Private investors circle Virgin Australia for take-over

A leaner and more competitive Virgin Australia could emerge in the wake of a dramatic 'take-over and turn-around' manoeuvre.

By David Flynn, April 17 2020
Private investors circle Virgin Australia for take-over

Virgin Australia is reportedly the target of at least two private take-over bids as both the government and its major shareholders turn their backs on a bailout.

Citing sources inside government and the aviation industry, The Australian Financial Review reports that “one consortium involves a private equity investor partnered with a ‘a strategic airline investor’.”

“The other is believed to be an investment bank partnered with an Australian infrastructure investor.”

It’s suggested that one of the players is Melbourne-based BGH Capital, whose co-founders Ben Gray and Simon Harle previously led the local arm of TPG Capital – which in late 2006 was part of an audacious but ultimately failed $11 billion private equity bid to buy Qantas.

Virgin Australia CEO Paul Scurrah is said to be very keen that Virgin’s new owners would be Australian, following recent criticism over the airline being 90% held by foreign entities. 

Air race for survival

Virgin’s future remains in limbo, caught between a crash landing under the weight of $5 billion in debt, or a return to the skies in a leaner, more competitive form.

On Thursday the airline extended its trading halt on the ASX “pending the release of an announcement regarding its ongoing financial assistance and restructuring alternatives.”

Scurrah has already flagged the possibility of entering into voluntary administration to onboard new investors and owners. 

This would be followed by a sweeping restructure of the airline – likely sidelining the existing shareholders and wiping out most debt in the process – and transforming Virgin into a leaner, more competitive operation.

Virgin Mk II

It’s been suggested this could take the form of a domestic-only airline pared back to fewer planes and routes – but also fewer staff – while adopting a ‘hybrid’ mid-market model to compete against Qantas’ full-service offering and Jetstar’s hold on the low-cost segment.

Appointed administrators would have the power to break the lease on all six Airbus A330s, which are leased from US firms at reportedly very high prices - an arrangement that's not been helped by the weakened exchange rate.

In February this year, after the airline posted an $88m half-year loss for July-December 2019, Scurrah commented that the A330 was not economical "when you look at its ownership costs combined with fuel performance.”

Four of Virgin’s fleet of five Boeing 777s are owned by the airline, but could be sold off or mothballed until the airline was ready to remount international flights.

However, Scurrah – like former CEO John Borghetti before him – has also voiced his belief that the airline should move towards a single model of twin-aisle jet rather than split its relatively small fleet across two types.

The airline's report for the July-December 2019 period noted at the time that a widebody fleet review was underway, with "significant cost savings available from next-generation aircraft."

No government lifeline

Virgin’s largest shareholders – Etihad Airways, Singapore Airlines, Chinese conglomerates HNA Group and Nan­shan – have also ruled out pouring more money into the airline’s bottomed-out coffers, although Richard Branson’s Virgin Group could still tip some of the Brit billionaire’s pounds into keeping his cherished challenger brand in the air.

Although the Federal Government is now under-writing domestic flights by both Virgin and Qantas to the tune of $165 million, those services will operate on a break-even basis, with the government continuing to pour cold water on Virgin’s hopes of a billion-dollar bailout.

Deputy Prime Minister and Transport Minister Michael McCormack said this morning that he is “confident there is a market solution” for the embattled airline, which is fast running short of cash while waiting out the prolonged COVID-19 pandemic.

“Of course, we will remember back in 2013-14 that when Qantas were struggling, they too wanted some assistance. Fortunately, they were able to get that capital and were able to re-energise and through good management led by Alan Joyce, they were able to get their books back in the back and very healthy.”

McCormack added that "we want to see that situation for Virgin too.” 

An Australian rescue package

Prime Minister Scott Morrison has also resisted calls to rescue or partially nationalise Virgin Australia, suggesting that the country’s industry superannuation funds could be part of the solution.

“The industry super funds in this country have got $3 trillion dollars worth of assets (and) here we’ve got a company that needs capital,” he told the ABC on Thursday night.

“It’s own workers have been paying into industry funds and there are funds out there, in these super funds, that could be investing in a number of companies.”

