Virgin Australia Mk II could launch in as little as three months

Virgin's administrators want to see a new owner in place by the end of June.

By David Flynn, April 23 2020
Virgin Australia Mk II could launch in as little as three months

A reborn Virgin Australia could be flying in as little as three months, with administrators seeking to lock down offers from potential new owners by the middle of June.

"This is not intended to be a long protracted process," Deloitte partner and administrator Vaughan Strawbridge said during a media conference call earlier this week.

"This is about working with a very sophisticated number of interested parties to map out and plan and get the restructuring through in the shortest amount of time... the intent is to run hard."

Under Deloitte's timetable for Virgin Mk II, as revealed by The Australian Financial Review, the shape of the new airline will be revealed to potential buyers in early May.

The administrators will then accept "non-binding indicative offers" through to the middle of May, while "serious, binding offers" must be lodged by mid-June, with the intention of signing contracts by the end of June.

New owners circling

Strawbridge has said there are "more than ten" potential buyers circling, with a roster that's said to include local and international investment giants.

Sir Richard Branson is said to be prepared to stump up $200-$250 million, saying his Virgin Group, which holds 10% of the airline, is "determined to see Virgin Australia back up and running soon.

"We will work with Virgin Australia’s administrators and management team, with investors and with government to make this happen and create a stronger business ready to provide even more value to customers, competition to the market, stimulus to the economy, and jobs for our wonderful people."

A spokesperson for Etihad Airways, whose 20% stake in Virgin is set to be slashed through the administration process, said the Gulf airline would "remain open for constructive discussions on a potential re-launch of the company."

The Queensland, Victorian and New South Wales state governments have also talked up offers of $200-$500m, contingent on where the new Virgin will base itself, although as with Branson, those offers also hinge on on financial support from the federal government.

Seven reasons to buy an airline 

Deloitte's pitch to the would-be owners of Australia's challenger airline highlights its key domestic routes, including the 'Golden Triangle' of Brisbane, Sydney and Melbourne, which it described as "historically one of the most profitable operating jurisdictions globally for air travel."

Until COVID-19 struck, Sydney-Melbourne ranked as the world's second-busiest domestic air corridor.

Deloitte's breakdown of Virgin's fleet cites 63 company-owned planes and 69 leased aircraft across the group, with an average fleet age of nine years.

The Velocity Frequent Flyer program is also on the menu, in line with Strawbridge's statement that the loyalty scheme – which in July-December 2019 netted Virgin more revenue selling points than flying people – would be offered to Virgin's new owner "as part of the package" rather than sold off "as an individual asset."

Read more: Virgin administrator says Velocity won't be stripped down, sold off

Here in full is Deloitte's seven-point pitch list for Virgin Australia:

  • Attractive two player domestic market with proven profitability
  • Strong ongoing demand for domestic air travel (long distances between major cities, limited alternative transport options, tourism destination)
  • Strategically valuable access to routes and slots in the "Golden Triangle", historically one of the most profitable operating jurisdictions globally for air travel
  • Highly cash generative and distinguished Velocity Frequent Flyer loyalty model, in excess of 10 million members and 90 partners
  • Key strategic assets and infrastructure, including aircraft, route network, airport gates/slots, built over 20 years
  • Unique opportunity to 'relaunch' Virgin Australia with a sustainable capital structure post COVID-19
  • Strong support from government, regulators and unions - have all expressed a desire to keep Virgin flying following recapitalisation

The shape of Virgin 2.0

Addressing speculation that Virgin Mk II could have a vastly reduced fleet and headcount, fly to fewer destinations, or axe international routes to become an entirely domestic airline, Strawbridge says "all of those things will be put on the table."

"What we are focussing on during this process is to create as much optionality as possible. Obviously we will look through the operating structure of the business, the asset structure, the lease structure and see what we can do to help position the business to be more profitable going forward. That's what we will do, but we want to create as much optionality for interested parties as possible."

Virgin Australia CEO Paul Scurrah, who will remain at the helm during the administration period, still sees "a role for some international flying," but allowed that "ultimately what we do in the future will be a decision for those who buy us."

