The Bailout Battle Between Qantas & Virgin Australia

Filed Under: Qantas, Virgin Australia

Qantas and Virgin Australia are engaged in quite the battle in Australia over survival. Qantas is saying Virgin Australia shouldn’t be given aid due to mismanagement, while Virgin Australia is saying that Qantas is trying to drive them out of business.

Government aid is a complicated topic…

Airlines are facing an unprecedented situation at the moment, and we’ve seen many governments around the world step in to try to help their airlines.

When it comes to government aid at the moment, there are two things that have stood out to me:

Alitalia has been given yet another lifeline due to COVID-19

That last point raises an interesting question — if an airline was already on the verge of collapse before this all started, should they be rescued, or is this the time to just let them go out of business?

Virgin Australia wants a big government loan

In Australia the aviation sector has already been given up to 715 million AUD in aid, in the form of waived air service charges, aviation security charges, and taxes on fuel. That will only go so far, though.

In light of the current situation, Virgin Australia has asked for a 1.4 billion AUD government load, that would convert into equity if unpaid.

Virgin Australia is looking for a government loan

The airline has lost money for seven years, but understandably this makes the situation way worse.

I’m not sure how much this should factor into the whole thing, but it is worth noting Virgin Australia’s rather complicated and diverse ownership structure:

  • Etihad Airways owns a ~21% stake in the airline
  • Singapore Airlines owns a ~20% stake in the airline
  • HNA Group owns a ~20% stake in the airline

HNA Group, the parent company of Hainan Airlines, owns a stake in Virgin Australia

Essentially, the Australian government would be providing aid to an airline that’s majority foreign owned.

Qantas thinks Virgin Australia deserves nothing

Qantas CEO Alan Joyce has in no uncertain terms made it clear that he doesn’t think Virgin Australia should survive. He explained that:

  • The current situation has created a “survival of the fittest” scenario
  • Qantas is making sure they are the “last man standing”
  • Australia shouldn’t “look after the badly managed companies which have been badly managed for 10 years”
  • “When good companies have managed their position very well, the government should let them manage their way through this, and not look after the badly managed companies; Qantas needs to be treated equally”

Qantas isn’t asking for government help, but is saying that if Virgin Australia gets a 1.4 billion AUD loan, then Qantas deserves a 4.2 billion AUD loan, since their revenue is three times as much.

Qantas doesn’t think Virgin Australia should survive

Virgin Australia complains about Qantas

Virgin Australia CEO Paul Scurrah has written a letter to the Australian Competition and Consumer Commission (ACCC) about Qantas’ actions, accusing Qantas of engaging in anti-competitive behavior. He accuses Qantas of “trying to send a message that Virgin was in trouble and would not survive.”

While a probe is being done, so far Rod Sims, the Chairman of the ACCC, has said:

  • “Australia went into this crisis with two full-service airlines and it’s really important that we come out the other end with two full-service airlines”
  • Joyce’s comments about “survival of the fittest” were “very unhelpful and inconsistent with the time of crisis we’re in”
  • “We don’t want to damage the structure of the economy, so that when the health crisis is over, we can rise up and be ready to go; we don’t want the sort of structural change that might be being suggested by Mr Joyce”

Australia wants to maintain two full service airlines

Bottom line

The topic of government aid for airlines in Australia is a complicated one. Australia wants to maintain two full service airlines, because that’s in the best interest of consumers. But one of the two airlines is in a significantly better financial situation than the other.

While I think Qantas has great employees and I like the airline as such, personally I’m not a huge Alan Joyce fan. I kind of put him in the same camp as Carsten Spohr, the CEO of Lufthansa, who will say whatever suits his narrative at any particular moment. I’m also not a huge fan of the approach he takes towards labor, but that’s for a different post.

In this particular case I don’t necessarily think he’s wrong. I do think it’s important for Australia to maintain two global airlines, but if aid is provided, it’s logical enough that it should be proportional (by some metric), and Virgin Australia being nationalized seems like it would put Qantas at an unfair disadvantage.

