Bailout for Virgin is Alan Joyce’s worst nightmare
Even during a once in a lifetime crisis Qantas boss Alan Joyce remains strategic and plays a long game. Until a week ago the devastating pandemic that will cost his airline billions in lost revenue also presented an opportunity to see off its weaker domestic competitor, Virgin Australia.
Thus a government bailout for Virgin – particularly one that involves the state ultimately converting a loan into Virgin shares – is Joyce’s worst nightmare. A back-of-the-envelope calculation suggests the $1.4 billion loan Virgin is seeking would convert into a stake of a little less than 70 per cent based on the current share price.
Such an outcome would dilute Virgin’s five major shareholders who together own 90 per cent of its shares (Etihad, Singapore Airlines HNA, Nanshan and Richard Branson) to less than 30 per cent.
This would effectively represent the nationalisation of Virgin and all the positive ratings implications that come with being, in effect, a sovereign airline.
Joyce will not agree, but the government has little choice but to retain a competitive aviation market in Australia. The competition regulator, the Australian Competition and Consumer Commission, believes it is imperative.
Virgin boss Paul Scurrah maintains that his financial request to the government is part of a broader $5 billion industry package – that would presumably include Qantas. The trouble is that Joyce, who has been singing loudly that his well-capitalised airline doesn’t need any assistance, is now putting up his hand for a $4.2 billion loan.
But it would be irresponsible for the government to financially assist a company that doesn’t need help on the basis of competitive fairness. (It is understandably galling for Joyce to see Virgin get help when he has worked hard to fortify Qantas’ own financial position.)
Having said that if the impact of the coronavirus is longer lasting it could well be that Qantas will need some financial assistance. But the last thing Qantas shareholders will want is for the government to structure assistance to the airline in the same way being proposed by Virgin. Pricing a convertible instrument with reference to the current depressed Qantas share price would be so dilutive it would be unthinkable for Joyce and the airline’s shareholders.
And other governments that have helped airlines – such as New Zealand and the United States – have placed some restrictive conditions on the carriers, such as ensuring the continuation of certain routes and the cessation of dividends. That removes an important level of autonomy for Joyce and his board.
Using the global financial crisis as a reference, governments around the world took large stakes in a number of banks to ensure the stability of the financial system. But only those that were in danger of collapsing.
Without government involvement there is a real possibility Virgin will not make it through if aircraft are grounded for more than another four, maybe five, months.
And the noises coming from Canberra suggest the government and the opposition are on board. Governments all over the world are doing the same in order to retain critical infrastructure.
Virgin and Qantas have already received a combined $715 million in help but much of this is activity-based and isn’t providing much assistance because flights are grounded.
The proposed $1.4 billion loan to Virgin would be capable of conversion after two to three years and on that basis, depending how the Australian aviation sector looks at the time, the government could even make a profit on the rescue.
(Remember the guarantee that the Australian government made to large banks during the GFC. It was never called on but the fees banks paid for the privilege generated more than $4 billion in revenue for the government.)
Elizabeth Knight comments on companies, markets and the economy.
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Source: Thanks smh.com