Virgin Australia Mk II: "everything is on the table"

The new Virgin will look very different to the old Virgin...

By David Flynn, April 21 2020
Virgin Australia Mk II:

Should Virgin Australia take flight under new owners, the airline will almost certainly look very different to what it does today.

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, appointed administrator Vaughan Strawbridge of Deloitte said "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," Strawbridge said during a press conference following this morning's confirmation that the airline had moved into voluntary administration.

"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."

"Everyone has got the ability to look at what the remodelled look of Virgin would be going forward, so it's around creating and maintaining optionality for everyone."

Remodelling Virgin

And there's no shortage of 'interested parties', Strawbridge confirmed.

"I would say there's been an extraordinary amount of interest in the business, an extraordinary number of parties are very keen to be involved both in the process and the restructuring to see if they can play a part in the relaunch of the business. I can't give you an exact number, I can say it is more than 10 and we'll just leave it there."

Virgin Australia CEO Paul Scurrah, who will remain at the helm during the administration period, still sees "a role for some international flying."

"One of the things that we did learn through the process of talking to our existing shareholders, through them doing the assessment on us and potential new shareholders, is that the plan we had going into COVID-19 was the right plan. We didn't trade our way into this problem, we had our oxygen supply completely cut off."

"So that is the plan that I've put to Vaughan, but ultimately what we do in the future will be a decision for those who buy us."

MAXing out

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.

"This is not a crisis that's limited to just Australia. My view is that you're going to see a fair lull in the world for the demand for narrow-body aircraft for some period of time, so we are watching that closely."

"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.

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.

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.

24 Aug 2011

Total posts 807

If domestic travel takes a long time to come back, Qantas aren't going to be using too many A330s on east-west routes either.

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 313

Vaughan also made the below comment. Let's hope all/as many as possible at Virgin Australia can keep their jobs.

Administrator Vaughan Strawbridge said the airline doesn't plan to make any of its 10,000 staff redundant as the company looks for a new owner.

At a press conference today, Mr Strawbridge said employees who were still employed would continue to receive their wages, and those who are stood down would continue to get the jobkeeper allowance.

“Hopefully we can maintain all the jobs, or as many as possible, through this process,” he said.

23 Oct 2014

Total posts 186

Or the other way to look at the 330, is the administrator has the authority to “re” negotiate the 330 leases to advantageous rates in the current global pandemic market and on relaunch turn a fantastic hard product and fleet into a strong financial contributor to the airline group. All this whilst maintaining a widebody suite in the TCP market and keeping FF happy. Makes scene, chance now to get the leases at the cheapest possible rate. Otherwise what will the lease company do with them in current market.

24 Aug 2011

Total posts 807

I love the VA A330s but it is hard to see a place for them going forward and returning them offers significant savings to the business in both lease costs and operating and maintenance costs. I suspect they will be gone which is very sad for the crew.

Of course, the lessors may sniff the wind and determine that they have little chance of finding new lessees and offer a killer deal but whether that makes sense to the new owners is questionable if int'l ops are removed or are just LAX using the owned 777s.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

If the VA cancels the leases and returns the planes, under asset impairment accounting standard IAS 36 the Lessor will most likely have to write them down to a carrying value of $Nil. And they'll likely have planes with other carriers wanting to do the same. The Lessors/Financiers will want to avoid that at any cost. A smart Administrator could re-negotiate the leases down to a level that, before Christmas, would seem 'obscene' or fanciful. The monthly cost could be reduced by as much as 60%, or more.

If not, the planes will need to be 're-possessed', flown elsewhere, mothballed and then 'passively maintained' until ready for use again. The US-based financiers have the US Treasury (hundreds of $Billions) behind them. The VA's need to run IAS 36 calculations, as that will set the low-ball lease the can offer to retain.

Yep, this could be the shortest airline administration in the last 100 years. But if relies on the Deloitte guys having the gonads to renegotiate hard and smart.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

Pperhaps Deloitte are only good as cutting staff numbers, but when it comes to the bare-knuckle brutality of lease renegotiation they dont like to get their knuckles skinned? Korea Mentha would be brutal with the aircraft financiers, and I do mean brutal.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

I'm currently VFF Platinum, but if Virgin reduces or abandons flights to USA I'll need to fly Qantas and that will be for all my business (domestic, LHR and USA). I sure hope Deloitte 'grow a pair's and go hard on aircraft lessons and other debt financiers. If their only experience in to beat up scared employees, they'll fail in their mission.

Based upon the Adsett collapse, it seems Administrators dont like to take advice. So I'll phrase this delicately. As at today, the Administrators have a far more loyal and financially lucrative customer base than a clothing chain or department store. Be VERY careful not to abuse it or take it for granted. :-)

Virgin Australia - Velocity Rewards

14 Mar 2017

Total posts 152

I'll trade an A330 for a waffle iron, if anyone is interested?

31 Aug 2017

Total posts 16

Anyone hoping for Long Haul International to be maintained is delusional.

