Fitch Ratings-Sydney-10 March 2020: Virgin Australia Holdings Limited (B+/Stable) 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, Fitch Ratings says. The airline's high levels of liquidity reported at 31 December 2019 (1HFY20), combined with cost savings already achieved under its strategic cost-reduction programme and enhanced operational discipline under the airline's new CEO, 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, we believe 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.

Virgin Australia reported it had total liquidity of AUD1.3 billion at 1HFYE20, consisting of cash on hand of AUD1.1 billion and undrawn facilities of AUD166 million. At the same time, it announced it will reduce group-wide domestic capacity by 3% in 2HFY20, with a further 5% reduction flagged for FY21, fast track the exit of its leases on subsidiary Tigerair's A320s by October 2020, and reduce short-term capacity into significantly affected domestic markets such as Cairns. It has also exited its Hong Kong routes and reduced its Trans-Tasman capacity in its international operations, and continues to prioritise cost-saving initiatives across the group. The implementation of these actions followed the company informing the market that it expects a negative impact on group earnings of between AUD50 million and AUD75 million in 2HFY20.

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. To date, Australian competitor Qantas Airways Limited has provided guidance that it will reduce its domestic capacity by 3% to 5% and international capacity - particularly in Asia - by around a quarter until mid-September 2020 - among other cost saving measures - while Air New Zealand has announced that it will cut its Trans-Tasman capacity by 7%. Falling oil prices will also help alleviate any liquidity pressures for the airlines.

Virgin Australia has additional cost-saving measures available to it to further adjust its cost base to demand levels, should demand decline more than IATA's current worst-case scenario. These include additional capacity reductions commensurate with demand declines, although we believe these would only be available up to a certain level, which would help reduce staff, maintenance, fuel and airport costs. The airline also has the ability to hand aircraft back to its lessors as it reduces capacity, which will lower aircraft rental costs. Over 50% of Virgin Australia's fleet of around 130 aircraft was leased at 1HFYE20. The airline also has the option to sell some of its owned fleet, if necessary.