To say that Virgin Australia (ASX: VAH) is finding it challenging to navigate through the COVID-19 storm would be an understatement. Virgin’s possible entry into voluntary administration showcases how the airline is on the brink of collapse.
Voluntary admission may be excessive. However, considering Virgin’s cash runway, mountains of debt, and recent decision to stand down 80% of its workforce, voluntary administration seems understandable.
Moreover, rating agency Fitch downgraded Virgin’s credit rating. Ms. Amaro said, “They’re burning through cash at a rate that will see them burn out by September.” I agree with Ms Amaro. Because:
- a) The availability of funds is shrinking as the credit markets dry up, and
- b) Virgin is grounding their aircraft’s, which is significantly reducing revenue, but they are still servicing leases. Thus, Virgin’s liquidity is under a serious threat.
Update on the government Bailout
Virgin desperately needs a government bailout. Which is why Virgin is using the threat of voluntary admission as leverage to gain a government lifeline. However, the government is not having a bar of it, as Josh Frydenberg said, “They’ve got deep pockets.”
Ultimately, shifting the burden onto Virgin’s shareholders to pull the airline out of financial distress. Virgin Australia’s shareholders include Etihad Airways, Nanshan Group, Richard Branson’s Virgin Group, HNA Group and Signapore Airlines. However, even Virgin’s shareholders are refusing to cooperate. Leaving Virgin, and the Australian government in a standoff.
Personally, the government should engage in an equity bailout. In which the government would own part of Virgin and then sell it in the future. The Australian government could use the profit to service their ever-growing debt. However, this scenario seems unrealistic as Frydenberg said “We want to see two airlines in the domestic market, but we’re not in the business of owning an airline.”
The absence of a government bailout resulted in Virgin approaching Deloitte, Morgan Stanley, UBS, and Houlihan Lokey for a possible debt-equity swap. Essentially, one of the following banks will come in as a white knight, pump in liquidity in return for substantial ownership in Virgin.
Is Virgin worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Virgin’s COVID-19 nosedive is sparking incredible interest for investors. Virgin’s trading halt expired today. However, before the market opened, Virgin suspended trading for another seven days or until they provide a funding/restructuring update.
If I was looking to invest in the aviation industry, I would not put my money in Virgin. We, all know the saying buy low sell high. However, there is a reason why Virgin is trading at 0.086 cents. Virgin is up to its neck in debt, burning through its cash at an unprecedented rate and could possibly enter voluntary administration. Which are all red flags, in my opinion. If:
- A white-knight bank can restructure Virgin
- COVID-19 improves and
- Virgin receives a significant liquidity boost
Then VAH might be a viable investment (opinion not advice).
Instead, Qantas (ASX: QAN) seems like a better investment. Now yes, Virgin could survive the pandemic. However, Qantas is better positioned to emerge from the virus as a more dominant airline. Qantas recently received an additional $1 billion in debt and can draw on $3.5 billion in assets. In turn, Darwinian’s evolutionary theory will see Qantas come out on top. Because out of all, the battered Australian Airlines Qantas is by far the fittest.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG