Credit downgrade cuts Virgin Australia to ‘substantial risk’ as coronavirus hits hard

Virgin Australia’s woes have continued with another credit ratings agency downgrading the airline to a “substantial risk”.

The future is looking grim for Tigerair, with the airline currently grounded and pilots expected to be among 1000 redundancies at the Virgin Australia Group. Picture: Stuart McEvoy

Embattled airline Virgin Australia has been dealt a further blow with S&P Global downgrading its credit rating to CCC, or “substantial risk”.

The move followed the airline’s announcement on Wednesday it would temporarily ground 125 aircraft, stand down 8000 staff and reduce domestic capacity by 90 per cent.

Virgin Australia is also suspending all international services from this weekend, and low cost partner Tigerair will stop flying altogether until leisure market demand returns.

Analysts Joel Yap and Craig Parker said despite management initiating decisive measures to preserve cash “we nevertheless believe the scale of the COVID-19 exogenous shock has created an immediate and sizeable cash outflow”.

“We estimate that up to half of Virgin Australia’s operating costs are fixed and that a reduction in variable costs will not offset the collapse in revenue,” said Mr Yap and Mr Parker.

“In addition, the positive working capital benefit provided by forward bookings and the Velocity Frequent Flyer business is now likely to partially unwind.

“As a consequence, Virgin Australia’s previous $900m unrestricted cash buffer is likely to materially reduce in the very near term.”

They noted that their analysis did not incorporate any extraordinary support from the Australian government.

“The prospect of Virgin Australia receiving timely and co-ordinated shareholder support appears unlikely given that its shareholder airlines are experiencing financial challenges to varying degrees,” the report noted.

Last week, Moody’s also downgraded Virgin from B2 to B3.

On Thursday, Virgin Australia CEO Paul Scurrah said more than 1000 of the 8000 workers stood down would probably be made redundant.

The figure was likely to include Tigerair pilots, after the axing of their Melbourne base.

Mr Scurrah said the crisis was the “worst” the airline industry had ever seen.

International Air Transport Association CEO Alexandre de Juniac said travel restrictions and evaporating demand had meant there was “almost no passenger business” left.

“For airlines, it’s apocalypse now and there is a small and shrinking window for governments to provide a lifeline of financial support to prevent a liquidity crisis from shuttering the industry,” Mr de Juniac said.

Virgin Australia’s shares finished the day up 16.9 per cent at 8.3c, the highest in almost three weeks.