Free of baggage, Virgin Australia is set to soar

Bain now holds the keys to Virgin Australia, and to the airline's future...

By David Flynn , July 1 2020
Free of baggage, Virgin Australia is set to soar

Just two months shy of its 20th birthday, Virgin Australia today hands over the keys to Bain Capital.

The US-based global investment giant, anointed by airline-appointed administrator Deloitte on the back of a multi-billion dollar bid, is now in the cockpit.

Perhaps more crucially, it today takes up financial responsibility for the failed airline which nosedived into administration on April 21, weighed down by almost $7 billion of debt.

Bain is said to be ready to inject as much as $600m in cash to keep the airline operating, even as the new Virgin Australia 2.0 takes shape, according to The Australian. 

That’s reportedly part of a $1.65bn package, of which just over $1bn has been split between honouring travel credit for cancelled flights ($600m) and fully-funding staff entitlements ($450m).

Bain’s billions also sees it elbow aside Virgin’s previous shareholders – an unwieldy roster mainly comprised of Singapore Airlines, Etihad Airways, China’s HNA Group and Nanshan, and Richard Branson’s Virgin Group – all of which which exit without a cent.

Shareholder wipeout

In a statement to the ASX yesterday, the administrator declared “we have reasonable grounds to believe that there is no likelihood that shareholders of VAH will receive any distribution for their shares.”

The prospects for other investors, bondholders and creditors are equally unlikely to be rosy, but Bain’s anointment as the new force behind Virgin Australia is almost done deal.

While all creditors will meet mid-August to formally vote on the takeover, their only other option would be to vote down the deal and send the airline into liquidation, resulting in a fire sale of assets.

With Virgin Australia no longer weighed down by debt, and having a refreshingly singular focus on the future, Bain – and Virgin Australia CEO Paul Scurrah, who is expected to remain at the helm – are now plotting a new trajectory for this streamlined challenger.

But it won’t be a flight path without some turbulence, with tough decisions still to come on the shape of the airline, which could see the 10,000-strong workforce potentially halved as Virgin becomes smaller.

Hard decisions and headwinds

In an all-hands email to Virgin Australia staff last night, Scurrah said he acknowledged “that there is a huge amount of anxiety across the Group regarding the size and shape of the business moving forward, and what impact that may have on your individual roles.”

“Bain officially takes financial responsibility from tomorrow, July 1, and from that point there are many decisions to be made.”

Scurrah spent part of Tuesday in what he described as “a productive two hour session with Bain and the (Executive Leadership Team) to begin discussing the future direction of the business.”

“We have another full day session with Bain on Thursday and I hope to have some more information for you then.”

Virgin has put in place a number of support mechanisms for staff, including 24-hour a day access to an employee assistance program provided by Benestar’s MyCoach service.

A Virgin Australia spokesman told Executive Traveller “Management will be working this week with Bain to discuss parts of the business moving forward and we’ll provide details when decisions have been made.”

The flightpath to Virgin 2.0

Bain intends to accelerate Scurrah’s own pre-pandemic plan, which he’s often described as “turning a great airline into great business.”

Some of that was set in motion as the coronavirus shockwaves hit: shutting down the budget Tigerair arm, closing the New Zealand crew bases, and replacing the Airbus A330 and Boeing 777-300ER jets with a single fleet.

Bain has adopted much of Scurrah’s plan and is adapting more of it to suit the times, with the necessary downsizing becoming more a matter of essential rightsizing in the face of the dramatically reshaped travel landscape.

The scene continues to prove a highly fluid one.

Within the space of the past 24 hours Melbourne cancelled all international flights following a surge in coronavirus infections; Queensland announced it would reopen its borders from July 10 to visitors from all across Australia except for Victoria; and South Australia abandoned a previous decision to open its eastern borders to NSW and Victoria as of July 20.

Bain’s blueprint for Virgin Australia 2.0 will recast the airline as a leaner ‘value-based’ player with a dash of that on-brand Virgin flair, and straddling the middle of the market rather than entering a dogfight with Jetstar in the budget space or going head-to-head with Qantas as a full-service airline for corporate travellers.

The airline will move to an all-Boeing 737 fleet, with fewer planes.

Bain’s local managing director Mike Murphy has said he expects the sweet spot for relaunching Virgin to be around 60-70 planes, close to half of the current total fleet, with the suggestion that there’ll be enough fat in the reduced schedule to have some jets on hand to ensure a high reliability of service should technical issues occur.

Fewer planes means fewer flights, with Bain set to axe some routes and in other cases trim the frequency of services, while focussing on the busiest and most profitable routes such as the 'golden triangle' between Brisbane, Sydney and Melbourne.

