GLENN WITHERS. Virgin Australia: Voluntary Administration and Beyond

Australia is a big country. Airlines help keep our population together. But the Covid-19 crisis has decimated traffic and exposed some basic financial problems in our aviation industry.

Virgin Australia has been placed into voluntary administration under Deloitte’s as its future corporate existence and viability is sorted out, including the outcome for its 13,000 employees and the mass of creditors holding $6.84 billion or more in debt.

The major shareholders (Etihad, HNA Aviation, Nanshan Group and Singapore Airlines) were simply unwilling to provide funding sufficient to see Virgin Australia through the pandemic, given an already weakened financial position for Virgin Australia and their own air travel market challenges.

But there might be other private finance interest in participating in a still viable market post-pandemic. And private enterprise is meant to be the source of resilience and flexibility in dealing with risk and uncertainty. This raises the question of whether there is any role for government?

Is there any role for Government?

In fact, the Australian government has already provided a large subsidy to the Australian airlines (direct and through generic programs) to help sustain key services during the period of Lockdown due to coronavirus. However, the Federal Government has rejected a Virgin Australia request for a further full rescue package.

Certainly, a further ongoing grant or handout could have sent wrong signals, including to other firms as a precedent for seeking special treatment over and above widespread business support policies already in place. And it may be that the voluntary administration process will produce a viable entity for the future, possibly under a different name, including if government were to reconsider its domestic route proscriptions as regards international airline competition.

The benefit for the government in otherwise standing back is that any support for a new entity can avoid payout to existing (foreign) shareholders. The worry for the Federal Government, though, is that if a serious second airline competitor for Qantas Airways does not emerge from the voluntary administration process, unaided by government support, it will be left with two huge problems: the first is Australian geographical integration loss and the second is industry monopolisation.

Normally, the community benefit of geographical integration from airlines comes without need for government assistance. But when the viability of commercial operation is in doubt, ensuring a core airline capability is still in place is sensible for government; and avoiding a monopoly for this capability is also important.

Monopoly invariably raises prices and reduces service quality and even a new dedicated Regulator might find ensuring good outcomes very difficult, compared to competition. Moreover, the capability for optimal air service provision will take a long time to restore if lost now.

The normal private sources for aviation finance don’t truly recognise and fund the wider national benefits desired. Private equity may seek to take over a floundering airline, but such firms typically pick over the carcass and much community value will be lost in the process.

So, governments might validly help where there are felt to be these wider community values involved and the danger of their being lost. Some of this value is also reflected politically and electorally, especially where regions carry votes disproportionate to their populations, as in Australia. Regions where service would diminish also attract wider public cultural sentiment that matters in democracy.

How should Government Help?

The key question then is how should government help during and after the Voluntary Administration period?

Governments can consider more grants (“handouts”). But ongoing handouts to industries where a CEO can be awarded remuneration of $20 million or more a year, does have dangers for politicians. So, governments may baulk at more handouts, particularly for individual firms rather than for the whole of the sector or more generically for the wider economy.

A keener eye to electoral acceptance and indeed to post-crisis budget restoration could lead to a compromise, which can be explicit or implicit government guarantee backing for the private finance (as we do for the banks), or possibly to concessional loans by governments.

However, the guarantee is a large windfall gain for private finance companies, who can pursue profits with massively reduced risk care. The concessional loan instead at least is transparent in its subsidy and in its risk to the taxpayer. Loans, rather than grants and guarantees, also clearly acknowledge a need to reduce the future burden on the younger generation.

But, for loans, conventional time-based repayments can put huge financial pressures on airline operations at just the wrong time. Getting the risk pattern right in such circumstances is very hard, and various arbitrary concessions and adjustments such as negotiated non-repayment periods typically follow.

For this same reason, government equity holding if not full nationalisation, is recommended by some instead of time-based loans. This is rejected by the Morrison government. According to Treasurer Freudenberg “we’re not in the business of owning an airline”.

But there is another alternative if no acceptable “full service” Australian-based private operator will otherwise emerge.

An Idea for a New Form of Loan

The alternative is Revenue-Contingent Loans, and it is an option that could readily be used more widely for other businesses caught by these mega crises, where ‘community value’ still justifies government intervention. These are simply loans which get repaid as and when company revenues return with recovery, but not while the difficult times beyond the corporations’ control remain in place.

Profit-based repayment could be suggested instead, but the capacity for clever legal (but immoral) accounting to avoid taxable income is very evident in Australia. Just look at the list of top corporations enjoying huge revenue flows, who pay no company tax here. In contrast to profit, revenue is easily verifiable, and repayment would be simple and efficient through the tax system.

The revenue-contingent loan approach can be part of a “market-based” solution still, if an adequate fully private solution has not otherwise emerged. The government revenue-contingent loan can indeed be part of a package eg sit alongside a mix of new equity-related fund raising, bank loans and grants.

If repayment of loans might become deficient, instead of a write-off clauses can be imposed to translate the loan into equity for later sale for the taxpayer. If Qantas and the small domestic airlines feel left out, the loan arrangements can be sector wide.

Future Crisis Planning

Loan innovation for the airline industry in crisis, actually illustrates a more general option for dealing with the pandemic impact on business. Indeed, a lesson from the pandemic and the bushfires and the floods and more, and no doubt for potential cyberstorms, trade wars and financial crises and more looming ahead, is to be better prepared.

To have a revenue contingent loan system in place, and even more so for small business, would massively improve our ability to deal with crises (see https://theconversation.com/give-people-and-businesses-money-now-they-can-pay-back-later-if-and-when-they-can-134998)

Glenn Withers is an Honorary Professor of Economics at ANU and UNSWCanberra.

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