Canberra treads a dangerous flight path on rescues

Virgin Australia CEO Paul Scurrah Cartoon: John Tiedemann

As Australia fights the coronavirus, Canberra is heading into dangerous policy turf that could severely limit its ability to recover from what economists predict will be a severe recession this year.

In Canberra on Tuesday, talk will reportedly include what sort of rescue package, if any, can be put in place to ensure Australia has two viable airlines.

The ACCC is bending over backwards to get business co-operating in a way that is on one level appealing and in another quasi-cartel behaviour.

The Feds in the past month have put in place a rescue package totalling 14 per cent of GDP that is both necessary and desirable but is also a relic of the days of big government.

They will shortly agree to expanded flights from both airlines underwritten by Canberra to maintain “minimum” services.

Where concern lies is on both the time for which these controls exist and the extent to which they delve into industry management like a Virgin rescue package.

Then there are landmark agreements between long-running adversaries such as Apple and Google with genuine public health appeal to develop applications to let people know when they have been in contact with someone who has tested positive to the virus.

Ultimately, such a deal would need government backing, but then red flags wave when you ­realise both companies are in business to collect data on you to sell advertising. How far does Google need to take it?

The two acknowledge the concerns by saying the alerts would drop off the moment you delete the app.

The ACCC has sanctioned talks between health insurers to “release with a unified voice” policies around rebates for premiums due to the shutdown of elective surgery.

Members would be better served if the insurers actually competed to give the best service and discounts.

There are genuine areas of policy that Canberra could pursue such as skills training, support for the apprentice network, technology and energy policy.

Government purchasing policies can be used to support local industries such as medical equipment, but there is no need to overturn decades of established policy by trying to recreate the manufacturing industry.

When the recovery comes it will come faster if big government and a highly concentrated industry network isn’t standing in the way.

Banking on bailout

The federal government is expected to underwrite an expansion of domestic airline services in an effort to keep more services running during the crisis. Virgin now does just five flights a week between Sydney and Melbourne, Qantas five a day, down from 48, among other routes and demand is tiny.

The government will pay to expand the services of both airlines, but so far has stopped well short of agreeing to any direct assistance for Virgin.

Deputy Prime Minister Michael McCormack has said the government would spend $1bn to help the airlines primarily by way of discounted service charges dated back from February 1.

The money has yet to be transferred into the airlines’ accounts, but by all reports $250m has been transferred to Air Services Australia, which is effectively the money the airlines would have paid for the air traffic controllers and other services.

McCormack, as transport minister, it seems is ensuring his money is in the bank.

Virgin chief Paul Scurrah is talking with his shareholders to get them used to the fact that any government deal would wipe out their equity.

Canberra it should be stressed is letting Scurrah talk to the shareholders and studiously avoiding creating any expectation of a deal.

That hasn’t stopped the chatter with one idea circulating being a $1.4bn convertible note providing capital convertible into equity for just $1 for all the equity. The market now values the equity at $684m. That equation should send the message to equity holders like Singapore, which paid $126m for its last 10 per cent in 2013, which would total $253m for its 20.3 per cent stake. That is now valued at just $140m by the market and, under the convertible note plan, just 20.3c a share.

The idea being equity holders would realise they hold few bargaining chips, nor do the bond holders who control $2bn in unsecured debt with the rest secured against aircraft.

The shareholder and debt talks are looking at just how the entire capital structure can be cleaned up, including the liabilities on the 9500 workers, of which 8000 have been stood down.

The dream deal is for a Singapore takeover backed by the federal government to clear the deal for the Singapore government-controlled airline, but talks are continuing with Etihad (20.9 per cent), Nanshan (20.01 per cent), HNA (19.8 per cent) and Richard Branson (10.02 per cent).

The convertible note plan is one idea, another is a scheme of arrangement with a US bond holders deal to clean up the capital structure and provide government backing for the staff under the Fair Entitlement Guarantee scheme (first put in place by John Howard for his late brother Stan, who was chair of National Textiles when it collapsed in 2000.)

The FEG would have to be modified to cover companies that go into voluntary administration.

Mall mayhem

On March 26, Solly Lew effectively shut down his retail network and some 10,000 jobs due to the coronavirus with a view to reopening the stores on April 22, adding that rent would not be paid during the closures.

The network includes Smiggle, Peter Alexander and FCUK.

The Victorian government has since extended its restrictions until May 11 and it can be assumed that Solly will update on his stores at some point.

Scentre Group’s Peter Allen has maintained his centres are open as essential services, as opposed to some stores in the centres like pharmacies and supermarkets being essential.

There is a difference.

In an effort to bridge the gap, Allen has extended Westfield Direct to allow food express and other outlets to use a click-and-collect service so customers can pick up their goods from the car park without entering the malls.

Different states have different rules, with Tasmania on Monday imposing Wesfarmers’ worst nightmare — the closure of the northern Tasmanian Bunnings stores (except for traders), Kmart and Target.

Unemployment woes

Tuesday’s release of the NAB business survey for March will be the first economic data to unveil the full extent of the downturn given the survey ran up to the last week of the month.

Business conditions can be expected to have collapsed, with NAB expected to forecast a 7 per cent fall in the economy in the June quarter, before bouncing with 2020 to show a fall in the economy of some 4.5 per cent.

Westpac’s Bill Evans is also expecting the economy to fall 8.5 per cent in the June quarter.

The ABS will release March employment figures on Thursday, but these were collected in week two of the month before the full impact of the shutdown.

NAB’s Alan Oster has unemployment peaking in June at 11.7 per cent.