Read more: For Virgin Australia Mk II, "everything is on the table"

Scurrah also flagged a rethink on Virgin's already-deferred deliveries of the troubled Boeing 737 MAX, which he pushed back from November 2020 to July 2021 as one of his first moves since taking over from John Borghetti on March 25, 2019.

MAX exposure

"We have indicated to Boeing that we want to talk to them about that. They've got a lot on their plate at the moment as you can imagine, but our future fleet considerations going forward will be something that's hotly discussed through the administration process."

Virgin's standing order for the Boeing 737 MAX, which has been grounded for over a year following two deadly crashes, comprises 25 of the top-end 737 MAX 10 and 23 of the smaller 737 MAX 8 – a deal worth US$6.17 billion at current list prices, although airlines typically enjoy a steep discount of 40-60%.

The 737 MAX 10 was most recently seen as launchpad for Virgin's next-generation business class, reportedly a fully-flat bed which Borghetti promised would deliver a "quantum leap in domestic business class", replacing Virgin's fleet of  Airbus A330s when those jets spearheaded an expansion into Asia.

However, the A330s – all of which are leased at what's said to be overly-expensive rates – could face the administrator's axe, leaving Virgin at a competitive disadvantage to Qantas' own A330s when chasing corporate travel on Australia's east-west routes.

Read more: Flying into administration, Virgin Australia rethinks Boeing 737 MAX

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.

Virgin Australia - Velocity Rewards

30 Oct 2015

Total posts 50

Stepid question, but how can Virgin still be selling flights for September 2020 when they are in voluntary administration? I could still book flights to LAX on Virgin metal for September today.

Qantas - Qantas Frequent Flyer

28 Oct 2011

Total posts 358

Because Voluntary Administration means a company continues to trade as normal, while its finances are reorganised. This is quite different from a business being in liquidation, which means it's closing down.

QF

11 Jul 2014

Total posts 408

I've been wanting to say this for a couple of days, this is the strangest Administration I've ever seen. We don't have Chapter 11 in Australia

24 Aug 2011

Total posts 657

Chapter 11 and administration are similar with one fundamental difference. In both cases, the existing management remain in place but in administration a insolvency practitioner, in this case Deloittes, has full management oversight and replaces the role of the Board of Directors. US Chapter 11 doesn't have this major change.

Receivership is the next step on the ladder where senior management is replaced and the insolvency firm assumes the role of senior manager whilst liquidation is the end of a business where the insolvency firm is no longer operating the business and only selling the assets to pay debts.

They do not need receivership to replace the management.

13 Apr 2020

Total posts 11

UpUpAndAway - Channel 10 were in administration a couple of years ago too. Channel 10 didn't stop and most people wouldn't have known it was in administration! Think of it as a debt refinance and (potentially) heavy restructure.

QF

11 Jul 2014

Total posts 408

Steve24, sorry what I meant was at the press conference Scurrah was leading the administrator most of the time, the government have someone in the mix keeping an eye on proceedings, the normal role of the administrator is to reclaim as much money for creditors as possible.

24 Aug 2011

Total posts 657

The role of the administrator is to maximise the return to creditors. It is important to remember that staff are major creditors at this point so keeping them in a job maximises returns for everyone as in a liquidation they and the Tax Office take priority and paying their accrued entitlements and redundancies would greatly reduce the amount of funds available to bondholders and unsecured creditors.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Ka-ching. Right on the money, Reeves35. Perhaps worth adding that the Administrators are also PERSONALLY LIABLE for debts incurred AFTER their appointment, hence they will have a personal interest to run the business prudently and not take any unnecessary risks (if that can be done with the help of Scurrah & Co). They also enjoy the advantage of being able to 'compromise' (or offer much less than 100 cents per dollar to pay out) the debts incurred prior to the time of their appointment - all without any real legal consequences.

