‘Deteriorating’ airline industry cuts Virgin’s credit rating
A "DETERIORATING" aviation industry through the coronavirus is expected to put more pressure on Australia's domestic airlines, with Virgin Australia's credit rating downgraded amid revenue concerns.
International travel restrictions as a result of the virus crisis coupled with the weakest economic in two decades has crippled consumer confidence and led to the downgrade of Virgin's credit rating from a B to B-.
S&P Global Ratings agency expects the downturn in international travel as a result of Covid-19 will "likely spread more deeply into Australia's domestic market", Virgin's predominate market.
The downgrade comes as Virgin's competitor Qantas cuts 90 per cent of international flights and 60 per cent of domestic flights to counter the crisis.
S&P says Virgin's efforts to reduce capacity, exit loss-making routes and accelerate cost reduction initiatives are unlikely to fully cover the cost of lower travel demand.
Virgin's large cash reserves and investments, worth about $900m, will provide a temporary buffer to the crisis, but S&P acknowledges the company's future stability may rely on it cutting more costs if this crisis continues beyond the next few months.
"The company's operating environment may be deteriorating at a faster pace than Virgin Australia can implement initiatives to protect cash generation and balance sheet health," S&P said of Virgin.
Last week Virgin Australia Group Managing Director Paul Scurrah announced the network's capacity would reduce by 6 per cent in the second half of the financial year.
The long-awaited Brisbane to Tokyo Haneda route will fly three times per week from March 29 instead of daily, and staff will be asked to take paid or unpaid leave.
Cuts to capacity are in addition to those announced in February, which saw Tigerair's fleet almost cut in half and its Brisbane base closed.
Mr Scurrah last week did not rule out further measures to protect the company's balance sheet.
S&P said it was less likely Virgin would receive extraordinary support from its shareholder airlines, Etihad Airways. Singapore Airlines, Nanshan Group, HNA Group and Virgin Group if it experienced financial stress, with each shareholder experiencing its own challenging conditions.
"We believe that government and lenders may have an incentive to support Australian carriers," it said.