The Queensland state government's announcement of the potential nationalisation of Virgin Australia Holdings Ltd (ASX: VAH) is undoubtedly a value-destroying move, in my view. Airlines are capital-intensive companies. They have good margins, but not great. Attaching a company like that to the state finances appears, prima facie, as a recipe for disaster.
At time of writing, Virgin owes $2.28 billion to secured lenders and secured leaseholders, $1.98 billion to unsecured bondholders, $1.88 billion to aircraft lessors and $451 million in entitlements to around 9,000 workers. In total, almost $7 billion to over 12,000 parties.
In any debt restructuring and bailout, creditors can exert some influence. However, all bidders will be looking to reduce payments to debt holders – a situation the state government would find difficult.
This is particularly as Queensland would be doing so for its own state interest. While this is fair enough, I believe it adds little value to the remainder of the airline's national customers, aside from placing their interests always second. The irreplaceable value of Virgin to the Queensland economy has been overblown. As has the need for government intervention.
Alternatives to nationalisation
Outside of nationalisation, a range of potential bidders has come to light. Among them is Andrew Forrest, a man whose determination has already launched 2 multi-billion dollar enterprises in Western Australia.
Deloitte, Virgin's lead administrator, previously stated that 8 bidders were already confirmed, with negotiations continuing with a further 12 potential bidders. Some of these allegedly include Wesfarmers Ltd (ASX: WES), American airline investor Indigo Partners, Richard Branson and private equity firm BGH Capital.
Indicative bids for the airline are due by tomorrow, 15 May. Final bids are expected in June with Deloitte confident of completing the sales process by the end of June.
Capitalism works
Within Queensland, there are regional airlines like Alliance Aviation Services Ltd (ASX: AQZ) or even Regional Express Holdings Ltd (ASX: REX). These airlines already carry a lot of the load of intra-state and regional air traffic. Not only in Queensland but also in my own state of Western Australia. The vacancy remains at the interstate level.
Of these 2 airlines, I am particularly fond of Alliance. This company is the nation's unheralded workhorse, ferrying many workers to and from resource projects. It has recently won a contract extension with South32 Ltd (ASX: S32) and has continued operations throughout the COVID-19 pandemic. All of its aircraft belong to the company, which prides itself in operating to world-class standards.
Foolish takeaway
In my opinion, any attempt at nationalisation by the Queensland government into the Virgin Australia bidding process is likely to produce a large number of losers. These include the taxpayers of Queensland, customers of Virgin across the nation, small but robust airlines like Alliance, as well as those who are dedicating time and capital to winning the bidding process.
Many airlines across the world have government support. However, in Australia, I believe this is not necessary. Virgin Blue demonstrated that.