I’ll be curious to see how this plays out.

What do you make of the Qantas & Virgin Australia feud?

Comments
  1. By being tough on labour, forgoing bells and whistles, it has probably put QF in a better position than many of their industry peers.

    People often forget that unions need to “appear” to look tough in order to keep their members happy. If unions ticked and flicked a perfect reasonable offer from an employer, they’d be no incentive for a member to continue their membership.

    While I appreciate you may not be a fan of Alan Joyce, Lucky, it is completely unpalatable for a government and Australian taxpayers to support a company (that is indirectly owned by foreign governments and a billionaire) that was so poorly managed for so long.

    The barriers to enter the Australian domestic market are low, let VA die and see if a better company comes along.

  2. I’ve been really disappointed by Alan Joyce’s behaviour over the last week.
    He clearly wants a Qantas monopoly in the domestic Australia market which would be horrible for consumers. He also had a go at VA for being mostly foreign owned while lobbying the government to remove the restriction on Qantas being no more than 49% foreign owned which is pretty hypocritical.

  3. Another Government bailout issue is brewing with Virgin Atlantic as yesterday they asked Airbus, Rolls Royce and Heathrow Airport to lobby on its behalf to save the airline from falling into administration. It’s looking like the U.K. treasury are not looking very favourably in offering assistance.

  4. My view is that if Virgin need money then Old Beardy has more than enough of it and it’s time he bailed out his over hyped, over promised and under delivering companies. Taxpayers wherever they are do not need to make Branson who is domiciled off shore any more wealthy.

  5. @ Jackson – actually it isn’t hypocritical to want the same level playing field as your competitor.

  6. Here in Australia tonight, the Federal Government has announced that Virgin Australia will not be receiving any Government bailout money. So with everything you’ve mentioned in this post, it’s highly likely Virgin Australia will die a death by a thousand cuts. Their only way out and survive is if they stop flying their international sectors and concentrate on being a purely domestic carrier again.

  7. IMHO Alan Joyce conveniently forgets the last time when Qantas got out of crisis by banishing a lot of… what I personally would think of as essential longhaul routes. i.e. Being the only Australian carrier who could offer them at the time, there’s some level of a duty to maintain some semblance of those as a counterpoint to foreign-owned carriers. It can’t be all about profit in that context. So if Joyce wants to trash VA by saying VA is foreign-owned… what has he done for Australia lately, ooh ooh ooh ooh yeah?

    I’ve put Joyce in the human trash pile for me for years. Only Don Carty, Carl Icahn and Doug Parker (and maybe Jeff Smisek and Alex Cruz on certain days) keep him from bottom of that pile…;)

    Airlines are big in mindshare. When they crash or collapse it can reverberate beyond their actual economic impact. That’s why airlines are often bailed out. But sometimes the right thing to do is “pull a Malev” and be willing to lose a big, storied name (if not THE flag carrier).

  8. Let us not forget it was Alan Joyce that asked the federal government for a AU$3 billion guarantee last time Qantas was in trouble. No level playing field from Alan, or request for funding by virgin Australia then. Also Joyce has several times asked that the foreign ownership cap of 49% be lifted from Qantas. Pot Kettle Black!

  9. If Virgin Australia was already in financial trouble for years before now, I think it would be waste of taxpayers money to try to prop them. If they haven’t fixed their finances by now, why would they be any different by the time the coronavirus situation is gone?

    As for Qantas, if their CEO thinks this is survival of the fittest and they want to be last man standing, I say go for it. No bailout should be given, as survival of the fittest means surviving on their own merit.

  10. “Even the “healthiest” airlines can’t weather a storm like this, and immediately sought government aid”

    I think you’ll find British Airways / IAG hasn’t (yet?) asked for government aid.

  11. Clearly management has been incompetent.
    If private companies cannot weather out this situation, there is no reason public money should help them, they don’t help the consumer other than squeeze every penny.