Read more: Here is what Bain Capital's Virgin Australia 2.0 will look like

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

Qantas - Qantas Frequent Flyer

09 May 2013

Total posts 121

Can someone here help me understand, does this mean VA becomes a private airline and not listed on the ASX?

01 Aug 2019

Total posts 8

As far as I understand it will no longer be on ASX and will be pvt.

24 Aug 2011

Total posts 753

Correct, VAH will no longer be listed. Once it emerges from administration, VAH will be majority owned by Bain with smaller shareholdings by Virgin (probably around 10%) and QIC (controlled by the QLD Gov't). There is also the potential that other shareholders like one of the industry funds may join in the short term. Over the next few years, assuming the business is a success, Bain will have the option of partially selling down via a trade sale (probably foreign airline partners and Australian super funds), doing an IPO whereby the business is relisted or leaving it as is.

The deal is currently structured so the tax losses have been preserved so it is attractive to hold for foreign businesses like Bain but less attractive to domestic shareholders who will not be able to access franked dividends.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 328

Good analysis, wholly agree.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 241

Bain will be doing what the previous dysfunctional lot had failed to agree to (e.g taking the airline private). Although to fair, it is a benefit/advantage of being a majority owner.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 328

Continuous Disclosure obligations to ASX do draw a lot upon management time and always a distraction from executing decisions. Not having them will be a breath of fresh air. Countering will be continuous stakeholder reporting, but that's to be expected and SHOULD have been the norm in a well run business. If dumping 5,000+ employees I hope Bain has the gonads to REALLY 're-negotiate' (in the biblical way) the 'Virgin' licence fee with Sir Richard for the next 5 years.

24 Oct 2010

Total posts 2405

Agreed, B-T, and for some time pre-collapse, Virgin was toying on and off with going private, delisting, so that it could both reduce the cost involved in reporting as well as the removing the visibility and need to front up to media.

Joe
Joe

03 May 2013

Total posts 517

Let's revisit in 6 months first shall we before the "lived happily ever after" hype starts.

QF

11 Jul 2014

Total posts 488

Paul Scurrah must have thought "what the"! Ansett mark 2 again. At least he's had the time over the years to think about the right direction VA should take now. The thing they need to do is openly tell everyone what VA will look like with club, lounges, seating on planes etc. Last week I flew Qantas and VA on the way back same day and tomorrow maybe just VA both ways. You can't really pick one better then the other at the moment, all staff were just happy to be working.

19 Jun 2020

Total posts 13

Agree, pretty quickly they need to tell senior execs who decide their companies air travel strategy and also frequent flyers, what will happen such what routes (and when) is there a business class, Economy X - in or out, what lounges will remain etc so they don't loses their biggest return customer base through lack of information. Now that most of the country is starting to open up, people are now thinking about work trips and holidays so if they want a cut of the action - better give us the detail before we escape their clutches

QFP

22 Jan 2013

Total posts 57

So the ATR's are gone along with regional ports!

24 Aug 2011

Total posts 753

Yes the VARA ATRs seem to be going. Still a bit unclear on the predominantly FIFO F100s. FIFO is profitable so it will either be retained or onsold to another operator such as Alliance.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 174

Their 737s can do the routes the F100s fly to - most regional airports can handle it. Even the private mining camps have asphalt runways that are capable. Likely more spare seats to fill but as long as the contract remains profitable they have potential to still fly key regional routes.

Virgin Australia - Velocity Rewards

08 May 2014

Total posts 44

I have the same question!

Removing the ATR fleet will likely have a significant impact on the frequency of CBR services.

Does anyone know if VARA will be retained to operate the ATRs and F100 fleet for FIFO?

What will happen to their 777

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 303

I read in The Australian that they will go into storage until the long haul international market comes back. They will also look to sell and purchase B787 once market conditionals allow.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 328

Surely the 777s could be used on MEL/SYD/BNE flights to/from Perth? If not, why not?

24 Aug 2011

Total posts 753

Way too heavy and too much capacity. It will be cheaper to eliminate all long-haul flight crew and 777 maintenance capability in the short term. If 777 operations to US return in a few years, crews can be rehired.

Virgin Australia - Velocity Rewards

08 May 2014

Total posts 44

A 777 on a 4-5hr leg would be expensive. A lot of fuselage weight to haul for a short flight, which is why single aisle aircraft are more popular with the bean counters.

I'm going to miss 'The Business' on the Transcon A330's.

02 Jul 2020

Total posts 3

They probably could, but on of Virgin's issues was it had too many different types.

