The Virgin Australia Holdings Ltd (ASX: VAH) share price has soared by 16.25% at the time of writing, following speculation the government could step in to rescue the airline.
Virgin shares were in a trading halt this morning, which lifted with the airline confirming it is seeking Australian Government support as it battles the financial impact of the coronavirus pandemic.
Virgin is 90% owned by overseas airlines including Etihad and Singapore Airline, as well as Richard Branson’s Virgin Group, all of which are facing cash flow issues related to the coronavirus crisis. Shareholder support for Virgin therefore appears unlikely.
Talks with government confirmed
Virgin confirmed this afternoon that it is in talks with the Australian Government about financial support in the order of $1.4 billion. This “may or may not include conversion to equity in certain circumstances.”
The government may have an incentive to support the airline, given the temporary nature of the crisis and the desire to have a competitive airline industry in Australia.
Qantas Airways Limited (ASX: QAN) has come out against any support of its competitor. As reported by ABC News, Qantas CEO Alan Joyce has said Federal Government assistance should not be offered to businesses that are “badly managed”.
Joyce had previously said it would be a matter of “survival of the fittest” in the airline sector. Virgin’s CEO then alleged that Qantas was engaged in anti-competitive conduct, telling the Chairman of the Australian Competition and Consumer Commission Rod Sims that its behaviour was designed to damage Virgin.
According to the ABC News article, Sims requested restraint and cooperation, saying “we really need companies working together during this crisis and talking about survival of the fittest could be seen as quite unhelpful.”
On Friday, ratings agency Fitch downgraded Virgin to a ‘B-‘ credit rating from ‘B+’. S&P also downgraded Virgin’s rating to ‘CCC’ from B-‘. Fitch said Virgin’s liquidity could come under pressure quicker than anticipated should restrictions on demand last longer than 3 months. S&P said pressures on the Virgin’s cash flow and liquidity have intensified.
During the crisis the Government has so far avoided offering direct support to strategically important companies. But Virgin’s request puts it on a tight spot – it will want to ensure Australia exits the coronavirus crisis with more than one domestic airline. Having just one would not only have a devastating impact on competition, but would make restarting the tourism industry more difficult.
The problem for the government is that in providing assistance to Virgin, it could be seen as favouring the airline over Qantas, or prompt Qantas to also seek additional relief. Thus far Qantas has gone to debt markets, raising $1 billion to help it survive the crisis. But if the shutdown is prolonged, it too could be in need of further funds.
In providing funds to just one airline, the government risks distorting debt and equity markets. In doing nothing, it risks Virgin going under.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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