    That said, this is one instance where majority foreign ownership has drawbacks : foreign money only comes in to make more money, never to help a national economy. So why should the taxpayer pay for foreign-owned mismanagement ?

    Therefore :
    1) Australia should revize its policies
    2) make sure local investors recapitalize VA or launch another airline, a monopoly is good for noone. Australia is far flung and large enough to sustain two companies.

  12. I reckon it would be better to just let Virgin go broke because the potential for another company to take over is high. Remember Virgin has around a 3rd of the Australian Domestic market, cities across Australia are all far from eachother which requires people to fly and there’s no High Speed Rail to compete with like in Europe or Asia.

    To Add to that Singapore Airlines and Air NZ have been very keen to get a slice of the Australian Domestic Market for decades now. There could be other companies/airlines keenly watching too.

    So if Virgin were to go broke the company that would set up here to replace them would have all the terminal space, hangars, aircraft and staff to absorb very quickly which reduces set up costs and saves time on having to set up from scratch.

    Any new 2nd Australian airline needs to purely focus on the domestic market only and to be a hybrid carrier catering to the business traveller and the low cost traveller at the same time (like JetBlue or Azul) and NO long haul! If they want to go international then NZ and the Pacific Islands would be the less risky option.

  13. @Phil – SQ and NZ have tried the Australia many times. Both with Ansett and now Virgin Australia. At least NZ ran from VA while they still could.

    The question should be whether the Australian market can support two airlines viably.

  14. @Dean
    Singapore Airlines wouldn’t simple just concede the Australian Market to Qantas. Australia is one of the most profitable markets for them.

    Plus Air NZ only ran off because Virgin refused to revert to a domestic only carrier. Air NZs goal was to have Virgin as a Domestic only carrier in order to funnel its international bound passengers through Auckland on Air NZ flights.

    And are you seriously questioning whether we need 2 careers? Having 1 carrier domestically would be a disaster! Remember Virgin always did well in the domestic market and have a 3rd of the market domestically. Virgins problem was them trying to fly internationally when it wasn’t needed.

  15. @Phil – NZ’s plan for VA was probably the right one. It should have remained a domestic airline. Tigerair, international, Skywest, selling parts of Velocity then buying it back at double the price, more shareholders with competing interests. The inability to have proper interline sales, computer systems, app, check in system. The list goes on of the failures VA’s management.

    Australian consumers deserve competition, but they need to be well managed businesses.

    SQ and NZ are in troubles of their own. I doubt they’ll be rushing back to the Australian domestic market anytime soon, especially now that NZ codeshare with QF and will most likely remain frenemies.

  16. VA is partly owned by the Chinese Communist Party via their HNA connection. No way should this airline get Australian tax payer dollars.

  17. I have a question more than a comment. We booked our tickets for June but working for the County I was informed to cancel all upcoming trips, 4 for me. One of those was to see family in Australia and visit friends in Launceston, Tasmania. Virgin Australia would not allow me to cancel my flights for July (4 domestic tickets but on the cheapest fare). They even want to charge me a change fee. What do you suggest I do after I already sent 3 emails including one that states the ACCC says they need to at least offer credit vouchers?

  18. VA hasn’t made a cash profit for many years. No way they could repay $1.4B in three years from operating revenue – even before the virus. Now it is just throwing good money after bad. The government knows this and will let market forces play it out. If/when VA peters out – another player can take their place – just as when AN died, VB rose up.

  19. So the airlines that are already dominant want to have their main competition die, which of course would make the dominant airlines vastly more powerful. Qantas and IAG want a handout; they just want to wait until the competition is wiped out to ask for one. That’s the opposite of what’s needed. Whether in Australia, Britain, or somewhere else, the governments should just refuse money to the single dominant airline while aiding the weaker one. That would make for a more level playing field.

