fools Joke there.
Great read though.
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
Virgin Atlantic is already sleeping in the Delta stables.
Qantas
03 Feb 2016
Total posts 11
VA potentially a better asset than QF....please!
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
VA currently not a better asset, but certainly a far better 'opportunity' that Qantas. Think Singapore Airlines (SIA), think SG Government (and it's uber national pension fund), looking for a larger, friendlier land mass (than its island) with similar legal/financial system. Since when, ever, has SIA needed to go begging for equity/debt funding? Never. It doesn't have the cost of a large infrastructure like Q's operations. The $22B additional funding SIA just acquired is more likely to top up its war chest for 'opportunistic acquisitions'. Q, with a market cap of $5B+ and routes that compete with it - hmm. V with an existing infrastructure (and HQ in BNE) and Australian market/loyalty program (minus Tiger Air) and youthful workforce, (unlike those that AJ is constantly battling). It's perhaps the best 'de-risk' option SIA has had in years.
SIA could easily leverage its direct SG-NYC flights to sync with arrivals from BNE, SYD or MEL to offer J Class pax a shower and sit-down meal during a 90-minute transfer. I dunno, I think HNA/Etihad/Nanshan would pass a Convertible Note issue, at too might, perhaps, Delta (although I doubt it). SIA could very well underwrite the issue (for a healthy fee), acquire VA and Velocity, to use Changi as hub for AUS travellers going to to HKG/PRC.
True, VA is not a better class asset than QF, but in terms of opportunity and upside, the Australian-resident shareholders in VAH (of which I'm not) could easily be having the last laugh. It's only AJ's arrogance (and that of the 'Mascot mafia' surrounding him) that's caused them to overlook the advantages to QF of having a struggling VA survive rather than SIA or Delta (or a partnership of both) get active in the AUS market via a privatised VAH Pty Ltd. Now that WOULD be the fastest approval by FIRB since Federation!
Qantas - Qantas Frequent Flyer
12 Jun 2011
Total posts 148
Ohhh, boy. I haven't laughed quite like this for some time.
Thank you :-)
QF
11 Jul 2014
Total posts 1010
I know a lot of people making money from the stock market at the moment, and what a golden egg VA is for a long term again.
Qantas - Qantas Frequent Flyer
04 Nov 2017
Total posts 348
If SQ are the "so-called saviour" as you claim, they would've done their 'so-called' takeover immediately.
Not make a song and dance about it 10000+ times a year, only to end up as 'fake news'
Most of that $20B bailout money/loans SQ got from their government and banks are likely to be covering the day to day million dollar losses due to COVID-19.
Whether SIA has enough leftovers from their bailout money/loans once the pandemic subsides is another question entirely. That $20B could easily run out if the pandemic lasts longer than expected.
SQ are not much better than EY when it comes to investments. Dismal and poorly run.
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
I think you'll find SIA's operating cost structure is leaner and more flexible than QF, so if QF can last 11-12 months ...
To be clear, SIA is less of a 'savior' and more of a well placed opportunist should the Australian Government be convinced to stay out of the way (and not come to QF rescue in its battle with SIA). After all, Virgin has a very, very loyal FF base, its in-cabin staff are fresh and friendly (occasionally a little too informal*) compared to the Matrons and Dowagers serving on its competitor.
If it happened, the only thing that would save Qantas would be a lifting of the foreign shareholding restriction (but we know AJ doesn't like foreign shareholders).
My point is: better the competitor/devil you know than the one you don't. An emotional AJ has screwed up big time trying to kick Virgin down and out. Richard Goyder (the same guy who oversaw and burnt $1.7Billion in Bunnings entry into the UK market) has been too distracted chumming it with the AFL and a little over-focussed on his Chairmans Lounge, leaving AJ (a bit of a media hero in recent times) unchecked. Leigh Clifford retired too soon (well earnt, but too soon), Goyder is clueless and AJ feeling a bit too much like Irish compatriot Conor McGregor. If AJ had any smarts, he'd be keeping his weaker competitor alive and right where he can keep an eye on them.
That's ALL OVER when SIA establishes an Australian beachhead in VAH's BNE office, makes BNE (with its 24/7 operating dual runways so close to the CBD) its AUS HUB and learns how to extract largess concessions from an ever-eager Queen Annastacia Palaszczuk. SIA will be more than a savior to Virgin, it'll have Queensland as its cheerleader.
Stability. Stability, stability, stability.
QF
11 Jul 2014
Total posts 1010
Love it, so true
Virgin Australia - Velocity Rewards
24 Jan 2018
Total posts 767
:-) And I've just taken a screenshot of your posted reply under mine. Thank YOU. :-)
Qantas - Qantas Frequent Flyer
12 Jun 2011
Total posts 148
Same ;-)
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