No Virgin rebirth through long-suffering taxpayers

The Morrison government is wisely knocking back ever more desperate pleas for a $1.4bn bailout of Virgin Australia. Highlighting the principles at stake, Josh Frydenberg declared the beleaguered airline’s shareholders needed to be the first port of call, not Australian taxpayers. “They’ve got deep pockets,” the Treasurer said on Thursday. “We want to see Virgin continue, we want to see two airlines in the domestic market, but we’re not in the business of owning an airline.” Those days are over; Qantas was privatised in 1993. Besides, as Mr Frydenberg noted, taxpayers have stumped up more than $1bn in relief for the aviation industry, with cuts to fuel taxes and other charges, as well as economy-wide measures such as the $1500 a fortnight JobKeeper wage subsidy to workers. The government is preparing to announce a network of subsidised domestic flights to be operated by the two major airlines, but the final details have been delayed as Virgin Australia pushes for a rescue.

Airlines have been among the worst affected companies by the coronavirus pandemic after governments imposed travel bans and severe restrictions on cross-border movements within Australia. Official figures show a 26 per cent plunge in international tourism arrivals in February, from a year earlier, as COVID-19 restrictions took hold, akin to the drop in visitors following the September 2001 terror attacks in the US. Given steeper falls are expected when March figures are released, it’s understandable the tourism industry wants a resolution to the troubled airline’s problems. For tourism to thrive, it needs two successful and competitive carriers. The Treasurer, an optimist in gloomy times, maintains talk of Virgin Australia’s collapse is “speculating about the future”, but the financial pressure is mounting.

Even before COVID-19, the airline was struggling, carrying $5bn in debt. A revamp by chief executive Paul Scurrah was in progress. But after two days in a trading halt, on Thursday Virgin Australia asked the ASX for a further suspension of up to seven days. In a statement to the exchange, the company said it was not in a position to make an announcement with respect to financial assistance and restructuring alternatives. It is in talks with insolvency and turnaround experts and debt restructuring specialists. But any restructuring would be reliant on a significant capital injection. Again, that must come from Virgin Australia’s shareholders, who are not hard up by any means. The carrier’s ownership is split between Etihad, Singapore Airlines, Chinese airline HNA and Chinese conglomerate Nanshan. Billionaire Richard Branson’s Virgin Group still has a 10 per cent stake, while 10 per cent of the airline’s shares are listed on our exchange.

Of course when the money taps of state are flowing like never before, it makes sense for companies to try every possible taxpayer spigot. After all, never let a crisis go to waste is the industry lobbyists’ credo. Much easier to scrounge a lazy loan or special deal than it is for a troubled company to cut costs, operate more efficiently, compete more effectively, inspire new investors, rationalise unprofitable routes, ditch flashy lounges and trim executive pay. Or simply take a leaf out of the Qantas playbook. In 2014, the national carrier was facing turbulence and it, too, chose the flight path of least resistance by asking Canberra for a debt guarantee or an unsecured loan. The Abbott government rebuffed Qantas. So, too, were Holden and SPC Ardmona on industry handouts. It was a mighty stand by Tony Abbott and treasurer Joe Hockey, perhaps their finest hour. In truth, the rejection did Qantas no harm. Chief executive Alan Joyce did whatever was necessary to repair, retool and revive the carrier. If Mr Joyce’s smaller foreign rival gets a leg up, he’ll take one three times the size!

An airline begging for money, even in straitened times, is not a good look. Sure, there may be a short-term political reason for a government to yield. Virgin Australia employs 9000 staff and carries 25 million passengers a year. Yet in the long run, like propping up failing vehicle producers or high-wage textile workers, it is a losing play. We are much better off as a nation putting our scarce capital and labour into areas where we have a competitive advantage. In any case, there’s nothing to stop a cashed-up emir, barnstorming billionaire, a rich city-state’s sovereign wealth fund or even a local superannuation giant from doubling down on their investments. And if they don’t, like all investors in tough times, they must take their financial medicine.

We need two viable airlines, but not via this desperate route. The proposal for a government equity stake if the $1.4bn loan is not repaid within a few years may have surface appeal for some but it would require investors and creditors to make huge sacrifices. That’s unlikely. The best path is for the carrier to be put in administration this year, clearing the decks decisively, then restructuring the airline under new management. Perhaps a return to its low-cost, high-profit roots. That would entice fresh capital into a lucrative market. Bailouts come with moral hazards and delay the day of reckoning. Imagine the queue of chief executives for industry support if this deal were done. All this speculation, and Labor’s Pollyanna idea of equity support for the carrier, is counter-productive, crowding out any potential market-led solution. Scott Morrison should hold firm and not be this ineptly managed airline’s “white knight”. As we have argued during this crisis, the COVID-19 recovery game plan must be to preserve our private enterprises, not to entrench big, heavy-handed government at the heart of the Australian economy.