Virgin threatens to enter voluntary administration

Virgin Australia Holdings Ltd (ASX: VAH) continues to teeter with the airline threatening to call in voluntary administrators. Shares in Virgin went into a trading halt yesterday as the company continued to consider issues arising from the coronavirus crisis. These included ongoing discussions regarding financial assistance and restructuring alternatives. 

Voluntary administration threat

According to the Australian Financial Review (AFR), Virgin has threatened to enter voluntary administration if the government fails to throw it a lifeline. But the Morrison government has so far taken a hard line with the airline, with the AFR reporting a senior minister saying no company could expect a blank cheque from taxpayers. 

Late last month, Virgin called for a $1.4 billion bailout from the Federal Government, however competitor Qantas Airways Limited (ASX: QAN) was not in favour. Qantas questioned why ‘badly managed’ companies should receive a bailout. Of course, if Virgin were to collapse, Qantas would be left with an effective monopoly over Australian air travel.

Reluctance to provide direct support 

The Federal Government is no doubt keen to ensure competition remains in the airline sector post the coronavirus crisis, but has thus far been reluctant to extend a lifeline to Virgin. While the government has extended a $715 million airline rescue package to the industry as a whole, it has stopped short of providing direct support to Virgin, which is majority foreign-owned. 

Treasurer Josh Frydenberg has said the airlines should talk to shareholders rather than the government about their capital needs. “Virgin and Qantas are both publicly listed companies, both with substantial shareholders,” he told the AFR, “in both cases, they continue to talk to their key shareholders about the road ahead.”

According to the AFR, Virgin has told government representatives it has just one month’s grace from its shareholders and lenders to obtain support for its survival. Major shareholders, which include Singapore Airlines, Etihad Airways, and Richard Branson’s Virgin Group, are dealing with their own virus-related issues. 

It seems unlikely these shareholders would be enthused about pumping additional cash into Virgin. Apparently even Singapore Airlines, which recently raised $20.9 billion, is refusing to use any of its cash to assist Virgin in its time of need. The AFR reports that Prime Minister Scott Morrison raised this prospect with his Singaporean counterpart last month, but was advised Singapore Airlines had its own financial issues to address. 

Government running the numbers?

Despite its obvious reluctance to provide direct assistance to Virgin, it is understood that Treasury officials are examining the company’s financials. Further government assistance for the industry is expected imminently in the form of subsidies to support specific domestic routes. 

The government has so far insisted that any assistance would be industry-wide, a stance backed by Qantas. “We’ve been very consistent in that message that we will support the aviation sector, but we’re doing so with a sectoral wide approach,” Frydenberg told the AFR. 

So where does this leave Virgin? No one wants to see a repeat of the Ansett collapse, and pressure is increasing to save the 16,000 jobs linked to Virgin. An outcome, one way or another, seems assured within the next month.