Virgin Australia has the flexibility to manage potential liquidity pressures over the short term that may stem from falling demand for air travel due to the COVID-19 outbreak, according to Fitch Ratings.
The rating agency says that Virgin’s high levels of liquidity reported at the end of 2019, combined with cost savings already achieved under its strategic cost-reduction programme and enhanced operational discipline under the airline's new chief executive, will provide the airline with time to implement measures to address any issues it may face.
Fitch expects the negative impact on demand for air travel to increase the longer and wider the outbreak continues. Demand will remain soft and may place liquidity pressures on airlines, which typically have high fixed-cost bases.
The International Air Transport Association (IATA) on 5 March 2020 increased its forecast of 2020 global revenue losses for the global aviation passenger business as a result of COVID-19 to between USD63 billion and USD113 billion, depending on the spread of the virus. Under its worst-case scenario, IATA has assumed that passenger numbers in Australia could fall by 23%.
Fitch believes Virgin Australia will be able to withstand additional liquidity pressures under the worst-case scenario presented by IATA until late-2020, based on its reported levels of liquidity at 1HFYE20 and measures announced to address falls in demand already experienced as a result of COVID-19 only.
Furthermore, said it believed that the reduction in costs already achieved under its strategic cost-reduction programme has increased the resilience of the airline's cost base and has given it more time to implement these actions to restructure its business and cost base as the impact of the outbreak continues.
“We believe that the decisive measures taken by Virgin Australia to date to address the fallout from COVID-19 underscore its commitment to taking necessary actions to maintain its liquidity levels. Furthermore, Virgin Australia's direct competitors have also exhibited rational behaviour as they seek to address similar issues. This rational competitive behaviour across the industry enhances both Virgin Australia and its competitors' ability to address any liquidity issues that may arise,” Fitch said in a statement.