S&P downgrades rating for "fundamentally well managed" Virgin Australia

S&P downgrades rating for "fundamentally well managed" Virgin Australia

Virgin Australia (ASX: VAH) has received its second credit rating downgrade in almost as many weeks, with Standard & Poor's (S&P) expecting a cut to the airline's variable costs will not be enough to offset its collapse in revenue.

A decision to cut domestic capacity by 90 per cent and suspend subsidiary Tigerair have led Virgin's rating to be reduced from 'B-' to 'CCC'.

S&P estimates half of Virgin's costs are fixed, and the positive working capital benefit provided by forward bookings and the Velocity Frequent Flyer business is now likely to partially unwind.

"As a consequence, Virgin Australia's previous A$900 million unrestricted cash buffer is likely to materially reduce in the very near term," the ratings agency said.

"Virgin Australia is 90 per cent-owned by Etihad Airways, Singapore Airlines, Nanshan Group, HNA Group, and Virgin Group. To varying extents, each shareholder is experiencing their own challenging industry conditions."

S&P's analysis does not take into account any extraordinary support from the Australian government, although it does believe the government has an incentive to support Australian carriers.

"We note that the government has taken steps to waive aviation fuel excise, air navigation charges, and security fees.

"In addition, the government has made public statements signaling that it is carefully considering further support measures.

"We note that Virgin Australia currently employs about 10,000 people, although about 8,000 have recently been stood down."

Despite the downgrade, which follows a cut from 'B+' to B-' last week, S&P forms the opinion Virgin Australia is "fundamentally well managed and that the Australian domestic market dynamic is fundamentally sound".

"The airline has successfully repositioned itself as a full service carrier, has the youngest domestic fleet, a dual-brand strategy, and integrated frequent-flyer business.

"In our opinion, management has taken decisive action to improve the long-term viability of the airline, including resetting the cost base in loss-making parts of the business such as Tigerair Australia, as well as exiting underperforming international routes and operating bases.

"Absent the Covid-19 shock, we consider that management had appropriately focused its efforts on cash generation and maintained liquidity levels in line with most of its major Australian corporate and international airline peers."

Updated at 11:34am AEDT on 27 March 2020.

Help us deliver quality journalism to you.
As a free and independent news site providing daily updates
during a period of unprecedented challenges for businesses everywhere
we call on your support

Five treatments to rejuvenate and brighten your skin without the hassle
Partner Content
Between working from home and Winter weather, our skin has seen better days. But with ...
Dr Lanzer Skin Clinics
Advertisement

Related Stories

Byron and Tweed to exit lockdown tonight

Byron and Tweed to exit lockdown tonight

The New South Wales north coast regions of Byron and Tweed will exi...

Mask rules change and jabs soon mandatory for truck drivers after QLD reports four new cases

Mask rules change and jabs soon mandatory for truck drivers after QLD reports four new cases

With Queensland today reporting four new locally acquired cases of ...

Rapid antigen tests have long been used overseas to detect COVID. Here’s what Australia can learn

Rapid antigen tests have long been used overseas to detect COVID. Here’s what Australia can learn

Australian Health Minister Greg Hunt wants COVID-19 rapid antigen t...

Patrick Terminals sounds alarm over October strikes, but union dismisses "exaggerated" claims

Patrick Terminals sounds alarm over October strikes, but union dismisses "exaggerated" claims

Patrick Terminals has issued a notice to customers today about a ra...