Hence, the Airbus A330's, which seem to have been negotiated on dreadful terms (perhaps reflecting the school-boy rush of Mr Scurrah's predecessor) , can only now be 'handed back' to the Lessors, with any unpaid lease payments (or early lease termination costs) probably ranking with unsecured creditors. The current 'fair market value' of those planes on the Lessors balance sheet will come under immediate scrutiny per international accounting standard IAS36. I would expect the Lessors auditors will insist the carrying value of returned planes be written down to $Nil, and that will hit the Lessor's P&L. Add to that, the Lessor will need to fly those planes elsewhere and put them into 'soft maintenance' until ready to fly again. That's another large and real cost to their P&L

An astute Administrator will use those consequence as a means to DRAAAAAAAASTICALLY reduce the lease payments, down to what might seem an obscenely low amount. But as the Lessors are US-based, they enjoy support of the Trump Government backing, so the P&L costs won't send them broke.

A REALLY astute Administrator will appreciate the benefits of having the one type of plane (whether it be Airbus, Boeing, etc.) in the fleet. With the challenges Boeing already had with the 737 Max jets, and now the likelihood of a rapidly dwindling order book, Virgin-2 could negotiate some really good deals once its finances are sorted out during the administration. I won't pretend the understand how the business cases differ between Boeing's 737 MAX-10 and their Dreamliners, but some earth-shattering deals could be struck for an order of 787-9 (or 787-10) Dreamliners for international routes and Max-10 for East-West routes to Perth. Other readers will do doubt opine as to what planes should be used.

But which ever way it goes, Virgin-2 will crave the return patronage of its loyal frequent flyers. There's no better customer to have than a returning customer (new ones are much harder and more expensive to get). Those Velocity members with points can expect to be courted with some truly great offerings. Because, if they're like me and very fiscally promiscuous, they/we could, perhaps, not take the risk and do all our flying with a competitor. Virgin-2 will, IMHO, fail in less than 6 months if it doesn't connect meaningfully with its Velocity members.

So, any Private Equity executives reading these pages who are with the 'sophisticated potential buyers', understand this: your dealing with a far more sophisticated and unashamedly promiscuous group of Velocity members who's loyalty is quite comfortable at the moment, albeit on life support. Do think VERY carefully before you attempt your version of 'First Aid' or think of using cheaper bandages, we're all very capable of getting prompt and immediate attention elsewhere.

Time for bed, I have to be up at 5am for Anzac Day tomorrow (junior's playing the Last Post to the neighbours in the morning!).

Administrators are NOT personally responsible for any further debt the same way they do not benefit from any profit - learn your corporate law before writing such nonsense. Virgin is gone. It is a carcass. A basket case. The worst run airline in our aviation history.

Virgin Australia - Velocity Rewards

02 Jun 2019

Total posts 12

If Administrators can set Virgin back onto a path for profitable trading - can we just leave them there and ditch the existing Board after years of bad management? Paul Scurrah excepted - I think he is doing an admirable job in such challenging times.

QF

11 Jul 2014

Total posts 408

I think Scurrah should stay, thrown in the deep end and then Covid came along. When you think about his short time in Ansett and how long a go that was he's had a lot of time to work out the best options for VA.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Too true. Some of the Board members only have experience pumping petrol at Caltex service stations. Others are welcome visitors to Australia (but don't understand the market down here).

AT
AT

Qantas - Qantas Frequent Flyer

14 Sep 2012

Total posts 293

I see a strong full service domestic + trans Tasman (maybe +Bali) as the way forward, and all other international as codeshare. I pray they totally rule out a return to low cost, it's just plain awful.

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 296

But if the rumour is to be believed, LA was their most profitable international route. I also heard management were extremely pleased with the bookings on the new service to Tokyo Haneda. So if this is in fact the case (and I have heard this more than once) they would be crazy to walk away from these destinations.

As suggested from the CEO of Flight Centre, It might be best to be a domestic only airline for the first 6 + months and then relaunch international services as things go back to normal.

Qantas - Qantas Frequent Flyer

29 May 2013

Total posts 49

I agree Mightyreds, concentrate on domestic first and make sure things are tracking well then bring international back. I would throw in Fiji as an additional international route that would have been profitable and would be kept. Flights were always full when we went.

AT i agree with you on the low cost option. To me it seemed to be more of a distraction. Maybe if Virgin MkII goes hybrid and uses similar Air NZ concept for fares with seat only option it might work? Otherwise I would just concentrate on being a full service.

