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COVID-19: Australian airlines, Qantas and Virgin Australia to ask for government assistance?

COVID-19: Australian airlines, Qantas and Virgin Australia to ask for government assistance?

My experience

It seems that the reality of the COVID-19 crisis has really hit customers and airline staff this week. The feel was a lot different a mere fortnight ago when I last caught a flight. Then, it was business as usual. Now, not so much.

I travelled from Sydney to Adelaide on Monday and my Qantas flight was less than half full. The Qantas business lounge was all but empty. There were a few masks even on the flight crew, while hand sanitisers and disinfectant wipes seemed to be common. Even cabin crew avoided touching paper tickets and phones during boarding.

If my experience today, and my intention to cancel all my booked travel over the next month or three is any indication, then airlines are going to be doing it very tough.

Qantas & Virgin Australia

Qantas is in a good financial state – well relatively. It has reduced capacity and cancelled flights and taken its A380’s largely out of the fleet mix. Virgin, which has less flexibility in terms of fleet makeup, and route network has done the same. However, Qantas has been making profits and had up until this current health crisis a healthy and increasing share price. It has however halved over the past fortnight, from over AU$6 to just AU$3.

Virgin Australia shares have ‘halved’ as well, from AU$0.16 in January to AU$0.76 today. Standard & Poor’s has downgraded the rating of Virgin Australia’s debt to B- from its previous rating of B+. S & P are also regarding the company outlook as “negative”.

What to do?

Well, Qantas can probably weather this storm from its own resources. They have nearly AU$2 billion in cash. Qantas could also look to some of its non-flight activity like its loyalty scheme to make some short term cash, by offering some good prices for points promotions with its current loyalty partners – like the banks.

Virgin Australia, is on the face of it, unlikely to survive unless it gets some financial support, either from its existing shareholders like Etihad Airways, Singapore Airlines and China’s HNA group or from the government. Virgin recently bought back its Velocity Frequent Flyer program from private equity. It funded this by issuing subordinated notes in November 2019 at AU$100. Those notes are now trading at AU$48.

Virgin may find itself very distraught if those debt holders appoint receivers – which they have the right to do if debt covenants are breached. Some people are speculating that this might be all for the good, allowing Virgin Australia to re-emerge as a viable domestic competitor to Qantas, while abandoning its expensive, and not particularly profitable international routes.

More flight cuts

Expect to see further cuts in Australian airline schedules, I would warn. Layoffs cannot be far away either if the health crisis continues. And there is evidence that it will continue for several months at least.

The Sydney Morning Herald is quoting industry sources:

‘Aviation sources say Qantas could imminently announce the grounding of all of its 747s and abandon flights to Santiago and San Francisco. It may also drop its flights to London via Perth (which it announced last week would be operated by 787 aircraft rather than A380s) and ground 90 per cent of its A330s. Qantas declined to comment.’

Sarah Danckhert and Elizabeth Knight on SMH.com.au

Just one correction to that, the A380’s never went via Perth. They used to go via Singapore.

Qantas won’t be the only one to ground A380’s and retire 747’s. KLM and Air France have already announced grounding and retiring theirs.

Qantas 747 at Santiago, Chile

Government support

The new rules for international travellers that came into effect at midnight last Sunday, requiring them to self-isolate for 15 days has lead to a tsunami of ticket cancellations, and that will affect the cash that airlines have to play with. Also, government and business restrictions on ‘non-essential’ travel haven’t helped, although the right thing to do from a health perspective.

The government will probably need to step in, and it can’t be seen to play favourites.

They could pre-pay for travel that they will use post this health crisis, which might ease cash flow problems. Alternately, offer some kind of loan guarantee, or tax concession or something. I’m sure there are other obscure financial instruments they could also turn to.

This is not just a problem for Australia. Both Delta Airlines in the USA and British Airways part of the IAG group in the UK have expressed concern about the pressure on their financial position, and have both suggested government support.

2PAXfly Takeout

Extrapolating from the personal, which is always risky – I am about to cancel 2 or 3 domestic trips, one international return flight to Asia, and quite possibly a trip to Europe. If I represent at least some of Australian airlines’ customers, then things are getting dire.

What, if any, flights and travel are you cancelling?

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