Cascade Effect: Virgin Australia goes bankrupt, and how...

Virgin Australia has become the world’s largest airline to seek bankruptcy protection in the weeks since the coronavirus shutdown created a debt crisis. Australia’s second-largest airline owed 5 billion Australian dollars ($3.2 billion) and hadn’t posted a profit in seven years when the pandemic virtually grounded the aviation industry.

Singapore Institute of Technology economist Volodymyr Bilotkach, author of Economics of Airlines, says small-to-medium European airlines with small cash reserves are similarly vulnerable. Some small European airlines including British regional carrier Flybe have already folded and Norway’s largest airline Norwegian Air has announced three subsidiaries in Denmark and one in Sweden have filed for bankruptcy.

Virgin Australia had asked the Australian government for a AU$1.4 bn emergency loan, but the government refused, partly through fears that the money could be siphoned off to the financially stressed foreign airlines that own Virgin. Financially stressed airlines typically turn to their governments for a bailout first and then to their owners.

Virgin Australia said some of its major shareholders — Singapore Airlines, Etihad Airways, Nanshan Group, HNA Group and British billionaire Richard Branson’s Virgin Group — were already receiving foreign government support that could not be shared with the Australian business. Virgin Australia has appointed voluntary administrators to assess whether it can be saved by restructuring or should be sold to other investors. If independent administrators can’t save Virgin, their job it to wind up operations and sell off assets.

A voluntary administrator can be appointed to a company by directors quickly and simply in Australia by passing a resolution that the company is insolvent or likely to become insolvent soon. The Virgin board did this on Monday night and notified the stock market on Tuesday that full control of the airline had been handed to a Deloitte team.

It’s similar to Chapter 11 bankruptcy protection in the United States, although insolvent company directors in Australia have no further control once independent administrators have taken over operations. But whether airlines in other countries are given time to restructure while insolvent or are wound up to pay creditors depends on variations of national corporate laws.

At least 10 unnamed potential buyers were quick to start talks with the administrators and have buoyed hopes that Virgin Australia will survive in a leaner form. The airline is continuing its scaleddown services through the pandemic shutdown. Analysts agree Virgin is in a stronger position than Ansett Australia, the nation’s former largest airline after Qantas. Air New Zealand-owned Ansett entered voluntary administration in 2001 and winding up the defunct airline took almost a decade.

Australian government and businesses want to avoid Qantas gaining a virtual monopoly over the domestic aviation market, which would likely lead to higher fares for fewer flights. Bilotkach, the economist, expects that Norwegian Air, LOT Polish Airlines and Czech Airlines are among the smaller European carriers most at risk of succumbing to the pandemic like Virgin Australia due to poor balance sheets and limited government support.

Asia would likely lead the international aviation industry’s recovery with Chinese and Japanese domestic markets remaining relatively strong, Bilotkach said.