Qantas - Qantas Frequent Flyer

26 May 2014

Total posts 427

Agree, if VA own 4 of the 5 777s, then they don't need to make the call on restarting LAX until there is either a market for selling 777s or flights to LAX.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Only Qantas-philes hope Virgin will abandon flights to LAX. The Delta Sky Club lounges (throughout USA) and Virgin Atlantic's Clubhouse lounges, all with showers, etc., were never well publicised by Virgin (reflecting, perhaps, too many kiddies in the marketing department?).

VIrgin are gone. Done. Whatever comes out of the carcass of Virgin will look nothing like them today, nothing. They have the unenviable record of being the worst run airline in Australian aviation history.

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 296

I personally disagree. I think we will see a Virgin Australia somewhat similar in size.

Only time will tell I guess.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

You are quite correct MightyReds. The only difference will be £Zero branding royalties to Tricky Dicky Branson. Whether he withdraws the right to use 'Virgin', or his ego to see the name out there reduces the royalty to £1.00 per annum, time will tell. In a y event, but for the name the Virgin product has far more in common with Atlanta USA based Delta Airlines, that owns half of Virgin Atlantic. With a pre-virus mkt value of US$40 billion, and Trump pumping over $400 billion into the US airlines, Virgin could, PERHAPS, be a very cheap price to get a such a strong beachhead onto the AUS market and secure travellers thru US using Delta. Delta will require Administrators to break crazy leases and clean up the balance sheet first, plus a few other things.

Time will tell. But won't take long.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

On the other hand, if able to re-launch, why not continue those international sectors (to LAX) that were not only profitable, but the fares on which were slowly increasing because the Business Class service on them was better than Qantas? Gee, if the Administrators replace the ridiculously expensive Airbus A330s in favour of Dreamliners (but keep the bar, as per Virgin Atlantic), they'll crush the competition.

So many opportunities available to the Administrators (all 4 natural persons), its an exciting thing to watch. A re-launched Virgin-2 will live rent-free, in AJ's head.

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 19

All good outcomes just please don't give Joyce the whole market.

So the number today after a week of administrators is $6.8b in debt with more to come ...... where are those supporters on the page that were singing the praises of this airline and how it had turned around ...... the wording from the administrators was chosen carefully ... "Virgin DISCLOSED just $5.3b in debt in the December accounts" ... so either this high performance management team have added $1.5b in more debt in less than 4 months or they withheld that information or even worse they didn't know!!

06 Feb 2014

Total posts 10

When was the debt issuing for velocity? Before or after those December accounts were finalised (I don't know the answer but I do know it was pretty substantial $$$ wise).

27 Aug 2013

Total posts 24

Look at the balance sheet before making silly observations. The $5.3bn in the December accounts related to interest-bearing liabilities only.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Good point, but research and fact-finding aren't in his wheelhouse, even when that information is in the public domain and less than 4 clicks via Google/ Safari/ etc..

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Sounds like you don't trust 'Lil Al?

We need Qatar Airways to buy Virgin...then Qantas and their buddies Emirates will be shaking in their boots. A350-900 on the Syd/Mel/Per route & Sydney/Melbourne route, and A321LR domestically and A220 to Coffs/Byron/Tamworth etc. Deep pockets, extraordinary leader in Ali Baker and currently being hemmed in by Saudi Arabia UAE and Bahrain...what better way to spread your investment than buy Virgin! They already own 25% of IAG ie British Airways Iberia Aer Lingus.

Qantas

03 Feb 2016

Total posts 10

Wow that debt is incredible, way higher than first reported.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

It will included trading losses suffered since the airlines were closed (the same as is happening to Qantas). Me thinks the chap from Sydney (above) is being 'cute' with the truth.

But then ..... Qantas does have that lovely Chairman's lounge to curry favour with people. And the Virgin lounges in AUS have been looking tired for the last 2-3 years (compared to, say, Virgin Atlantic's Clubhouse lounge at LHR and Emirates lounges).

