A Virgin bailout would be a step too far for the government

If the government does help Virgin, conditions should be imposed on CEO Paul Scurrah’s pay. Picture: Jeremy Piper

A federal bailout of the airline industry is a step too far and runs counter to what so far has been a well-constructed government rescue effort.

Treasurer Josh Frydenberg has made it clear he wants to maintain two airlines in Australia, but there is no justification in the government stepping in to decide which two companies should be involved.

Virgin Australia on Tuesday confirmed it has requested financial support from the federal government in the order of $1.4bn, after the airline was placed in a trading halt by the ASX.

Virgin boss Paul Scurrah was asked at the weekend to come up with a definitive plan for the bailout package he has been shopping around Canberra for the last couple of weeks.

His answer is a $5 billion line of credit, of which he wants $1.4 billion.

It mirrors efforts in the US, which has granted a $US100 billion package, of which Delta has grabbed $US10bn.

This week’s federal wages bailout was a welcome initiative, but bailing out the airline sector - even if it does account for eight per cent of the economy - is frankly dumb and should be avoided at all costs by the government and by Virgin.

If Virgin says it doesn’t need the money now then let it go, otherwise provide the most stringent terms that its board would have no alternative but to say no.

If Virgin fails, history shows alternative carriers emerge from the ashes, just as they did from the Ansett collapse.

We are dealing here with a moral hazard which is too large for the government or company to play with.

As soon as the government starts to throw money at specific sectors it opens the debate to a conga line of rentseekers.

What should be done first is to tell Scurrah to pack his bags and instead talk to key shareholder Singapore Airlines about a merger, or take him at his word that he doesn’t need the money right now.

Virgin boss Paul Scurrah, left, with Qantas boss Alan Joyce, who has strongly opposed any prospect of preferential treatment for his rival. Picture: Getty Images

Singapore Airlines is more focused on getting its own house in order but it has just raised $US10.5bn in fresh capital, which is more than enough to buy Virgin.

Virgin’s other four shareholders - including Etihad, HNA and Nanshan - would gladly sell and in any case, HNA is virtually an arm of the Chinese government, which throws even more doubt on the merits of any bailout package.

Inevitably any bailout of Virgin would raise questions about the fact it is 95 per cent foreign-owned.

This is irrelevant but does require some detailed restrictions on the use of the funds, seeing we are playing with taxpayer money.

If Frydenberg makes the mistake of granting Virgin access to cash then it should come with strings like a strict guarantee that Scurrah gets no more than, say, two times the average salary of a Virgin worker.

In the US the top 50 CEOs earn up to a thousand times the average staff.

In Australia, based on ACSI data, the multiple is more like 66 times but if taxpayers are going to bail out highly leveraged airlines, then we can at least demand some control over how they are run and what sort of perks management gets.

Maybe details like that would have Scurrah thinking again.