That means personnel need to be type-rated for each different type, and spare parts readily available.

So back to basics for VA2.0 - one type, the B737.....KISS.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 241

Only thing confirmed according to paywall articles on AFR/etc is that the 777s (as they are owned/considered as 'assets') will be stored (mothballed) until demand for wide-bodies and long-haul travel picks up from 2021. From there, Bain will decide whether to resume long-haul flights or sell/trade the 777s for 787s.

24 Oct 2010

Total posts 2405

Expect the 777s to be either put into storage, so they can return to the skies once demand for AU-US travel is back in force, or to be sold off, although right now would not be the best time to pop your B777 on eBay!

02 Jul 2020

Total posts 3

They'll go back to the lessor.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 241

@Kanamochi, 4 of the 5 777s are owned by VA.

As there are little to no buyers for 777s, they will be stored for the short term future.

21 Jan 2018

Total posts 5

Most of the 777's were due for expensive D Checks this year. Interesting to see what they do with them.

02 Jul 2020

Total posts 3

They'll be returned to the leasing company.

24 Aug 2011

Total posts 753

Only one is leased; 4 are owned.

16 Dec 2016

Total posts 40

Let's not forget the many Australian suppliers that Virgin Australia owes money to. I know it's the nature of bankruptcy but it's still devastating to be owed money and know you'll be the last to see it. Many of us won't be supporting Virgin 2.0 as it's been years of being shafted by this group who got too big for their boots.

05 Dec 2017

Total posts 4

Again, what's the difference between where old VA positioned itself (value, mid market, new world etc) and this version? It just seems the same regurgitated press release with no detail. Seems like it's effectively the same airline, minus international and ATRs and a tonne of debt.

Qantas - Qantas Frequent Flyer

20 Aug 2014

Total posts 113

So anyone know how many cents on the dollar creditors will be offerred? Sounds like the employees (one of the biggest creditors) will be offerred 100 cents on the dollar, but what about the rest? What are the chances that creditors vote down the deal?

I do find it interesting that the risk of this business sat with its creditors. The old owners walk away, having lost their initial investment (fairly minor compared to the damage they caused), but yet the creditors, who had no influence on how the business was led or managed, carry the can. A whopping $7B! I am still puzzled how a listed company goes into administration with $5B of debt, and then on further investigation another $2B made its appearance. Seriously...did the VA leadership not know about $2B of additional debt, or was that an oversight in reporting to the ASX??

23 Oct 2014

Total posts 186

I think you will find the $5b into administration went to $7b once

+$1b in future ticket sales for future flights were transferred from the revenue line to a debt/creditor definition

+$451m added for staff entitlements if all staff paid out.

When Virgin relaunches these debts will Disappear as the $1b goes back to revenue, and the entitlement removed as the staff are retained, re trained or made redundant.

Back to 5.1b then the administrator and new owner will reduce this to under 2b easily.

24 Aug 2011

Total posts 753

Future ticket sales were always a liability until delivered but they are just part of normal trading so not a huge issue whilst the airline is a going concern.

In addition, the future aircraft lease obligations counted as liabilities as part of the new IFRS16 accounting standard. As agreements are made with lessors and surplus planes returned, the future lease liability for the surrendered planes disappears.

XWu
XWu

09 May 2020

Total posts 102

Interesting that ET hasn't reported the news (reported by ABC yesterday) that some of the bond holders are unhappy with Deloitte's handling of the process, seeking more info on the Bain's bid and may be voting against accepting the deal

Hi XWu, regardless of the topic, ET doesn't report on every issue or every angle, and that's especially true when other media outlets have covered an angle extensively - because if we're going to cover a story here, it would ideally be covered in a way that provides the reader with extra value or insight, beyond what other publications can provide.

Bond holders being grumpy might be relevant to a financial publication like AFR, or a general news publication like ABC, but as it's more of a financial story, there isn't much value to be added by ET covering it, particularly given ET tends to lean a little more on the 'passenger' side of the mix.

(In that same token, we've not covered most of the domestic border openings, closures and restrictions, even though that news is relevant to travellers, as it's been covered heavily elsewhere.)

24 Oct 2010

Total posts 2405

Hi XWu - glad you find that 'interesting', but as you'd have noticed, yesterday was a very busy day (eg closure of NSW-Vic borders was a major story, and we were already juggling several others) so we had to make a call that the the Virgin-Deloitte-Bain-bondholder story was one we could skip, especially as this was more involved to unpack (from a business/financial writing perspective) and we judged correctly that it'd be well-covered by the likes of Fairfax, The Australian and the ABC.


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