Australian government comes to the airline industry’s rescue, mulls subsidising flights

By - Hina Chowdhary

The Australian airline services have almost come to a cessation. Domestic flight frequency has gone down from daily to once in a week, and a few capital cities have been ditched by the airlines.

Fortunately, Australia is not hit as hard as other countries by the COVID-19 pandemic because of quick government actions to shut down borders. With its small population spread over a vast land area, the population density of the continent also does not aid COVID-19. However, just like other countries, the movement of citizens has been highly restricted and thus having a significant impact on the aviation industry. Several flights have been cancelled, and the fall in demand is as high as ~98 per cent.

Related: Impact of SARS-CoV-2 on the tourism sector?

Australia is the world’s seventh-biggest tourism market and a prime spot for business investment. Moreover, the travel industry is an integral part of the Australian economy with a noteworthy contribution to the country’s Gross Domestic Product (GDP) along with employment. The tourism sector has continued to be a considerable growth driver in the financial system of Australia.

With locked borders and no travel within the country, COVID-19 is expected to be under control in a few weeks. This suggests that air travel facilities can commence the long road to recuperation.

When the situation gets under control, the government will move for improving the domestic services, focusing on the profitable link between Melbourne and Sydney. After the domestic travel is functioning and regional centres linked, the country will start to reopen its borders with the neighbor countries who have subjugated the coronavirus infection.

The Australian government is in discussions with Qantas Airways and Virgin Australia about subsidising COVID-19-hit city flights. The pandemic has dealt an enormous disappointment to the air travel industry, and some experts are forecasting that this crisis could have the worst impact on Virgin Australia and that the airlines might not even survive. Both the airlines have stood down many of employees and dropped services across the nation.

Let’s look at what the government has in mind.

Also Read: Impact of Global Shutdown due to Covid-19 on Travel Stocks

Government’s proposal:

Michael McCormack, Australia’s Deputy Prime Minister, has been firm at negotiating work with Qantas and Virgin Australia to open few domestic services again, ahead of the national lockdown being lifted.

The airline companies are so far hesitant to operate in these routes as it would involve running near-empty flights with no profits and a higher risk of subjecting their staffs (aircrew) to possible coronavirus infection from people who are coming back. Maybe a slight lift from the government would be helpful.

Notably, until now it has not been mentioned how much the government would subsidise the routes, it’s only that the discussions are ongoing.

Who could be eligible for the rescue package?

Possible contenders of this rescue package are Qantas and Virgin. Qantas Airways has a massive convoy of aircraft (Boeing 737) geared up to start at an instant notice. Furthermore, Virgin Australia would be considered potentially, with approximately 12k workers presently stood down and determined to get back to work.

These subsidies would also act as a prodigious way for enhancing the crumbling air travel industry across Australia. While a few experts have agreed that while Qantas Airways has adequate cash assets to see the remaining of the year out, Virgin Australia is in the considerable unsteady territory.

Moreover, these subsidies will permit the air travel companies to keep operating, possibly compensating the ramifications of the aviation disaster and get the trapped Australians home.

Qantas Airways Limited (ASX:QAN)

ASX-listed aviation company Qantas Airways Limited was founded in Queensland in 1920 and has grown to become a major domestic and international airline across the globe. The main business of the Group is providing transport to the customers by using its two airline brands- Jetstar and Qantas. The airline brands operate international, domestic and regional services and have been providing its services to communities for nearly a century.

Qantas has raised funding for additional liquidity to navigate through the current situation of COVID-19 pandemic. In the recently concluded round of debt financing, the Company revealed that it secured approximately $1.05 billion to supplement its existing liquidity to solidify further its position as it endures through the coronavirus outbreak.

Moreover, the Company highlighted that with an additional $3.5 billion in unencumbered assets, the Group maintains the flexibility to raise its cash balance as a cautious measure during the existing climate.

On 14 April 2020, QAN stock closed the day’s trade at $3.680, up by 3.371 per cent, with a market cap of approximately 5.31 billion. The Stock has nearly 1.4 billion outstanding shares on the ASX.

Virgin Australia Holdings Limited (ASX:VAH)

Virgin Australia Holdings Limited is a part of Virgin group that was established in 1970. Since the establishment, Virgin has created more than 300 branded companies across the globe. These companies operate in sectors ranging from mobile telephony to travel, transportation, media, music, financial services and, Virgin Galactic, the space tourism operation.

Virgin Australia Holdings Limited is into airline business and is involved in providing domestic as well as international flights services to its customers. It has its operations in two segments, including Virgin Australia Domestic and International.

Pause in Trading:

Dated 14 April 2020, Virgin Australia informed the market that the securities of VAH are placed in a trading halt, and a further announcement is pending.

COVID-19 Update:

Virgin Australia confirms that the Company continues to look for various options to cope with the COVID-19 pandemic. Moreover, it also acknowledges the request for financial support from the Australian government in the order of approximately $1.4 billion as a portion of a wider industry support package to prepare for a continued pandemic.

Furthermore, the Company mentioned that it is an initial proposal and remains subject to sanction by the Board of the Company and the Australian government. It may or may not comprise conversion to equity in certain situations.

Virgin Australia Group is taking various actions to respond and manage the impact of COVID-19 on its financials. However, financial backing would be required for the industry if the COVID-19 pandemic continues indeterminately, for protecting occupations and guaranteeing that Australia retains a sturdy, modest aviation and tourism sector after this crisis is over.

VAH has a market cap of nearly 726.29 million with 8.45 billion outstanding shares on the ASX.

Related: Travel and Airline Stocks Amidst COVID-19

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