The Morrison government is facing calls to buy an equity stake in Virgin Australia after the embattled airline sought a $1.4 billion taxpayer bailout.
Virgin’s request followed Treasurer Josh Frydenberg’s announcement of $715 million in waived government fees and charges to keep the crippled aviation industry afloat.
The company’s CEO Paul Scurrah told the ASX federal support would bolster the airline’s ability to reinstate workers once the virus is contained.
But politicians and economists have cautioned the government against bailing out the airline without taking an equity stake.
Last week, the airline slashed 90 per cent of its domestic capacity and stood down 80 per cent of its 10,000-strong workforce until at least May.
Following the announcement, Qantas CEO Alan Joyce told the SMH he expects a $4.2 billion loan to “level the playing field” if the Coalition agreed to bankroll Virgin’s rescue package.
Mr Frydenberg declined to rule out a part-nationalisation of Virgin.
Aviation sector buckles under ‘uncertain and difficult times’
UNSW lecturer in aviation Dr Tony Webber said Virgin’s suggested bailout figure matches the airline’s estimated manpower costs, which totalled $1.346 billion in the past calendar year.
But a loan wouldn’t solve all the airline’s problems.
Dr Webber said Virgin still needs to address the “enormous liquidity issue” from not earning revenue while continuing to operate.
“It could lead to their demise,” he said.
“They have bills such as labour retained, aircraft, commitments to pay pre-delivery payments and deposits on aircraft, and other overheads – and they are certainly not alone in this.”
Despite Qantas reaping three times the revenue of its smaller competitor, Dr Webber said Australia’s largest airline was not immune to economic shock.
“Qantas’ financial position going into this crisis is far wealthier than Virgin’s … but it is possible if this [virus outbreak] goes on for 12 to 18 months, both airlines could go under,” Dr Webber said.
The benefits and pitfalls of nationalisation
Virgin permanently withdrew all its Hong Kong services last month – less than three years after establishing a route from Sydney – scuppering its bid to gain a foothold in the Asian aviation hub.
Dr Webber believes this highlighted the airline’s biggest shortcoming: Its “unprofitable” international arm.
He said the federal government should consider nationalising Australian airlines’ international offerings to offset any major losses.
“It’s very hard to consistently make money in international, because you are competing with Emirates and Singapore Airlines, which are majority government-owned airlines,” Dr Webber said.
“So the advantage of [nationalisation] is you can take a hit on the airline, but make profit on the economy – so although an airline might make a $3 billion loss, they bring in hundreds of thousands, and even millions of tourists a year.”
University of Sydney professor in transport and supply chain management Rico Merkert, however, said the nationalisation conversation is premature.
Virgin is on shaky ground as it operates with effectively zero tangible equity and has lost money for seven consecutive years.
But Professor Merkert warned that sprinting towards such reactive measures was dangerous even if COVID-19 is the “final straw” for Virgin.
“Globally, it used to be the case that each government had their own nationally-owned airlines which were run very inefficiently – there was no competition, particularly at the cross-border level,” Professor Merkert said.
“You could argue for a short period in time there is a role for governments to step in.
“But having liberalisation – and that includes privatisation and competition – is vital for the success of the airline industry.
“What I would ask Virgin to do is sell off a few assets if they can, for example Velocity, or some of their aircraft if they have any – and then if there’s nothing else left, then they should pursue more significant loans.”
Passengers would ‘pay’ in a domestic monopoly
Editor in chief of airlineratings.com.au Geoffrey Thomas said any shift towards a domestic monopoly would deliver hip-pocket pain to travellers.
And so he urged government to step up to the plate.
“We’ve seen [government bailouts] around the world. Air New Zealand has gone to its government for money. Qatar Airways, which is a government-owned airline, has gone to its government. No airline is capable of withstanding this,” Mr Thomas said.
“If we don’t have a duopoly, passengers are going to pay for it because Qantas will jack up fares.
“If we have one airline, the fares are going to rise 20 or 30 per cent.”