Putting aside the personal impact on Virgin's staff, which would be absolutely terrible, the government has a real problem on it's hands.
The big difference between Virgin and other companies that have been the beneficiaries of government support is that Virgin is a publicly listed company whose main shareholders are outside of Australia and who are in no position to provide a bail out. So the Australian government would then become a prime guarantor for ongoing operations of a private and foreign owned entity.
Don't think that would sit very well with most Australians and the argument against the bail out will be that it's not a government responsibility to prop up a public company that has been totally mismanaged by others over the years.
You can bet that AJ will be leaving no stone unturned to try and stop this, without equivalent funding for Qantas.