With Virgin Australia expected to be placed into voluntarily administration today, what does this mean if you're holding credit in the airline's Travel Bank scheme?
Virgin was pushing passengers towards accepting Travel Bank credit for domestic and international flights cancelled as the coronavirus pandemic took hold, to be used towards a new flight booking at a later date – although as Executive Traveller pointed out at the time, travellers were also entitled to a full refund, even if booked on a 'non-refundable' fare.
You can still use your Travel Bank credit
Despite entering administration, Virgin Australia is expected to continue flying on selected domestic routes until June 7, 2020, as part of the Government-subsidised 'minimum domestic network'.
This provided both Qantas and Virgin with $165 million to underwrite flights serving all capital cities and regional centres on a break-even basis.
At the time of writing, Virgin's rebooted domestic network spanned 64 return services each week, primarily between the capital cities but also from Brisbane and Perth to a handful of destinations in each respective state (for a full schedule and timetable, visit travel.virginaustralia.com).
It should be stressed that these flights are intended for the purposes of essential travel, with Deputy Prime Minister and Transport Minister Michael McCormack pointing out that "Australians are asked to stay home unless absolutely necessary."
However, if you need to take one of these Virgin Australia flights, your Travel Bank credit can be used to secure that booking.
If you have no plans to fly, but know of somebody who does, you can use your travel credit to purchase a flight for them – although the credit itself can't be directly transferred to them.
Travel Bank credit when Virgin enters administration
Once Virgin Australia moves into administration, the longer-term fate of Travel Bank credit literally remains up in the air.
Administration doesn't necessarily mean liquidation, which would render that credit worthless: the company-appointed administrators will assess Virgin's position with an eye towards the best outcome for the business, which could very well mean that a new, streamlined Virgin Australia emerges, free of debt and with a new lease of life.
"A Voluntary Administration (unlike a Liquidation) is designed to maximise the ability for the business to continue as a going concern," explains Fabian Micheletto, Director at business insolvency and advisory firm SV Partners.
"The scale and complexity of an international or domestic airline will almost certainly see any attempt at recapitalisation or formal restructure be undertaken via a Voluntary Administration and Deed of Company Arrangement process," Micheletto says.
"It is common for Administrators, conscious of preserving the Company’s image and branding, to incentivise consumers to continue to utilise the Company’s services. In the case of an airline operator, this could include the honouring - say, in part or possibly, in full – of any outstanding travel vouchers issued to consumers prior to the Administration."
In other words, what could at this stage be termed Virgin Mk II might find it's in their best interests to let the 'new' airline accept Travel Bank credit, although perhaps not the full value of the credit.
Reset, then rescue
"The Voluntary Administration process is a business rescue regime," says Andrew Spring, a partner at insolvency and turnaround specialists Jirsch Sutherland.
"Whilst the holder of the voucher will rank in the process as an unsecured creditor, their engagement with the business as a customer will also factor into the goodwill calculation."
One option for the owners of Virgin Mk II would be to require that holders of Travel Bank credit spend some money in order to use their credit, such as $1 in real money for every $1 redeemed from the Travel Bank.
"This is a technique utilised by Administrators to improve stock turn and maximise cash flow, whilst preserving goodwill," Spring says. "This could be considered for travel vouchers, but it is less likely to be effective in the current restricted travel environment."
In the end, the value of any Travel Bank credit held with Virgin Australia rests with the choices which the administrator, and any potential new owner of the airline, will make in the coming weeks and months.
The honouring of travel vouchers "is at the complete discretion of the Administrator and will be influenced by such considerations as cashflow management, operating constraints and capacity," SV Partners' Micheletto cautions.
Jirsch Sutherland's Spring echoes those remarks. "A Voluntary Administration process provides a lot of flexibility for the business to be restructured, through a compromise proposal with its creditors, the restructure of its operations, or sale of all/or part of its business. The flexibility means that the outcome for voucher holders is not certain."
What if Virgin Australia is wound up?
If Virgin Australia's administrator can't see a path forward, or fails to find an investor and new ownership for the airline, it would move into wholesale liquidation, selling its remaining assets – from any fully-owned aircraft to the Velocity rewards program – to pay off as many creditors as possible.
Unfortunately, while anyone holding a Travel Bank voucher would automatically become a creditor, they'll find themselves standing at the back of a very long line – behind banks and bondholders, the companies which leased Virgin Australia many of its aircraft, and outstanding staff-owed entitlements (such as salary, leave and superannuation)– as an ‘unsecured creditor’.
In this scenario, with Virgin holding $5 billion in debt, everyone may receive only cents in the dollar on what they're owed.
Research and additional writing by Chris Chamberlin