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Virgin collapse hints at further turmoil facing Asian airlines

Government support critical to industry's overall survival

TOKYO -- The collapse of domestic and international carrier Virgin Australia could be just the start of a radical reorganization facing Asia's aviation sector in the wake of the devastating coronavirus crisis.

Virgin Australia entered the market in 2000, targeting cost-sensitive passengers, but it suffered from fierce competition with budget carriers. Without lucrative business-use customers to fill the void, the carrier recorded a seven-year consecutive net loss.

As border controls continue to tighten worldwide, a number of Asian carriers are scaling back expansion plans and assessing merger and acquisition opportunities.

"There is no doubt the massive disruption -- which will continue for some time yet -- will in many ways transform the industry," said Peter Harbison, chairman emeritus of leading aviation research company CAPA (Centre for Aviation).

While Asian airlines should benefit from short haul international markets opening up more quickly than long haul, Harbison added, price-sensitive passengers will put low cost carriers in a better position to compete. "But their profit margins were thin before this and making profits will be hard," he said.

With the industry already struggling to overcome difficult trading conditions before the onset of the coronavirus pandemic, taxpayer-funded financial aid could become a crucial lifeline for many carriers.

"Some airlines in Asia Pacific that are similarly not able to secure government financial support may have to file for bankruptcy," said Brendan Sobie, founder of Singapore-based consultancy Sobie Aviation. "We will see similar issues pop up with many other airlines in the coming weeks and months."

Asia-Pacific airline passenger revenue will fall by a staggering $113 billion in 2020 compared to last year, according to International Air Transport Association estimates.

That's worse than the $88 billion fall in passenger revenue forecast in March, with global passenger revenue set to fall by 55% to just $314 billion, the airline trade association added.

Virgin Australia, the country's number-two carrier, went into voluntary administration on Tuesday after Prime Minister Scott Morrison's government rejected the company's appeal for a 1.4 billion Australian dollar ($883 million) bailout.

Virgin Australia's administrator Deloitte said in a press conference Tuesday that over 10 parties had already expressed interest in recapitalising the airline which is expected to continue operating domestic routes.

On Monday the Malaysian Association of Tour and Travel Agents (MATTA) pleaded for an urgent capital injection into government-owned Malaysia Airlines.

The Malaysian government has been considering merging the money-losing airline with low-cost rival AirAsia Group -- Asia's biggest budget airline -- as a way of saving both companies.

"Massive bailout fund is needed to help Malaysia Airlines, being the national carrier, to go through the current crisis and expand afterward, and travel demand will eventually return," MATTA president, Tan Kok Liang, said in a statement.

"The bailout will not only tide it over a short-term financial liquidity challenge but will also assist in putting forth growth far off the pandemic."

Fierce competition with AirAsia and other budget airlines, in addition to the mysterious disappearance of MH370 and shooting down of MH17 over Ukraine in 2014, had already pushed Malaysia Airlines to brink of collapse.

AirAsia has also had its share of problems, registering its second consecutive quarterly loss of 384.5 million ringgit ($92 million) for the quarter ended Dec. 31, 2019.

Earlier this month AirAsia said 96% of its fleet was grounded, having suspended most of its flights since March. Its long-haul arm AirAsia X has also parked most of its aircraft.

Other restructuring moves across the region includes Vietnam Airlines sale last week of its 49% stake in state-run Cambodia Angkor Air to undisclosed buyers to secure cash, with five A321 aircrafts also included in the deal.

The Vietnamese carrier halted all international services late last month, maintaining limited domestic service on three routes.

Competing Vietnamese carrier Vietjet Aviation also announced last week that it had reached an agreement with lenders including HSBC and Citibank to delay repayments on loans it had used to buy aircraft.

Last month Singapore Airlines tapped existing investors for up to 15 billion Singapore dollars ($10.5 billion) through the sale of shares and convertible bonds.

The bailout was underwritten by the airline's biggest investor, state-owned Temasek Holdings, which owns about 55% of the group. On top of this, it arranged for a $4 billion bridge loan facility withSingapore's biggest bank DBS Group.

The airline was forced to cut 96% of its capacity originally scheduled up to the end of April.

And despite U.S. crude oil prices falling into never-before-seen negative territory on Monday, forward-hedging practices mean that most Asian carriers won't benefit from lower aviation fuel prices.

Before the onset of the coronavirus pandemic, most regional carriers including Singapore Airlines and AirAsia actually hedged a significant portion of their fuel needs to guard against price rises not price falls.

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