By Anthony Cicuttini (Brisbane, Australia)
The Australia and New Zealand aviation market certainly has provided its fair share of excitement in the past several weeks. Principally, this fervour has been focused on the airlines and how they are dealing with the COVID-19 crisis and associated liquidity issues. The three major airlines operating in the ANZ market have each taken different paths to dealing with these pressing challenges.
Air New Zealand
The New Zealand government took pronounced steps at the beginning of the outbreak to lock-down the country and avoid propagation of the virus. Consequently, this shut down the aviation market and left only a handful of flights operating with little to no passengers. Cam Wallace, the Chief Revenue Officer of Air New Zealand, has written some effusive messages on twitter that highlight their plight.
In the five fiscal years prior to the crisis, Air New Zealand has witnessed a steady decline in earnings, with a net debt 2,389 ($M) and 1,246 ($M) in aircraft lease commitments as of Dec. 31, 2019.
Source: Air New Zealand 2020 Interim Financial Results
In order to shore up their finances, Air New Zealand was granted a NZ$900m credit facility from its federal government. The airline was forced to cancel its interim dividend and will not pay a dividend for the next two years as a condition of the rescue package. The federal government owns 52 per cent of the airline.
Qantas
On the other side of the Tasman, Qantas is currently operating a limited network of its own and has taken the opportunity to bring forward the retirement of its B747 fleet. Similar to Air New Zealand, lock down measures have essentially brought its operation to a standstill.
By contrast, in past five fiscals, Qantas has seen a steady, albeit modest, growth in revenues but a steady erosion of operating margins, along with lower profits and return on invested capital.
Source: Qantas 2019 Annual Report
With no government ownership, Qantas has sought refuge in debt markets and was able to secure $1bn in debt against a part of its fleet. The airline is stating they have ample cash reserves to weather the storm for an extended period.
Virgin Australia
Operating in the same market conditions as Qantas, Virgin Australia has taken more radical steps in an attempt to avoid bankruptcy. The airline, which was in poor financial health prior to the crisis, shutdown all flying except for a single daily Sydney-Melbourne. This was before government intervention secured additional flying by subsidising domestic operations for both airlines.
Virgin Australia Ownership Structure
Source: Virgin Australia Investor Prospectus 2019
Virgin Australia, which is 90% foreign owned by other airlines, has not been able to secure additional financing to shore up their reserves. The Australian government has on a few occasions refused to rescue a single company but rather support packages would be industry wide. The shareholders, who are fighting their own battles, have also closed the taps on new equity injections. The airline’s shares went into a two-day trading halt as they attempt to negotiate rescue deals, which was extended last week for a further seven days and rumours are floating of the airline entering into voluntary administration. Out of the three airlines, Virgin is in the most precarious position.
Breaking News: Virgin Australia has confirmed it has entered voluntary administration
According to BBC, this is making it Australia’s first big corporate casualty of the coronavirus pandemic. The country’s second-largest carrier cut almost all flights last month following wide-spread travel bans. It was already struggling with a long-term A$5bn (£2.55bn; $3.17bn) debt. The airline is now seeking new buyers and investors, after failing to get a loan from Australia’s government. Virgin Australia chief executive Paul Scurrah said: “Our decision today is about securing the future of the Virgin Australia Group and emerging on the other side of the Covid-19 crisis”.
Virgin Australia has turned just two statutory profits in the past decade. It is part-owned by a number of entities including the UAE government, Singapore Airlines, China’s HNA, and Sir Richard Branson’s Group. It employs about 10,000 people directly and another 6,000 through ancillary businesses.
Rescue Packages, Debt, Hopes & Prayers
Alluded to above, there have been a number of ways the airlines have shored up their liquidity and balance sheets to ensure their survival. Air New Zealand has been able to secure funding from the federal government whilst Qantas has issued long-term debt. As the news above indicate, Virgin Australia however is in a much different position. Although the Queensland government recently announced a rescue package of $200m for the airline but it was conditional on a number of other funding sources also chipping in. The Victorian government on Monday (20th) morning indicated they would not provide funding to the airline. New South Wales has not yet committed to any funding as well.
The airline’s future are in serious doubt given the uncertainty of its finances and the travel restrictions that are choking revenues. The Australian government provided support packages to the industry at the beginning of the crisis but this came in the form of waivers on fees and taxes; it hasn’t been enough. The airline’s trading halt is over on the 22nd of April with an eager audience waiting to see what plays out next.