It has been the noose around VA's neck and main cause for it being in it's current predicament.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

The MEL-LAX flights I've taken during 2018, 2019 and earlier this year were near full. You might want to double check your sources?

31 Aug 2017

Total posts 16

The Annual Reports reveal the facts....

22 Apr 2020

Total posts 8

Apparently the 777 fleet was making money. They also had a good product, and all but one aircraft was owned outright.

There may not be any demand for sometime, but i wouldn't say it's delusional to see some international ops again.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

Virgins 777-300 ERs were a party in a tube at 39,000 feet. Granted, I'm a bit of a Boeing fan, but even the folk down the back seemed to be in great spirits. My fam and I would have been back there (Economy-X) to the US in September. Virgin could do a super deal with Boeing if they junked all Airbuses, its not like Boeing are too busy with pre-orders.

31 Aug 2017

Total posts 16

Unfortuantely not financially competitve to the 787...

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

The 787-9's aren't called 'Dreamliner' for nothing. Given VAH owns 5 of 777 and leases 1, maybe their replacement is also a task? Comfort of sleep in J-class, both Qantas and Virgin Atlantic flights on the 787-9 were just as good as the 777, but VS also had a bar, whereas Qantas does not.

I think it would be a truly exciting time to be at VAH at the moment, the dealing to be done by the VAs will be a hoot!

31 Aug 2017

Total posts 16

Not sure where your getting information the 777s were profitable. Airlines do not reveal such detail and are particularly careful to not reveal route profitability or equipment profitability.

The fact is VA International is a huge loss maker and has been virtually for its entire history. The 777 has been superceded in terms of cost and efficiency to the likes of the 787 or A350. Thus VA is at a disadvantage almost anywhere it can fly them. GOOD-BYE 777.

I'm don't understand why people are so defensive of VA International. It certainly can't be because of its financial performance. Sure you may have had a pleasant experience but it came at the expense of shareholder returns.

22 Apr 2020

Total posts 8

Amillar. We are not being defensive about VA International. It's just that there are a lot of people just like you, that don't have a clue what they are talking about.

Having the newest and most fuel efficient jet is not the sole factor determining route profitability. For one, the cost of leasing or financing these new aircraft, revenue management, freight, JV partnerships, competition...and the list goes on. And fuels cheap right now too.

Yes the A330's were dragging it down, but it has been reported the 777's/LA had been paying their way the last three years.

Due to the fact VA own all but one of the 777's, and the second hand market for them is dire. It is entirely possible that we MAY see them in the air again at some point.

31 Aug 2017

Total posts 16

No clue what I'm talking about?

31 Aug 2017

Total posts 16

The very fact you chose to state that my opinion is without a clue only serves to undermine your argument.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 123

International was such a good money maker they kept switching Los Angels back and forth on Brisbane and Melbourne (at the same time according to DOT documents making some of the lowest margins on trans pacific). They made so much money on Hong Kong... they made lots of money through Abu Dhabi and Johannesburg. Oh and they were going to make so much money to Tokyo! In the last few months they were doing so well capacity dumping into New Zealand. Rightttt...

PS full planes don't mean profits if you're sell tickets at ridiculous fares.

Cathay Pacific - Asia Miles

27 Nov 2012

Total posts 44

I feel business flying will change dramatically in the near future; virgin's extra leg room X product will definitely appear attractive to business, and maybe a PE product replacing J on trans continental and NZ routes, remembering that Companies will be facing financial problems as well. Can't see VA domestic as a full service identity in the near future.

I recall flying to Sydney for a Virgin Blue (as it was then) press conference. I was initially disappointed to be seated in the back row, until CEO Brett Godfrey sat down next to me, clutching his take-away meal, bought in the departure lounge before boarding.

That image is a world away from his successor, John Borghetti. And in many ways, the airline that has now collapsed is as far removed from the vision mapped out by Godfrey on a drinks coaster in the pub.

Every time I swipe my Velocity card to enter a Virgin Lounge, I'm reminded of Godfrey's insistence that there will “never be lounges, nor a frequent flyer programme nor business class”.

As a no-frills airline, Virgin Blue was very successful. It ran profitable services on popular routes with cheap fares.

Clearly, the fledgling airline soon had the lucrative (or so it seemed) corporate market in its sights – and to some extent, that explains its current woes.

Initially, in the post-9/11 era, Virgin had some success in a corporate market fixated on cost control and “best fare of the day”. Back then, lounges and rewards were “nice to have”, but low fares were essential, and Virgin locked in some heavy-weight Queensland business clients. In the early 2000s, it even secured a chunk of business from the Queensland government.

As a business travel writer, I watched Godfrey “walk back” his three promises one by one. First, the Blue Room lounges started rolling out in facilities previously occupied by Ansett. Then we witnessed the conversion of the front three rows of the aircraft into pseudo-business class seats, and finally, Velocity was launched.

