Virgin Australia raises the prospect it might end up in government hands, confirming it is seeking $1.4bn

This article is more than 5 months old

This article is more than 5 months old

Australian airlines are in continuous talks with the federal government after asking it for loans totalling as much as $5.6bn to keep them alive through the coronavirus pandemic.

Virgin Australia raised the prospect it might end up in government hands on Tuesday by confirming it had asked for a $1.4bn taxpayer loan that could be converted into shares in the company “in certain circumstances”.

The transport minister and deputy prime minister, Michael McCormack, has said he does not want to nationalise airlines but at Virgin’s current depressed share price conversion of such a loan would result in the government owning about two-thirds of the company.

Nationalisation of Virgin has also been bitterly opposed by Alan Joyce, the chief executive of its bigger rival, flag carrier Qantas, who last week earned the ire of the competition regulator after making a series of public remarks sledging Virgin’s ownership and management.

Qantas is believed to now want a loan of $4.2bn, reflecting its position that it is about three times as big as Virgin, should its competitor get a bailout.

Conversion of such a loan to shares would, at current prices, see Qantas narrowly avoid falling into public ownership, with the government controlling 47% of the stock on issue.

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Regional airline Rex also wants government support to keep flying. For the past week, it has been threatening to shut down its network unless it quickly receives a cash injection.

The government has so far slashed taxes and charges levied on airlines – a package it says is worth $715m – and over the weekend McCormack announced an additional $298m designed to keep regional flights in the air.

Airlines have been all but shut down by government travel restrictions. Qantas has laid off 20,000 people and Virgin 8,000 as planes are put into care and maintenance mode to wait until the skies reopen.

But even without planes in the air both companies continue to burn cash on expenses including maintenance and aircraft leases.

Industry sources say Virgin has about six months worth of cash and Qantas at least a year’s.

Over the past fortnight, governments around the world have bailed out airlines, typically by giving them loans that can be converted to company stock if they fail to repay them.

New Zealand, which already owns more than half of Air New Zealand, loaned that airline $890m on 20 March and on Friday the US government said it would lend its aviation sector US$60bn. Both sets of loans are convertible to shares.

However, as recently as Saturday, McCormack said that it was “not the government’s intention to nationalise airlines” and he wanted them “to continue to be commercial operations”.

The minister has so far preferred to provide support to entire sectors rather than individual companies.

On Tuesday, he said he was “speaking with industry stakeholders and representatives daily, making sure they’re receiving the support they need and listening to what else may be required as the pandemic continues”.

He said the government was trying to save “lives and livelihoods”.

“As a sector that employs tens of thousands of Australians, the aviation industry is a crucial part of that,” he said.

Virgin stock skyrocketed more than 16% on Tuesday while Qantas scrip rose just 0.6%.

On Tuesday Virgin told the stock exchange a request last week for a $1.4bn loan, which was first reported by the Australian, was “part of a broader industry support package to prepare for a prolonged crisis” that is believed to total $5bn.

“It is a preliminary proposal and remains subject to approval by the Virgin Australia Holdings board and the Australian government and may or may not include conversion to equity in certain circumstances,” the company said.

Virgin said it and other airlines had cut costs in order to reduce the financial damage caused by the shutdown.

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“However, support will be necessary for the industry if this crisis continues indefinitely, to protect jobs and ensure Australia retains a strong, competitive aviation and tourism sector once this crisis is over,” it said.

Qantas declined to comment.

Rex shares fell 19% on Tuesday on the company’s announcement that it would close its Queensland routes, including ones that are subsidised by the state government, after passenger numbers across its network plunged by almost 95%.

The company is seeking additional money from state governments, but the deputy chairman, John Sharp, welcomed the package McCormack announced on the weekend.

“In my view it’s the most significant announcement made by government regarding regional airlines in my memory,” he told Guardian Australia.

“It’s turned what would have been a complete rout into a survival story.”