Oh yes of course Virgin incurred almost $2b in debt in a trading loss .... your blind support of a basket case of an airline is amusing ..... the last week has shown just how little you understand the airline industry ... goodness only a week ago you were talking about how well run they were and here we are this week with administrators uncovering (so far) another $2b owed with more too come .. and it keeps being amusing that the blind support of Virgin always points to Qantas to deflect. Virgin are gone, whatever comes out of this won't be an airline anything like the debacle in the hands of the administrators right now.

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 19

Can all of the keyboard accountants please leave their masters year of grad and university after their comments. Cheers

As distinct from the Virgin accountants overseeing $7b in debt?

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

So mate, since 3pm yesterday, to 8pm, the debt increased by $0.2 billion? Which is it? I can see you wish it had increased, but can you please try and keep it factual (and without getting too personal)?

Coming back to you on the laws of corporate administration over the weekend. But feel free to finish your research and modify your other post (before I do).

QF

11 Jul 2014

Total posts 408

Accountants should never ever have the keys to a business all they want in compression, a good marketer should run a business with a good accountant as his second.

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Faculty of Law, 1998

Monash University, Victoria

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 19

One out of fifty aint bad

Qantas - Qantas Frequent Flyer

24 Jan 2018

Total posts 197

Its how I know, what I know, about administrations under the Corporations Act, and the roles and obligations of Administrators, particularly the significance of Sub-sections 443A (1) and (2). It's why the appointments of Administrators are of natural persons, not a firm (partnership, company, etc.)?

This will all be over and behind us before the Melbourne Cup !! And Trump will get re-elected with a mjority in both houses on Congress. All will be well for Australia, and we'll all be back to work. But .... buggered if I know who'll be AFL Premiers this year. Korda wants Collingwood, Mentha wants St Kilda, I know who I want. Happy Anzac Day.

This looks like Ansett all over again to me. Fox and Lew come in as the shining lights to save Ansett, they were going to bring Ansett back, smaller, leaner and profitable, only for the travelling public to abandon Ansett and we all know how it ended. Hopefully VA return in some form, but I can't see it happening unfortunately.

Qantas - Qantas Frequent Flyer

26 May 2014

Total posts 427

The great challenge for a revived VA will be to sell confidence in their viability. Those that consider the history of smaller players in domestic aviation will be even more likely in the near future to put up a premium for QF tickets to reduce the risk of travel plans being disrupted. I picked up what looked like a great deal on VA happy hour back in December for travel in May but even then had some doubts if VA would be around come May. Covid-19 only accelerated the demise.

22 Sep 2017

Total posts 25

For the business market, rather than trying to match Qantas lounges and booze and IFE, it would be good to see the new VA offer practical benefits such as:

- walk-up access to the next departing flight

- better carry-on allowance (10kg is much more practical than 7kg)

- Economy+ with sufficient seat pitch to use a laptop

- Good free wifi usable seamlessly from boarding gate to disembarkation

...

That's exactly the type of thinking required. They have to have a different strategy - they lost to Qantas so they have to find a different path.

11 May 2020

Total posts 3

[Deleted by admin]

DavrosLives: We draw your attention to Executive Traveller's long-standing comment policy, which outlines that posting personal attacks and remarks about other users here is unacceptable. Since joining the website, all of the comments you've posted fall into this category, and so have been deleted. If this continues, we will have no choice but to revoke your commenting privileges.

11 May 2020

Total posts 3

Could you please be more specific? I'm genuinely interested in how you could construe any of my comments as personal attacks, so could do with a proper definition to make sure I don't fall afoul of the flock in future. The Ts and Cs don't give me that. Happy to discuss privately if you don't think this is a suitable forum what with the flock watching and all.

The comment policy as linked makes this clear. As it also asks for comments posted to remain on-topic and on-track to the subject of the article, and we're not going to debate this with you.

Qantas - Qantas Frequent Flyer

18 Jul 2015

Total posts 24

IMO, the new "normal" will be very different to the old one. Maybe the planes seized at airports are leased ones? Let Macquarie Bank or whoever keep them! Senior business people that used to be flying SIN-LAX-ABU all the time are now teleconferencing


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