Apr 08 2020
COVID-19 has significantly disrupted the aviation sector. Revenue in the Domestic Airlines industry is forecast to decline by 24.3% in 2019-20. The International Airlines industry is expected to be hit harder, with a 32.0% revenue fall projected over the year.
“The unprecedented demand decline has begun to threaten the viability of airlines around the world. Domestically, Qantas and Virgin Australia have begun to enquire about what support might become available,” said Tom Youl, IBISWorld Senior Industry Analyst. This is in addition to the Federal Government waiving about $715m in airline taxes and charges, to support the short-term prospects of all domestic airlines.
Three scenarios are possible for the Domestic Airlines industry:
Scenario A: Virgin conducts capital raising
- The scenario: In the event that COVID-19 continues to affect the economy for six to twelve months, Virgin is expected to require funding to remain viable. One option the company has is capital raising.
- Likelihood of occurring: Unlikely
- Why: There appears to be little appetite from existing shareholders to further invest in Virgin Australia, given the current environment of ample government support packages. Significant demand from other potential investors is also unlikely. Virgin Australia has not reported a statutory profit in seven years, despite reasonable cashflow.
Scenario B: Government bailout, Virgin only
- The scenario: Virgin has lobbied the Federal Government for a $1.4b funding package (as part of a wider cash injection) to carry the company over the ongoing period of weak demand. The Federal Government may end up owning the company if, such as in the United States and New Zealand, loan amounts are convertible to shares.
- Likelihood of occurring: Highly unlikely
- Why: The Federal Government has stated it does not wish to nationalise an airline, and Qantas has robustly protested such a move. While the case for holding the company temporarily and selling it under a more positive environment is strong (the Federal Government will likely need to source additional income to pay off the debt it has entered into), the Federal Government has stated that it will not be offering direct support to any one company.
Scenario C: Government bailout: industry-wide
- The scenario: Virgin CEO Paul Scurrah has suggested that Virgin’s $1.4b support package be part of a broader aviation industry package of up to $5bn. In addition to quelling protests from Qantas, which will be heavily funded at up to $3.5b, this industry-wide support would aid the many small-scale aviation operators that service regional Australia. This includes notable firms REX and Alliance Airlines.
- Likelihood of occurring: Most likely
- Why: Significant financial outlay has already been committed by the Federal Government, totalling approximately $213.5 billion at the end of March 2020. In this context, an extra $5b does not seem a hefty price to pay to ensure the ongoing viability of Australian aviation. A healthy domestic aviation sector is in the national interest. Helping Qantas, Virgin and smaller airlines rebound from this crisis will aid employment and contain airfares over a period of what is likely to be a decline in incomes for many Australians.
Why a ‘no-bailout’ scenario is unlikely
Australia has not had a true monopoly in the Domestic Airlines industry for many decades. When Ansett Australia collapsed on September 14 in 2001, Virgin Blue (Virgin Australia before a rebrand) had already been in operation for over a year. Furthermore, Ansett’s industry exit was not abrupt. The airline continued to operate in a diminished form until March 2002, with airfares rising for only two months following Ansett’s final flight.
“In 2020, there is no third airline waiting in the wings to fill capacity gaps. The most likely outcome of a Qantas monopoly is higher airfares, unless the flag carrier undertakes a strategy to buy the goodwill of the Australian public by keeping airfares stable, knowing that a second airline will eventually enter the market,” said Mr Youl.
Regardless, the potential for increased airfares has kept the door open for publicly funded support, with several government officials confirming a two-airline industry is highly desirable.
Australia’s unique airline industry
Australia’s large landmass makes air travel essential for many, be it for the purpose of business, holiday or visiting loved ones. “The Sydney-Melbourne route ranks second for aircraft movements and third for passenger volumes among all global flight-paths, which is remarkable given Australia’s modest population. As such, a price-competitive industry benefits the nation,” said Mr Youl.
The Federal Government agrees, stating a competitive airlines industry is crucial for enterprises and households. This indicates that a bailout of the aviation sector, in some form, is more likely than not. However, the Federal Government has publicly stated that it has no current intention to offer a relief package. Should Virgin collapse, it is extremely unlikely the Federal Government would allow Qantas to follow. A second airline will inevitably operate in Australia, whether it receives government support or not. Australia’s Domestic Airlines industry is suited for two operators. However, as no existing airline appears ready to enter the domestic market, Australia may be a one-airline nation for several years if Virgin folds.
IBISWorld reports used to develop this release:
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