  20. Bruce, the ACCC doesn’t say that for every time frame.

    As your booking is in July, you need to wait to see the situation then. If as expected, travel restrictions continue through then, the time frame will be updated and you can then request travel vouchers. For now, just wait.

  21. What needs to be clear to anyone not living in Australia that Qantas extortion is what makes them money, it’s cheaper to fly to anywhere in Asia business class than it is to do so on lots of domestic routes. Its disgusting and needs to stop and for God’s sake it’s a second class airline but too many Qantas lovers will say otherwise even while they’re being ripped off

  22. @Andrew-Stuart

    The likely scenario of Virgin Australia going to domestic only is when they’ll file voluntary administration, where chances VA filing administration eventually is high.

    When VA files administration, a domestic ‘VA replacement’ will take VA’s place whilst the administrators searches for a buyer of VA’s remaining assets.

    The VA ‘domestic replacement’ may not take the ‘Virgin’ name to save on licensing fees, as the administrators should take take over VA will want to save as much $$ as possible while they prepare what’s left of VA for a new buyer.

    @Phil

    NZ and SQ had attempted the Australian market numerous times.
    In particular, SQ has had three goes at the Australian Market (Strike 1: Air New Zealand/Ansett Group, Strike 2: Tiger Airways Australia and Strike 3: Virgin Australia) and have failed dismally at all three attempts.
    SQ also had full management control of Tiger Airways and still managed to screw that one up with the maintenance debacles. SQ only ended up “selling Tiger to VA” to “save face” on their own incompetence.
    If SQ can’t get their three goes at the Australian market right (especially when they had full control of their 2nd go), what makes people think they can get their “4th go” right.

    Also to add to SQ’s failures is their “epic fail” in their Virgin Atlantic. Selling out to DL at a loss. Not a good record for a “so-called messiah” of Virgin.

    As also pointed out, SQ and NZ are battling financial issues of their own and the main game for them is survival. They won’t be investing in the Australian market anytime soon, and there’s talk of NZ reverting to a domestic & regional carrier anyway, with LAX as their only long-haul.

  23. @Christian
    “…in … Britain … the government … should just refuse money to the single dominant airline while aiding the weaker one”.

    Why? VS is not the only competition for BA on any of its route. Why should tax-payers give free cash to a small boutique airline that provides the 3rd, 4th, 5th or more airline operating cherry-picked flights between, say, London and New York, or LA, or Hong Kong, or…?

    Branson has become a billionaire (who magically manages to avoid paying much tax in the UK) by milking his businesses when times are good. Well, times are now tough, so he and the other shareholders should be putting back — not expecting tax-payers to subsidise his under-capitalised business.

    You can’t privatise profits while socialising losses. That ain’t capitalism.

  24. @Dan
    It dosent need to be just SQ or Air NZ that come into the domestic market. Other carriers or companies might be interested too. Remember Virgin has a 3rd of the Domestic market so if this new carrier just focused on domestic flights they’ll have a good chance at success.

  25. As a long term loyal customer of Qantas, I think they have been great. All my flights have converted to credit and frequent flyer status has been extended by 12 months. They are quintessentially Australian and a worldwide recognised brand for Australia. If the government is supporting an airline, prioritise an Australian one to give them another 100 years of Aussie service. The crew that are hurting now deserve that at least!

  26. People easily forget the loss making years at QF, not so long back when JB took over VA he came after QF, new planes, new business class, new investors, new routes etc and who can forget the domestic capacity war that almost killed both airlines, all whilst unions were screwing over QF. The one who stood up was in fact AJ, grounded the airline, yes he did ask the govt for a debt guarantee (and they refused) but in the end he didn’t need it. These tough times is when these CEO’s need to earn their million $ salaries, not running to govt for a bailout. VA were badly managed by JB and I feel for Scurrah – he’s the new guy in a tough spot, but so was Joyce about 10 years ago, Why wouldn’t AJ now try to protect everything he’s done to fix QF. Prior to COVID19 QF was in the best shape in decades.

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