Coronavirus: Virgin seeking $1.4bn bailout to keep flying

Virgin Australia confirms talks over a $1.4bn government bailout request, which Canberra is considering.

A deserted Virgin Australia terminal at Sydney Airport. Picture: John Feder

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

The halt came as the ASX sought market disclosure from the airline, following reports in The Australian of the bailout request.

Virgin Australia responded with a statement from CEO Paul Scurrah, acknowledging The Australian report, and confirming he continued to explore a range of options to manage through the COVID-19 crisis.

Mr Scurrah said financial support of a $1.4bn loan facility was a “preliminary proposal that remained subject to approval from the Virgin Australia Holdings Board and the Australian Government, and may or may not include conversion to equity in certain circumstances”.

“Companies like the Virgin Australia Group are taking a range of measures to respond to and manage the financial impact,” Mr Scurrah’s statement said.

“However support will be necessary for this 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.”

Virgin Australia continued to be in compliance with its continuous disclosure obligations and would update the market as required, he added.

Shares in Virgin jumped 31 per cent to 10.5c following confirmation of the talks.

On Tuesday morning, The Australian reported that the plan proposed by Mr Scurrah last week, would see the government take an ownership stake in Virgin Australia if it was unable to repay the loan within two or three years.

The plan is a bid to keep the airline viable if the crisis continues beyond six months.

While Mr Scurrah told the government that Virgin was not in need of an immediate cash injection, uncertainty over the length of the crisis meant the government might be the only feasible funding option left with normal debt and equity markets unlikely to be an option down the track.

It is understood that the government is still considering the proposal, which called for a $1.4bn loan instrument that could be converted to equity if repayment of the debt could not be met.

Virgin Australia CEO Paul Scurrah. Picture: Britta Campion

Finance Minister Mathias Cormann said on Tuesday that the government was not yet planning to bailout Virgin, but it was committed to ensuring two airlines are operating in Australia.

“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.”

Josh Frydenberg did not rule it out but said he would not comment on commercial negotiations.

He said Virgin would ultimately benefit from Monday’s wage subsidy package.

“I think yesterday’s (Monday) announcement, they will be very important for a company like Virgin as well because it will provide wage subsidies for many of their workers,” the Treasurer told Sky News.

Anthony Albanese did not rule out Labor supporting a Virgin bailout.

“We have a good structure in the aviation sector here in Australia. I wouldn’t like to see that changed or diminished in terms of competition,” the Opposition Leader told ABC radio.

Mr Scurrah is believed to have suggested any rescue package not be exclusive to Virgin and should be part of a broader aviation industry package of up to $5bn.

The request for government intervention in the Australian market comes as major airlines around the world have been extended multi-billion-dollar government bailouts, including US giant Delta and Singapore Airlines which received $9bn.

There is sympathy within the Morrison government for the argument that it needs to maintain a competitive aviation market once the economic crisis lifts.

The prospect of government assistance for Virgin, which has a market capitalisation of $675m, sparked a war of words between Mr Scurrah and Qantas chief executive Alan Joyce a fortnight ago. Mr Joyce had said the government should not “pick winners and losers” in relation to propping up airlines and that “badly managed” companies shouldn’t be ­supported.

Following Mr Joyce’s intervention, Mr Scurrah wrote to staff labelling the Qantas chief’s comments as “very disappointing” and complained to competition watchdog chairman Rod Sims to investigate “public commentary and an industry-wide campaign by Qantas that is designed to ensure a lessening of competition in the aviation sector”.

Qantas, which has said it could ride out the coronavirus outbreak using cash reserves, and Virgin have stood down a combined 28,000 workers in response to travel restrictions and domestic lockdowns triggered by the COVID-19 outbreak.

Mr Sims last week told The Australian he was concerned about the language Mr Joyce had used in the current climate.

“The ‘survival of the fittest’ (reference) followed by language about government not giving (Virgin) support — it’s just the implication that Virgin might be in trouble,” Mr Sims said. “That could be seen as ‘wouldn’t it be good if they weren’t here anymore’. It’s not what we need to be seeing at this time in Australia.”

Eight regional airlines last week sent a letter warning Transport Minister Michael McCormack that they would run out of cash within days and called for the government to “temporarily underwrite” smaller to mid-size airlines. The airlines, including Fly Pelican, Airlink Airlines, Alliance Airlines and Hardy Aviation, told the Deputy Prime Minister that travel restrictions and lockdowns had resulted in airlines being left with little option but to “suspend all or nearly all of their scheduled regular passenger transport flights”.

“The containment strategy has had a devastating impact on the revenue of all airlines but in particular for smaller regional airlines with lower capital reserves,” the joint letter said.

“Unlike the major carriers our companies are generally privately or family-owned. The current funding crisis facing our companies results not from mismanagement but as a direct result of government policy to restrict travel. The priority to save lives is important but so too is the protection of businesses and the economy generally.

“It is galling that our viable companies, typically having been built up over a period of many years, face imminent closure under circumstances they had no control over.”

The airlines said “restoration of regional air travel services” was highly doubtful if existing operators were not protected.

“What is urgently needed is meaningful and substantial support, fairly distributed, in which the government temporarily underwrites the smaller to mid-size airline operators until such time as normal demand returns.”

On the weekend, regional airline REX welcomed moves by the government to set up two funds worth $298m to support smaller regional operators in staving off any fall into administration. REX deputy chairman John Sharp said the additional funding would help in attempts to “prevent the existing regional aviation providers from collapsing”.

On Saturday, Mr McCormack announced a $198m regional air network assistance package, building on the government’s previous $715m aviation assistance measures. Mr McCormack said the new fund would guarantee core routes for domestic airfreight would remain open and essential workers would remain employed. A $100m fund has been set up to provide direct financial support to smaller regional airlines.