Virgin base has its price

The Queensland government was keeping quiet on Tuesday as news that Virgin would remain in the state emerged.

While Virgin Australia administrator Deloitte’s Vaughan Strawbridge is knee-deep in negotiations with rival bidders for the airline, one of the questions to be answered now is what deal the Queensland government has done to keep the airline’s headquarters in Brisbane?

Will the state end up with equity in a Virgin 2.0 and if so how much? And what will it paying for it? While it has not been publicly confirmed by any party, it appears that the Palaszczuk government has fended off a last-minute charge over the weekend from the NSW government to do a deal with the two finalists — New York hedge fund Cyrus Capital and private equity fund Bain Capital — to retain Virgin’s headquarters in its state.

The NSW government said on Tuesday that it was still “engaged with all parties including the administrators and the remaining bidders”, but it appears that Queensland has won the main game.

It was never the intention of the Queensland government to make its own bid for Virgin, which some thought in May when state Treasurer Cameron Dick announced plans for “Project Maroon”, which would see the state commit a possible $200m to a bid that would see Virgin keep its headquarters in the state.

But putting up some incentive capital for a bidder to keep Virgin in Queensland made sense given that the airline’s head office employs 1200 staff directly and the state government estimating it is responsible for 5000 jobs in total in the state.

There are also long memories of the suffering in regional Queensland in the time following the collapse of Ansett Australia in 2001. “We saw the punishing increase to the cost of flights after the Ansett collapse,” Treasurer Cameron Dick said in May. “This government will not stand by and let that happen again.”

A large and regionally diverse state, Queensland is heavily dependent on tourism, including regional tourism, and regional industry.

It could not afford to lose regional route capacity or see regional fares skyrocket in the state at a time when domestic tourism is set to play a key role in its economic future.

If the reports are correct, one of the two bidders to be announced by next Tuesday will not only keep Virgin’s headquarters in the state but will commit to keep some base route structure in Queensland.

With a state election due on October 31 this year, only weeks after Virgin’s new owners will be receiving the keys to the cockpits, Premier Annastacia Palaszczuk always had far more to lose from Virgin leaving Queensland than rival states NSW and Victoria would have had to gain from Virgin shifting to their states.

It would have been nice for NSW Premier Gladys Berejiklian to announce that Virgin was moving its headquarters to western Sydney at the site of the proposed aerotropolis near the site of the new Western Sydney airport, but the opening of the second airport is still years away with a proposed opening date of late 2026.

And while the Victorian government has also been involved in talks with the two rival bidders, the Andrews government now has its hands full with a turnover of top ministers and a second coronavirus outbreak.

The Queensland government was keeping quiet on Tuesday as news that Virgin would remain in the state emerged. There is also a long way to go between now and next Tuesday, when the preferred bidder for Virgin will be announced, and the meeting of Virgin creditors on August 21 which will consider a final proposal from administrator Strawbridge and the date when the lucky winner actually starts running Virgin.

On the edges of the negotiations are also the holders of some $2bn in unsecured bonds in Virgin who would also like to do a deal which would allow them to preserve some as much of their original investment as possible.

Faced with losses of as much as 90c in the dollar, the bond holders have got access to the Virgin data room and are rattling around looking to do a deal of sorts.

They too have had discussions with the Queensland government but have so far not come up with any deal or proposal.

Until the bidder signs on the dotted line and Strawbridge hands over the keys — which may not be until August/September — the Queensland government may be able to justify not revealing its package offering to the winner. But sooner or later — well before the October election — it will have to tell taxpayers what it has spent and what it hopes to get in return.

It is not out of the question that the state could end up with, say, 5 per cent of Virgin 2.0 which it can hold onto or eventually sell off at a profit when the airline and the state’s economy recovers.

The government made it clear that it was not just going to hand over a pot of cash but was prepared to put up a package which could range from incentives to equity.

Cameron Dick said the state government’s investment could take the form of a direct equity stake, a loan, a guarantee “or other financial incentives” .

Leading the negotiations for Queensland has been Damien Frawley, the CEO of Queensland Investment Corporation, which manages more than $80bn. QIC has been appointed to “facilitate and manage” the state’s bid for Virgin. But this does not mean that QIC will stump up the whole $200m.

For now, it appears that Treasurer Dick may have achieved the goal that Queensland will retain its claim to being “Australia’s home of aviation”.

The question now is, at what cost?