Over the first decade, Virgin Blue had come so far from its original incarnation and so close to its rival, Qantas, that it had to appoint a Qantas executive to its helm and rebrand.

If the last decade has shown anything, it is how hard it can be to mimic Australia's de facto flag carrier, especially when you start with a model so different.

Of course, the current Coronavirus lock-down was the last straw, but let's not forget that Virgin has been bathed in red ink for eight of the last 10 years.

I'm sure if Brett Godfrey and his team could find an open bar and some coasters to plot a revival today, they could do no worse than the original blueprint. And maybe that's what the administrators will recommend – stripping back the quasi-Qantas and getting back to basic Blue.

22 Apr 2020

Total posts 8

Except that Jetstar has cornered the bottom of the market. Good luck competing directly with them.

Virgin has found itself in a similar position to

Target in retail, they're wedged in the middle ground.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

Appointing a Qantas executive bitter for being overlooked to replace Dixon, done with the little chap running Jet Star, was an executive clearly carrying an axe to grind - and pure lunacy. These valid observations are rather backward looking, not looking forward.

Virgin has only two highly valuable assets - its staff and its Velocity members. Bruise or burn either (not just one, but either) and its all over. Better to bruise the shareholders, debt financiers and Lessors as they can afford it and are better resourced, financially, to deal with it.

Etihad - Etihad Guest

04 Mar 2018

Total posts 29

Rather sad, but in my experience they lost their way. I really tried to use Virgin, but the kept letting me down.

They NEED to join an Alliance. Sky Team or Star Alliance. OR they do the world by themselves, which is NOT Possible.

I had 2 issues.

1. The only way I could get from London to New York, was via Sydney. It appears they only had a small number of code shares with Delta ( Sky Team).

2. The cannot get me to Israel, as it appears EITHAD will not allow it.

3. They are 'linked to" Singapore Air ( Star Alliance) - but only on limited routes.

Thinking if they just had an Alliance they could rely on, their opportunities would have been many times more.

Air New Zealand - Airpoints

21 Jan 2016

Total posts 195

I think the VA Mk2 will be domestic carrier initially using a LCC/FSC business model similar to Air NZ, with the A330's going, the B777's being ground/mothballed until the trans Pacific travel re-starts. Once Australia and New Zealand sort out there COVID-19 travel bubble, then trans Tasman travel will be restarted. Since airline alliances are expensive, Singapore Airlines, Delta and possibility Eithad, Qatar and other interested airlines will negotiate deep co-share alliances for Australian domestic and trans Tasman markets.

Etihad - Etihad Guest

04 Mar 2018

Total posts 29

I agree with what you say about overseas airlines being able to code share domestically on Virgin in Australia, However on the flip side I have a small business that sources and supplies across the globe. So that arrangement will not help me once I am out of Australia.

Forces me back to Qantas for overseas, and that means also for domestic to keep status etc.

OR Maybe I just Fly ( say Singapore) and then use their code share in Australia.

Interesting times ahead.

23 Apr 2020

Total posts 4

The Virgin brand is a relic of the 80's - you'd ditch it (and it's royalty fees) in a heartbeat if it wasn't for the cost of rebranding livery, collateral etc

Etihad - Etihad Guest

04 Mar 2018

Total posts 29

I like your thinking.

Someone up above quoted a LARGE Figure they pay to Virgin. What do they get for that in real terms?

Maybe they could save that fee and re-brand to BOOMERANG Airlines . "We always bring you back" :)

Yes its been a long day.

AJW
AJW

16 Nov 2011

Total posts 581

The brand is licenced so they could be forced to ditch it or may find it cheaper to ditch it.

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 44

I'm here to read all of the google accountants and google airline ceos opinions

23 Apr 2020

Total posts 2

Just because it worked 20 years ago and they adopted a new technique which went south, doesn't mean that that same technique or similar variants are going to work today. In my opinion, people are too quick to dismiss the new VA model because the previous one was "successful" 15+ years ago. Times change as we are no doubt all too familiar with and while the new VA model might not be the right one, I highly doubt the old model is the best way to go in these times of downturn and crisis. Call me an armchair CEO but the choice I would take is to downsize and run the tightest ship possible while still honouring the velocity program. This might be closing down VA int'l (depends on the fleet utilisation and slot times I should think, considering LF's have been rumoured to be quite high) or shedding the 73's on the indo-pacific routes. Or it might be (as brutal as this sounds esp in times like these but perhaps because of it) re-negging staff contracts and critically I think, the 330 leases which I believe Scurrah already had in mind (He might be the one to head the new airline, at the very least, as morale for the staff). Economy X from what I have heard is doing quite well, although I'm in two minds as to whether the business product is the option they would want to take due to competition with the much more stable and, in the future, much more convenient and available QF although the other option would be to lose corporate customers who I think they have a genuine customer base to work with and that might be worth retaining for at least the near future as they will be the money makers until leisure travel is brought back up to speed which I imagine will take a little while longer than the investors will be willing to count in on.


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