Denied a Bailout, Virgin Australia a Warning for Other Airlines

The collapse of Virgin Australia Holdings Ltd. after the briefest of fights indicates the world’s weakest airlines have little time to secure funds before they succumb to the coronavirus.

The debt-laden carrier became the outbreak’s biggest airline scalp when it handed control to administrators on Tuesday. A near-halt in passenger revenue overwhelmed the Brisbane-based company in less than two months.

“We should get used to news of this kind,” said Volodymyr Bilotkach, a lecturer in air-transport management at the Singapore Institute of Technology. “We’ll see more airlines go under.”

The speed of Virgin Australia’s unraveling suggests industry groups haven’t been exaggerating in raising the alarm with increasing frequency. The International Air Transport Association, which represents nearly 300 airlines, has said half face bankruptcy in two to three months without government help. Many carriers have furloughed staff and grounded entire fleets. IATA has warned that 25 million jobs in aviation and related sectors are at risk.

In Australia, the government rejected Virgin Australia’s initial plea for a A$1.4 billion ($884 million) loan. Several other proposals for state aid met the same response, according to Chief Executive Officer Paul Scurrah, until a final request for just A$200 million was rebuffed Monday.

Other carriers struggling to tap rescue funds are also teetering.

No Wages

Virgin Atlantic Airways Ltd. is battling to convince a skeptical U.K. government to step in provide backing, with billionaire founder and 51% owner Richard Branson saying Monday that the carrier won’t survive without outside help.

Discount airline Norwegian Air Shuttle ASA, which has grounded its entire fleet, said Monday it put four pilot and cabin-crew units in Denmark and Sweden into bankruptcy protection because it couldn’t pay salaries. The company has floated a debt-for-equity swap in a bid to meet the terms of bailout funds from Norway’s government.

South African Airways, which last made a profit in 2011, plans to lay off its entire workforce after failing to persuade the government to provide more financial aid. The coronavirus may prove too much for the 86-year-old airline, which was reducing routes and considering job cuts even before the outbreak.

With more than A$5 billion in debt and a run of seven consecutive annual losses, Virgin Australia was already financially frail. Scurrah, who took the helm in 2019, was in the middle of a turnaround plan to reduce debt and costs when the virus emerged. Ultimately the airline’s balance sheet denied him time to negotiate the funding needed.

The administrators at Deloitte who control Virgin Australia now aim to restructure the business and find a buyer within two to three months. More than 10 parties have already expressed an interest, according to Vaughan Strawbridge, one of the four administrators. He said Tuesday that he doesn’t plan to change the airline’s operations or fire staff.

First Victims

Virgin Australia joins FlyBe Group Plc, which was the U.K.’s biggest domestic airline before it collapsed last month, as early corporate casualties stemming from the virus. Ravn Air Group, whose airlines connect the far reaches of Alaska, recently filed for Chapter 11 bankruptcy after it ran out of cash to pay staff and keep its planes flying, and Sweden-based Braathens Regional Airlines is also restructuring under court protection.

Pummeled by domestic and international travel bans, airlines may lose out on $314 billion in ticket sales this year, according to IATA. Sydney-based CAPA Centre for Aviation predicted in March most airlines would go bankrupt by the end of May unless governments and the industry take coordinated steps to avoid such a situation.

As to Virgin Australia, its failure also exposes the perils of running a company by committee. The carrier had one of the most unusual ownership structures in the industry, with four foreign aviation groups—Singapore Airlines Ltd., Etihad Airways PJSC, HNA Group Co. and Nanshan Group Co.—each holding stakes of about 20%. Branson’s Virgin Group owns about 10%.

None of those major investors had ultimate control of an airline that habitually lost money. Shareholders now rank below Virgin Australia’s creditors as Deloitte attempts to save the business. Even employees owed wages sit above the company’s owners in the event of a liquidation.

Even for those carriers that have received government help, the aid may amount to no more than a stay of execution, according to Air Baltic Corp. Chief Executive Officer Martin Gauss.

For the weakest airlines, lockdowns have halted operating losses while state bailouts cover costs, so the real test will come when flying resumes, Gauss said by phone. Weak demand, an economic slump and onboard distancing curbs that hurt occupancy levels could produce a wave of bankruptcies, he said.