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Issue #1928      August 17, 2020

Nationalise the airlines

At least 3,000 jobs will be lost. Virgin Australia would continue to operate, but as a smaller, leaner airline if the offer of private equity group BainCapital goes ahead. Virgin CEO Paul Scurrah would keep his position in the company and work with Bain to implement a restructuring and downsizing of the airline.

Deloitte was appointed administrator when Virgin went into voluntary administration in April with debts of almost $6 billion.

The airline would for the time being concentrate on domestic flights and short distance international routs such as New Zealand and possibly Bali.

Bain’s takeover is still subject to endorsement by creditors including its workforce. A group of bondholders whose loans to Virgin are unsecured may challenge Bain when the vote is taken this month.

Bain Capital plans to put Tiger Air, Virgin’s competitor to Qantas’ budget airline, JetStar, into hibernation. It was left open which of Tiger Air’s regional services would be maintained by a new meaner and leaner version of Virgin.

The Australian Services Union described the job losses as shattering, saying, “It will mean thousands of skilled workers leaving our critical aviation sector. And thousands of people losing their jobs at the height of this crisis when it is hardest to find work.”

“For months now, we have been calling for the Morrison government to urgently implement an aviation support package. It is beyond time for Morrison to step up and deliver,” the union said.

Qantas has also been downsizing. It had already stood down 20,000 of its workforce in April, and in June announced that 6,000 of these workers would permanently lose their jobs.

Business in the aviation industry is down by ninety-seven per cent as a result of the pandemic and related government restrictions and is unlikely to pick up in the immediate future.

Virgin was already struggling prior to the pandemic, returning a loss of more than $300 million in the year 2018-19. It is saddled with billions of dollars in debt. The impact of the pandemic was the final straw. Virgin went to the government, begging bowl in hand, but all to no avail.

Capitalism on steroids

Bain Capital may lift the immediate fortunes of the airline, but with no guarantees of longevity. It has proven to be one of the leading global private equity institutions in the world.

Bain Capital is a private equity financial institution. It opened in Boston in 1984 and set out raising a fund of $37 billion from wealthy individuals. It now has offices in twenty countries and more than 1,000 employees, with more than $100 billion under management. As for the bloated profits and bonuses paid to executives, these figures are not in the public domain. Their profits are believed to run in the billions and executive bonuses in the hundreds of millions.

Retail outlets such as Toys “R” Us, Myer, Harris Scarf, and Dick Smith have all suffered in the hands of private equity takeovers.

Like other private equity outfits Bain Capital operates outside the normal regulatory framework that governs banks and other investment funds. It is not listed on the stock exchange, is not accountable to anyone except its own board, and does not need to report to the Australian Securities and Investments Commission (ASIC) or the Australian Prudential Regulation Authority (APRA) or the Stock Exchange as required by other “public” financial institutions.

These private equity outfits are often referred to as “capitalism on steroids,” and for good reason. They move in like vultures and take over failing companies using mostly borrowed funds – what are referred to as leveraged buyouts. They use relatively little of their own money, relying on short-term loans from wealthy individuals and financial institutions such as superannuation funds and other managed investment funds.

Typically, they carry out ruthless restructuring, sack workers, slash wages and working conditions and sell off some of the assets. They then use the remaining company’s assets as security, and borrow large amounts of capital to put the company on its feet. This debt is carried by the company, not the private equity institution.

The interest payments on the debt are tax deductible. They fund interest to their creditors from the sale of some assets or profits when generated. They pocket the remainder of the sale of assets as the owners of the business.

Once the company is running at a profit it is relisted on the stock market carrying a large debt. The shares are bought up resulting in a massive profit for the private equity. The company, when it is relisted, carries unsustainable debt and before long is in the hands of the receivers. At the same time its assets base has been substantially reduced.

There are variations on the main theme, but there is a pattern of private equity institutions bailing out within a few years of taking over a company.

Nationalise the industry

Aviation is a strategic industry. The long distances between cities and regional centres and being an island for trade in goods makes it even more important. What’s more, Australia requires a national airline that is controlled by government in the interests of the people and the national economy, and is available to the government during emergencies and international disasters.

The industry is notoriously prone to the repeated booms and busts of the capitalist economic cycle. (See page 2) It should not be left to the anarchistic “markets” to determine flight routes or the operation of airlines. In the hands of private equity, Virgin’s future is uncertain.

The industry should be planned on the basis of need, not on making a fast buck and abandoning routes that are not “viable.”

Both Virgin and Qantas should be nationalised to serve the strategic interests of Australia’s needs and ensure jobs are more secure with the backing only a government can provide.

Next article – EDITORIAL – Political corruption leads to icare nightmare

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