COVID-19: Virgin Australia asks for governement loan, Qantas says ‘Me too!’

Virgin Australia has asked for an AU$1.4 billion dollar loan from the Australian government to help it survive the current COVID-10 crisis.

Introduction

It is well recognised that there is an imbalance between Australia’s major airlines. Qantas has a strong financial position, is by far the bigger of the two, is profitable, has slightly less than 50% corporate ownership and has a call on more and bigger lines of credit, about AU$4 billion at last count. As part of the Australian Government giving up ownership of Qantas in 1992, Qantas must retain a minimum 51% of its shares held in Australia. It has also asked for this restriction to be removed, several times.

Virgin Australia on the other hand, hasn’t made a profit for 7 years, is smaller, is holding a bunch of debt (about AUS$5 billion), has a concentration (90%) of corporate shareholders that are airlines or have airlines as part of their business. It’s main corporate shareholders also happen to be located overseas.

These Australian and non-Australian shareholdings will become important once you see the argy-bargy that Qantas is indulging in.

What Virgin Australia is asking for

Earlier today, Virgin Australia went into a trading pause, before it disclosed to the Australian Stock Exchange (ASX) in response to an article in The Australian newspaper, that it has asked the Federal Government for AU$1.4 billion in financial support, which:

‘. . . may or may not include conversion to equity in certain circumstances.’

Authorised by Paul Scurrah, CEO & MD, Virgin Australia Group ‘Response to Media Reporting’ ASX Release

Qantas’s ‘Me too!” moment

In response to Virgin Australia’s request, Qantas has told the Australian government, not that it needs any money from them, but that if they give the money to Virgin Australia, then it would ‘expect’ an AU$4.2 billion loan to ‘level the playing field’. A playing field that is already tilted markedly in Qantas’s favour.

Qantas says that it doesn’t want the money, but with the Australian government being like a grandmother sharing out sweets between her grandchildren, if she gives little poppet Virgin Australia some, then granny has to give grown-up Qantas about three times as much, (AU$4.2 billion) just so granny is not playing favourites. And besides that, the Virgin Australia grandkids live overseas.

That ‘three times’ represents the relative size between Qantas and Virgin Australia, which Qantas argues should be the way the support is doled out – in proportion to their size. Qantas also doesn’t think the taxpayer should be supporting an airline that is largely foreign-owned. Which is ironic, given how many times Qantas has tried to have its foreign ownership restrictions lifted.

Qantas is playing to win

It would delight Qantas if they could remove their major rival domestically from the Australian airline landscape. They would no longer have any domestic competition, allowing Qantas the up its ticket pricing.

Even if Alan Joyce is right, and Virgin Australia has not been well run for the last decade, it has provided competition which has benefited customers by keeping fares in check.

Virgin’s predicament

Because Virgin Australia is primarily owned by airline companies with their own funding issues, it’s going to be hard for Virgin Australia’s shareholders to provide additional funding. Virgin Australia is already carrying AU$5 billion worth of debt, with a market value of only AU$675 million. So if Virgin Australia was unable to pay back an AU$1.4 billion loan, the Australian government could end up with a hefty stake if the debt was swapped for equity.

The government has a hard decision

Does the government fall for the ‘treat us equally and proportionally’ argument of Qantas, or does it act on behalf of the Australian domestic consumer, and ensures that competition and employment continues by ensuring Virgin Australia’s survival?

The government has already thrown over AU$1 billion dollars at the industry to stem the flow of employee stand-downs currently topping 28,000 pilots, cabin crew, admin and other staff across Qantas and Virgin Australia.

2PAXfly Takeout

Despite some consistent criticism of the airline, I am a Qantas fanboy. It is the airline I travel on most, and I have Platinum Frequent Flyer status with Qantas. I have no premium status with Virgin, and despite liking their hard and soft product, find that their schedule rarely suits me. I also hate their Sydney terminal.

Having said that, I think Qantas is just being greedy here. Whatever the government does, Qantas is going to survive the current crisis better than Virgin Australia. In fact, I’m not sure Virgin Australia will survive, without government support. Although, I do think that even if they fail, some airline will come in to replace them – as Virgin did after the demise of Ansett Airlines.

On the other hand, Alan Joyce has a bit of a point about the government not ‘picking winners’.

If I were the Government, I would be handing this problem for urgent advice to some independent body like the Australian Competition and Consumer Commission (ACCC) or the Productivity Commission – if appropriate. Let them weigh up the interests and principles involved, and make the decision as non-political as possible. If that’s even conceivable.