Corporate Australia has seen the first big casualty of the coronavirus pandemic, with VAH announcing overnight that it was entering voluntary administration.
VAH, unlike Qantas (QAN), was in the unfortunate position of entering this period of uncertainty with debts of around $5bn and an unknown length of time during which revenues are dramatically reduced. Additionally, with five large airline shareholders comprising roughly 90% of the share register, VAH has a group of shareholders currently facing the same cash flow issues themselves and unwilling (or unable) to provide support.
The government has additionally made it clear that while it recognises the need for two domestic carriers, it was not in the business of propping up bad businesses and it shouldn’t be forgotten that VAH has not turned a profit in many years. The government also saw the likelihood that there would be enough interested parties that would cast an eye throughout the administration process, and with a new balance sheet and new shareholders there is reason to be optimistic that the Virgin we know will surface in a very recognisable form as conditions start to normalise.
VAH also stands as a cautionary tale that while the government is doing its best to support the entire economy, providing support to questionable businesses with over-geared balance sheets is not something we’re going to see.
Oil prices
It’s symbolic that during the night that Virgin announced its voluntary administration, we saw the craziest night in the oil market in our lifetimes. With huge drops in demand for oil stemming from forced travel restrictions, we saw an incredible situation in the US last night as the price for West Texas Intermediate (WTI) May contract trade as low as -US$37.63 a barrel. What this effectively means is that with the Cushing oil storage hub in Oklahoma (where physical delivery of WTI oil typically takes place) almost full, and with no demand from refineries, producers of oil have needed to pay buyers to simply take the oil off their hands.
This is, quite frankly, unprecedented and shows that in an environment of forced closures, demand for oil right now has no real link to the price. There is neither the storage, nor the demand, to satisfy any delivery of oil. Interestingly, the June delivery price is only a little below US$20 so the view that economies will start to reopen throughout the coming month is likely contributing to this.
Typically, any oil price shock like this would have major implications for the global economy but this is a very unique situation and is not likely to be seen again. Either we are going to see demand pick up as economies reopen, or things will remain subdued and production will finally plummet as high cost producers are finally unable to hold on any longer.
