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Pull up! Pull up! Virgin in tailspin, warned to cut fast and hard to survive


Virgin Australia edged further into crisis today as it told investors that the shutdown of domestic travel would have a further negative impact on the company.

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Moody’s also downgraded the company’s debt and one analyst was privately saying that Virgin would likely collapse unless it received significant Government assistance or a bailout.Moody’s warned Virgin had to act fast and hard to cut costs. It said Virgin had about $900 million of cash on its balance sheet and minimal availability under its credit facilities.

“While the airline has no new aircraft deliveries until July 2021, and no significant debt maturities until October 2021, significantly lower bookings …  will lead to material cash burn in the short term,” Moody’s said.

It follows a report in the AFR over the weekend citing a Credit Suisse analyst note that said Flight Centre could need as much as $200 million to deal with liquidity issues and may need to raise as much as $150 million from investors.

Flight Centre has announced it will cut its dividends to save about $40 million. Executive pay will also be cut by 50 per cent. It suspended trading in its shares to develop its “comprehensive response to the unprecedented travel and trading restrictions that governments are implementing to slow the coronavirus’s spread”. T

he company said it would continue the positive discussions it has been having with key stakeholders on ways to manage the financial impacts flowing from these restrictions and forced closures and would liaise further with governments to discuss support packages for businesses and people who are adversely affected.

Managing director Graham Turner said cancelling the dividend was not a decision that was taken lightly.”But we felt it was appropriate to preserve cash and protect long-term shareholder value, given the current uncertainty and the unprecedented actions that governments have been forced to adopt to slow the coronavirus’s spread,” Turner said.

Credit Suisse said Flight Centre faced an issue of liquidity, not an issue of business value, and the question for investors was whether to chase the liquidity issue that is already known or to support rectification of the issue.

“We believe that a combination of dividend cancellation, tax relief and a 15 per cent placement of shares would provide sufficient liquidity to meet funding requirements,” it said.

“A placement raising up to A$150 million would be feasible, although that window is narrowing.”

Hello World Travel has also announced it will stand down of about 1300 people, or 65 per cent of its workforce, across all countries.

Remaining staff will be offered reduced working hours.

Moody’s said its re-rating of Virgin reflected the impact of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Moody’s said it was assuming there would be a gradual recovery in passenger volumes from the third quarter.

“However, there are high risks of more challenging downside scenarios, and the severity and duration of the pandemic and travel restrictions is uncertain,” it said.

“Moody’s analysis assumes a more than 60 per cent reduction in Virgin’s passenger traffic in the second quarter of calendar 2020, whilst also modelling significantly deeper downside cases.

“The sharp decline in demand has come at a time when Virgin has minimal headroom under its current rating. Moody’s expects the issuer’s debt to EBITDA to exceed 7 times at the end of fiscal 2020, which is above the downgrade trigger of 6 times that had been set for its rating.

“Virgin is currently reducing costs as much as possible to manage its way through this very volatile market  environment and mitigate some of the negative credit effect.”

Moody’s said redundancies would be a last resort.

“The pace and quantum of Virgin’s cost reductions will be a critical factor in reducing the cash burn and ensuring it has the liquidity to meet its obligations.”

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