Virgin’s plea: help us across the bridge

Virgin Australia has called on the government to provide an ­urgent ‘statement of confidence’ for the airline to stay afloat.

Paul Scurrah at Virgin Australia’s headquarters in Brisbane on Tuesday Picture: Glenn Hunt

Virgin Australia chief executive Paul Scurrah has called on the federal government to provide an ­urgent “statement of confidence” for the airline as it continues talks on a $1.4bn loan facility to allow it to survive the COVID-19 crisis.

He said the issue at stake was protecting the jobs of Virgin’s 9500 staff and ensuring Australia did not emerge from the crisis with a monopoly airline position both domestically and potentially on the Pacific route to the US.

“We would like to get a statement of confidence from government as quickly as we can, in much the same was as they would do for a bank,” he said in an interview with The Australian.

“We are not looking for a bailout. We are looking for a hand-up, for assistance to bridge through the crisis. Confidence is a very important thing for airlines.

“We are asking the government for a bridging facility and working with them to make sure there is confidence that people can look forward with certainty that there will be a competitive and robust airline industry coming out of the crisis. We need that statement of confidence ASAP.”

He said the preservation of two airlines in Australia was a vital part of the nation’s economic recovery and was critical to industries such as the tourism sector.

“The federal government wants to emerge from this crisis with two airlines,” he said. “And without us, it is not going to have one. We all know what would happen if there was a monopoly.”

Mr Scurrah said the airline was looking for up to $1.4bn in liquidity from the federal government to get it through the current COVID-19 crisis.

“We are discussing what form that might take,” he said.

“We are prepared to be flexible about how this is done.”

Mr Scurrah, who only took charge of Virgin last March, declined to reveal any more details of its proposal to government.

At the end of December Virgin Australia had unrestricted cash of $900m and $166m in undrawn committed facilities, according to figures contained in its interim results released at the end of February.

Fitch Ratings analyst Kelly Amato said on Tuesday Virgin needed to get some additional liquidity within three months “if it is to ride out the government-­imposed shutdown on aviation”. “They have a little bit longer than that — a couple more months tops,” she said. “They need to ­secure some additional funding from somewhere.

“In the current state of the credit markets it will be difficult for them to get a loan (from the private market).”

According to information given to The Australian last week, plans being discussed could see Virgin emerging with the federal government as a majority owner if Virgin could not repay the loan in two or three years.

Virgin’s shareholders include Singapore Airlines, Etihad Airways, and two Chinese investors — the financially troubled HNA group and Nanshan — all of which have a 20 per cent stake in the company.

About 9 per cent is held by Australian shareholders through the company listed on the ASX, while Sir Richard Branson’s Virgin Group has another 10 per cent.

Fitch recently downgraded Virgin’s credit rating as it considered that Virgin’s major shareholders were not in a position to provide more financial support given their own problems.

In a statement to the ASX last week Virgin said proposals being discussed with the federal government “may or may not include conversion to equity in certain circumstances”. Virgin’s shares are trading at around 8c, with the company’s market capitalisation now valued at about $675m.

Mr Scurrah said the leaking of Virgin’s appeal for a $1.4bn loan from the federal government last week had added to the financial pressure on the airline as it battles to survive a near-total shutdown of global and domestic travel.

“The leaking of the document has had the unintended consequence of people starting to question whether we may or may not be around,” he said. “We have seen a significant increase in people demanding refunds and a significant increase in activity with our frequent flyer program, both of which don’t help.”

Mr Scurrah said there was almost universal acceptance in Australia of the need to maintain two viable airlines as the country came out of the COVID-19 crisis.

“I don’t think that there is anyone who disagrees with the fact that Australia needs two competitive and strong airlines,” he said.

“This is a crisis of nobody’s doing. It has taken a free market and turned it into no market. It has decimated airlines globally.”

Mr Scurrah strongly rejected suggestions that if Virgin collapsed, a new entrant could easily come into the market to replace it and provide a competitor to ­Qantas. He noted it had taken Virgin two decades to get to a position where it was a financially viable competitor to Qantas.

He said any new potential ­operator would not be able to get funding from international airlines, which would have been the most likely investor in the past, as they were also being bailed out by their own governments.

There was a real danger that if Virgin were not around Qantas would also have a monopoly on the international routes to the US. He said this was because the Trump administration had made it clear its financial assistance given to US airlines would only be available to help US jobs and might not be available for them to continue flying to Australia.

Mr Scurrah said Virgin had taken 20 years to get to its current position. It would take “three to five years” to attract any new investors to put money into a new airline in Australia and 20 years for it to be able to be a serious competitor with Qantas.

Mr Scurrah said Virgin was “talking to all potential sources of capital coming into the business”,

He did not rule out that this could include a potential equity raising on the ASX. He said he did not want to speculate on any potential moves by the company including going into voluntary administration or a scheme of arrangement with its creditors.

“I am not focused on us collapsing,” he said. “I would prefer not to speculate on anything else but finding a way to trade through this in our own right.”

Mr Scurrah said it was Virgin’s view that financial assistance should be given to all airlines to get through the current crisis and play a role in the economy as it emerged from the crisis.

However he said he did not know when Virgin would receive a response from the federal government on its proposal.

“We are one of a number of parties in a quite long queue (asking for financial assistance from the federal government).

“But we are, in my view, a very, very important part of a rapid recovery which is why it is important to address it sooner than later.”

He rejected suggestions by Qantas chief executive Alan Joyce that Virgin should not get assistance as it had been badly managed. After 20 years of operation Virgin was now becoming more financially viable.

He said Virgin had already taken some tough decisions to reduce its cost base including shutting down its Hong Kong routes, closing its New Zealand base. The crisis had also allowed the airline to take other cost-cutting moves such as renegotiating contracts with suppliers. Fitch downgraded Virgin from B-plus to B-minus and put the airline on “rating watch negative”. It said the downward notch had come from its current liquidity pressure because most of its fleet had been grounded due to the COVID-19 crisis.