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Where next for ASX airlines as Virgin enters voluntary administration

‘Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.’

The Qantas (ASX: QAN) share price rose as much as 7.24% off yesterday’s closing price – before pulling back as Tuesday’s session wore on – after news broke that rival airline Virgin Australia (ASX: VAH) had entered voluntary administration.

This announcement, which Virgin officially released to the market at 8:51AM on Tuesday morning, is not exactly surprising news.

On Monday evening, the Australian Financial Review published an article titled Virgin Australia headed for VA after government knockback.

This speculation turned out to indeed be true, with Virgin today revealing it had failed to secure the required levels of funding from either the government or other institutions/ investors.

As a result of this, the low-cost carrier will now enter voluntary administration, as it attempts to recapitalise the business. This, said the company, will 'ensure it emerges in a strong financial position on the other side of the COVID-19 crisis.'

The airline has appointed Deloitte’s Vaughan Strawbridge, John Greig, Sal Algeri and Richard Hughes to lead the process.

Business as usual, kind of

In spite of this disappointing news, Virgin said it would continue to offer international and domestic flights as well as maintain its freight corridors.

Speaking to the current situation, Virgin Australia’s Chief Executive Officer, Paul Scurrah said:

'In 20 years, the Virgin Australia Group has earned its place as part of the fabric of Australia's tourism industry. We employ more than 10,000 people and a further 6,000 indirectly [...] and contribute around $11 billion to the Australian economy every year.'

Where next: Qantas and Virgin share prices in focus

Ultimately, Virgin stressed that it is necessary that Australia have a second airline. The concern is a valid one too, with many worrying that without Virgin, blue-chip carrier Qantas will have free reign to establish a monopoly.

In abstract terms, monopolies may lead to higher prices and reduced choice for consumers, as well as contribute to less efficiency and innovation. On the plus side, for companies at least, they may also lead to higher profits.

Philosophically, as Peter Thiel mused in his masterpiece Zero to One:

‘Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.’

Such a prospect may help to explain why the Qantas share price rose significantly at the open, even as the broader market stumbled. Though to be fair, QAN has pulled back since then – currently trading around the $3.58 per share mark.

In saying that, these monopoly concerns may be overdone, with Virgin’s own administrators saying ‘We've got an extraordinary number of parties who have reached out to us around the restructuring and recapitalisation of this business.’

Before being suspended from trade, the Virgin Australia share price traded at $0.086 per share.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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