Loading Qantas should have the cash and balance sheet to ride out whatever the pandemic does to the economy longer than almost any of its competitors, anywhere in the globe. That’s the result of difficult and, indeed at times traumatic, decisions taken over nearly a decade. Some might call that good management. Similarly, most super funds – industry or retail – have enough liquidity to manage the impact of the $27 billion-plus that could be withdrawn as a result of the government’s response to the distress the shutting down of most of the economy will have on their members. Super funds know that some sort of financial crisis, or at least financial market implosion, occurs roughly every decade. Most funds are aware, or should be, that a balanced fund should theoretically have one losing year in roughly every five. They should ensure they have sufficient cash and liquid assets to manage those events, and most do. The funds that don’t are those that cater to the kinds of lower-income workers in hospitality and other service industries, where the call on savings might be greatest, but have large slabs of their members’ funds tied up in illiquid assets such as infrastructure, or direct property or private equity.

While the governments’ actions and their impact on the airlines and funds might not have been foreseen, the history of the aviation industry and the financial markets to which super funds are exposed says some kind of cataclysmic event – a "Black Swan" event - does occur periodically and therefore some form of extreme shock should be part of the entity’s risk-management planning. Loading Virgin’s Paul Scurrah is in an unfortunate position. He had only really just embarked on a major restructuring of the group to substantially lower its costs and reduce its capital intensity. He hasn’t had the time to undertake the major surgery he planned. Unlike Qantas, however, Virgin had been poorly managed over the best part of a decade before Scurrah arrived. In that period it had doubled its capital base but generated $2 billion of losses as it transitioned from the old low-cost carrier, Virgin Blue, to Virgin Australia with the misconceived ambition of challenging Qantas head-on as a full-service carrier. In the previous decade, which it started with seed capital of only $10 million, Virgin Blue had generated a billion dollars of profits, paid dividends and returned hundreds of millions of dollars to its shareholders.

Should Australian taxpayers bail out Virgin’s shareholders – Singapore Airlines, Etihad, China’s HNA and Nanshan and Richard Branson – for their defective stewardship over a decade of a company that, when founding chief executive Brett Godfrey left, was highly profitable and had a $1 billion equity base? While the loan Virgin has asked for apparently would convert to equity if not repaid within two or three years – the taxpayer would wind up with a majority stake in Virgin – that would only be tenable if the shareholders were completely wiped out and lenders, who were prepared to fund a leveraged airline, took a major haircut. Virgin Australia's major shareholders should face the consequences of their own ineptitude. Credit:Edwina Pickles They shouldn’t be rescued from the consequences of their own ineptitude. The better option, if it were to come to that – and Virgin has sufficient cash to get through the next three to six months – would be to put the business into administration, wipe out the shareholders, impose losses on creditors and enable a more dramatic restructuring of the business than Scurrah could achieve in more normal circumstances.

Loading There’d be no shortage of groups interested in acquiring, or investing in, a restructured Virgin, with a third of the Australian domestic market – one of the most profitable markets in the world, shared by a duopoly. Just as the government shouldn’t discriminate and tilt playing fields in aviation, it shouldn’t effectively punish well-managed super funds for the poor liquidity management of their peers. In good times, assets such as infrastructure, direct property, private equity and hedge funds provide some measure of diversity (partly because they aren’t revalued in real time, like shares or bonds) and a premium for their illiquidity – the inability to easily exit the investment whenever the fund wants. When times aren’t so good – when markets are imploding and fund members are trying to dial down their risk and are switching from more aggressive investment options to cash – that illiquidity premium becomes an illiquidity discount, assuming the investment can be liquidated at all.

Loading In the dash for cash that has been occurring globally, any buyers, if there were any, of illiquid assets would want a material discount on the value of similar assets in more liquid markets (like the sharemarket). The losses within the fund would be quite significant in a forced sell-off to generate cash to fund a rush of withdrawals. Bailing those funds out with RBA facilities would prevent the funds from experiencing the consequences of their own investment strategies and provide the entire sector with encouragement to hold greater proportions of illiquid assets in future in the knowledge that the taxpayer would always come to their rescue. Government bailouts of individual private entities are the option of last resort. They distort playing fields, expose taxpayers to risks and losses, protect boards and managements from the consequences of their own failures and encourage poor behaviours in future.