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Administration Could Save Virgin and the Two Airlines Policy

Virgin Airlines was put into voluntary administration on Tuesday morning. Deloittes was appointed as the administrator and Nicholas Moore, the former head of Macquarie Bank and an expert in airline financing, has been announced as the Government’s representative in any financial negotiations.

The decision to go into administration was taken by the board after the Government refused to give the airline a $1.4 billion bailout. The Labor Opposition is critical of the Government’s decision not to provide funding to Virgin, saying 16,000 jobs are at stake. But this is based on a misunderstanding of Virgin’s financial situation. If the money had gone in as debt then it would have been subordinate to the bond holders and would have flowed to them if the airline went into liquidation. To put the money in as equity would have required the agreement of the other shareholders whose equity would have been diluted down to nothing. In the circumstances the creditors, some of whom are major shareholders, would have pressed for liquidation and grabbed the taxpayers’ money.

The Government will now wait to see whether the administrator can successfully restructure the company to reduce the $5 billion in debt and find new equity from the private sector. If this is successful then the Government may fill the gap if additional assistance is required to rebuild the airlines asset base. This assistance will likely to be provided on a sector wide basis and comprise measures such as accelerated depreciation on aircraft and other equipment.

The position of the workers is unlikely to change. They will remain on jobseeker payments until the airline is operational again. Virgin Australia’s fleet is likely to remain grounded with the exception of those flights that are currently being subsidized by the Government. This situation is unlikely to change with the company in administration.

Administration does not necessarily mean that Virgin will disappear. There is scope for restructuring. Virgin was profligate in its sponsorship of bodies such as AFL. It was also over staffed and running too many aircraft with too many full service seats. It is therefore possible that the balance sheet can be repaired but it will be painful.

However airlines are renowned for going into administration. Three of the world’s top four airlines have been in administration this century. At the moment Norway’s national airline is in administration despite it having a very cashed up Government.

If Deloittes is unable to save Virgin, this does not mean the end of the two airlines policy. Private equity holders will see this as an opportunity to grab a share of a lucrative market. Virgin had 40% of the Australian air travel market; there is a large pool of job ready workers; lots of airlines will go bankrupt as a result of the pandemic so there will be plenty of aircraft going cheap and fuel prices are the lowest they have been since the 1980’s.

The best option would probably be for an equity fund, like Singapore’s Temasek Holdings, which owns Singapore Airlines to replace Virgin. It could put in management from Singapore airlines to oversee the company’s finances and it could link with Singapore Airlines for overseas travel.

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