One of the biggest casualties so far of the COVID-19 pandemic has been Virgin Australia (ASX: VAH), which now seems highly unlikely to resume flying in its current form.
With the Federal Government having turned down the airline’s request for a $1.4 billion loan to help the struggling airline, there are now a welter of interested private parties trying to engineer a change of ownership.
The key to recapitalising Virgin Australia is for the company to somehow shrug off its $5 billion debt which has accumulated as the company has continued to post losses for many years.
Virgin needs to be freed of its massive debt
That presents several scenarios, with the existing debt holders no doubt very nervous and willing to negotiate rather than being wiped out if the company enters administration.
There are many private equity funds and hedge funds and other potential airline investors now circling the troubled airline with a range of consortium offers to recapitalise and relaunch the airline.
Ironically, considering the source of COVID-19, some Chinese state owned airlines are also thought to be interested in taking on Virgin Australia.
Most of those proposals would be working on the basis that the airline had entered administration and shed its debts with the current debt level seen as inconsistent with survival given the sudden hibernation caused by COVID-19.
That puts pressure on the existing large shareholders which include UAE’s Etihad Airways (20.94%), Singapore Airlines (20.09%), China’s Nanshan Group (19.98%), China’s HNA Group (19.82%) and Sir Richard Branson’s Virgin Group (10.42%).
Current airline investors reluctant to sink in more money
All have made investments in Virgin Australia for strategic reasons – some of which no longer apply – and it is thought that none apart from Virgin Group have any interest in funding a restructure, although all may be reluctant for Virgin Australia to enter administration because it would wipe out their shareholdings.
Administration would also wipe out the shareholdings of small Australian shareholders who hold around 10% of the airline.
There may be little choice though because under its current structure Virgin Australia is burning through millions of dollars in interest payments with no airline revenue to speak of.
It is not alone in that given that many airlines around the world cannot survive for more than another month without some sort of bailout.
Slimmed down Virgin the most likely outcome
So, what would a restructured Virgin Australia look like?
Most pundits think it would no longer include the budget airline Tiger and probably very little in the way of international routes, with the possible exception of the US routes.
Loss making regional routes would be closed down, the airline fleet would be greatly simplified, thousands of staff would be shed and hopefully damaging capacity wars with Qantas (ASX: QAN) would be avoided.
Keeping the air fair
If all of this was achieved and domestic tourism was allowed to return in a post-COVID-19 future, the idea is that the slimmed down Virgin Australia would be profitable and after some time operating under private equity ownership, it could even return to the share market through a float.
Virgin Australia won’t be the only Australian corporate victim of the COVID-19 crisis but at the moment it has the biggest profile and is also arguably the most vital given its role in keeping some competitive pressure on Qantas and thus keeping airfares more affordable.