Virgin Australia, Why Won't The Aussie Government Rescue The Country's Second Largest Airline?
Following the suspension of trading of Virgin Australia stocks last week, Virgin Australia announced this morning that due to the sharp decline in travel demand caused by the Covid-19 pandemic and its own high-debt operating conditions, the company will enter into voluntary administration and has appointed Deloitte as the administrator to reorganise the assets in hopes to overcome the difficulties. Since the beginning of this year, Virgin Australia has been hit by this coronavirus pandemic. Since the end of March, all international flights of Virgin Australia have been suspended, and the proportion of domestic flights has also exceeded 60%.
Virgin Australia was established in 2000 and initially operated in Australia with a low-cost business model under the brand of “Virgin Blue”. After Australia’s second-largest airline Ansett collapsed in the economic crisis followed by the 9/11 event, Virgin Blue quickly captured 30% of Australia’s domestic market share, becoming the second-largest airline after Qantas. In 2011, Virgin Blue transformed into a full-service airline, renamed Virgin Australia, and now has more than 130 aircraft, with a network of more than 41 major domestic and foreign cities. Although Virgin Australia has been operating at a loss for eight years in the past decade, the company contributes 11 billion Australian dollars to the Australian economy and provides employment for nearly 160,000 people. Moreover, Virgin Australia has been an important player in maintaining the balance of competition in the Australian aviation market for many years. Its competition with Qantas has guaranteed the interests of consumers to a certain extent. Some aviation analysts have suggested that if the Australian aviation market is monopolised by Qantas, the average fare will increase by 10-20%.
Faced with the severe blow of the pandemic, Virgin Australia has repeatedly requested financial assistance from the government, A$ 1.4 billion in loans to be exact, but the government disapproved of it. In recent days, Virgin Australia once again applied to the government for an emergency grant of A$ 200 million to maintain its two-week operation. During this period, Virgin Australia continued to negotiate capital injection with potential investors to find a solution. But the government once again rejected Virgin Australia’s application, and immediately, Virgin Australia announced that it had entered into voluntary administration.
Since Virgin Australia made such an important contribution to the consumer market, Why won’t the Australian government rescue the airline when it’s being hard hit?
First of all, the Australian government believes that bailouts of individual airlines are unfair to the market. The Australian Minister of Finance Mathias Cormann said, “We are dealing here with taxpayers’ money, A$ 1.4 billion is a huge amount of money and you’ve got to make sure that the decisions you make are principles-based and that you’re making the right decisions for the right reasons.” At the same time, he denied the possibility of the government becoming a shareholder, and said,” bailing out Virgin Australia would set an inappropriate “precedent across the economy” for the government to bail out big businesses.” Although the Australian government has made it clear that the Australian aviation market requires two large airlines, the government has never stated that one of them must be Virgin Australia. In the context of the free market, even if Virgin Australia collapsed, the government believes that other airlines will enter the market and gradually become airlines capable of competing with Qantas.
Second, the Australian government is reluctant to benefit the foreign capital behind it by supporting Virgin Australia. At present, most of Virgin Australia’s shareholders are foreign capital, including Etihad Airways (accounting for 20.94%), Singapore Airlines (20.09%), Nanshan Group (19.98%) and HNA Group (19.82%). The Virgin Group, its founding shareholder Richard Branson, accounted for 10.42% of the shares, and the remaining shares were owned by other investors. In the current situation, the consortiums that are major shareholders are also in difficulty and have no spare time to take care of Virgin Australia. The Minister of Finance Mathias Cormann stated publicly, “Virgin Australia is a very good airline performing a very important role and this is a difficult day for its staff, for its suppliers, and for the aviation sector more broadly. But the government was not going to bail out five large foreign shareholders with deep pockets who, together, own 90 per cent of this airline.“
The third reason is that the Australian government has to consider the intentions of other airlines in the industry. When Virgin Australia requested assistance from the government, Qantas constantly stated to the media that any assistance should be for the entire industry and should be proportional to the size of the company. Such assistance is fair and reasonable. If the Australian government provides assistance to the entire industry according to the company’s size and provides A$ 1.4 billion in aid to Virgin Australia, it will need to provide A$ 5.6 billion in assistance for four times the size to Qantas, together with other airlines, it will overwhelm the government’s finances. Alan Joyce, the chief executive of Qantas, whose financial position is relatively stable, has also repeatedly suggested that the government respect the market rule of “survival of the fittest” and do not need to take care of companies that fail because of their poor management.
Although Virgin Australia went to voluntary administration without receiving government assistance, voluntary administration only entrusts professional third parties to manage it. It does not mean bankruptcy and liquidation, nor does it mean that the airline company has ended its life. During the administration period, Virgin Australia will continue to operate. In a statement submitted to the Australian Securities Exchange (ASX), Virgin Australia stated that through the administration process, the company’s assets will be reorganised to enhance its ability to respond to the crisis.
Virgin Australia CEO Paul Scurrah said, “There are currently at least 10 potential investors watching the progress of the event“, which includes the Australian private company BGH, and another consortium involving Etihad Airways, which is rumoured to even include China’s state-owned airlines. Australia’s local governments – the Queensland government and the New South Wales government also actively strive to provide financial support for Virgin Australia on the premise of certain bailout conditions: the Queensland government stated that if the federal government permits, it will provide A$ 200 million to Virgin Australia. As a condition, Virgin Australia’s headquarters must remain in Queensland to stabilise local employment; the New South Wales government claims that if Virgin Australia moves its headquarters from Brisbane, Queensland to Sydney, it will provide certain financial assistance.
It has been reported that asset restructuring under administration may make Virgin Australia lose its current structure of ownership with foreign capital involvement. After the outbreak, Virgin Australia may transform into a low-cost airline that initially reduced its size to focus on the more profitable domestic market. A government official said, “under this model, our preferred outcome is that the airline emerges as a competitor with Qantas but not costing the government a dollar.”
The original article is in Chinese, this version is translated by Albert K. Field