“Now, I appreciate that comes in a different risk premium, but this is their own contributors that are involved here. And I’d like to see the industry and broader superannuation funds playing a more active role in dealing with the economic issues that we’re dealing with at the moment.”

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.

QF

11 Jul 2014

Total posts 466

I can't see why Singapore Air wouldn't want control to pick up Sydney then they could do the full circle of the globe

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 220

AU government isn't going to budge on 5th freedom rights. Even more so now that Trans-Pacific travel has basically plummeted.

Qantas - Qantas Frequent Flyer

11 Dec 2017

Total posts 50

If you count Newark and JFK as the same “node” then they already did.

QF

11 Jul 2014

Total posts 466

How did I guess that

Qantas - Qantas Frequent Flyer

02 Sep 2018

Total posts 136

We all knew this was the most favourable situation that could ever happen for Virgin. It gets rid of their primary problem of sourcing capital whilst at the same time, increasing Australian ownership to appease locals and hopefully a slimmed down operations would also appear to the public of a properly managed, financially responsible airline. Of course, there is no way that the airline can't at least maintain its current partnerships to have a partnership based international network to US with Delta, Asia with Singapore Airlines, ANA and maybe even HNA Group as well as Middle East and Europe with Virgin Atlantic and Etihad. Such a model would ensure the airline's financials are healthy whilst maintaining a broad route network that offset initial costs and customer acquisition costs to partner airlines.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 220

Unfortunately for a number of people, VA domestic as a FSC will likely be dead in the water if the takeover eventuates.

News article stating those parties are likely to revert VA back to a LCC and rebrand away from the 'Virgin' name. This will mean limited to no partnerships with the international FSCs, and closer co-operation with the likes of Scoot, Cebu Pacific and Jeju Air.

The current international partnerships will likely be ruled void if the buyers pick up if VAH files administration during the purchasing process.

23 Oct 2014

Total posts 183

The article says nothing about reverting to a LCC, it talks about a merged carrier.

23 Oct 2014

Total posts 183

Article talks about “leaner” Virgin Financially, absolutely nothing about winding back from FSC, in fact if the “static airline partner” invests Virgin might maintain its Hard product, improve its Soft Product, have its financials in order and power ahead.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 155

Not to be rude to those that have already commented but can people stop with the 'likely' speculation. Some of it is complete nonsense. There is no strength currently to an argument that virgin will become the likes of say scoot or Ryan air. If anything the article suggests a hybrid model - think along lines of Air New Zealand which offers no frills fares to premium..

VA already has a small premium offering and removing that isn't going to solve their debt issues. Can you imagine the cost they need to spend to remove business class and then make their lounges redundant. Not to mention to lose the corp travel market they built up.pver the years..

Then you do not understand how investment from a VC will work. They'll remove the management responsible for this mess and put in their own with a pure focus on finance and zero focus on spoiling the customer, they'll remove any part of the airline that loses money and they'll do that before Virgin starts flying again - that will mean International, it will mean competing with Qantas - they will end up a cheap as chips airline and it would not surprise that the Virgin brand is ditched quickly.

17 Apr 2020

Total posts 3

I think we can safely say Tiger is dead in the water. High cost A330's? Send them back. There'll be plenty of aircraft up for lease as international travel ramps up and at much more favourable prices. Downsize the airline as was proposed to happen during the ill-fated Fox/Lew takeover of Ansett. It can work but the airline needs to go back to basics and examine the business model e.g is a lie-flat bed really needed on coast-to-coast services? Get the important things happening e.g. delivery of priority bags as a priority, not just ahead of all baggage. Receivership could be used as a tool to rebirth the airline with new pay awards reflective of a more humble rebirth.

Qantas - Qantas Frequent Flyer

04 Nov 2011

Total posts 348

Tiger fly A320's....not sure what they have to do with A330's?

S
S

13 Sep 2013

Total posts 110

Yeah, they need to focus on what's important atm. Like making sure your bag comes out first....

24 Aug 2011

Total posts 705

That is an excellent impartial summary of the situation as we currently know it. Thanks

10 Apr 2016

Total posts 43

Do we know how long is to run on the A330 leases?

08 Jul 2015

Total posts 14

I don't think the prospects for Velocity Members ever seeing a result for their accrued FF Points...

Has anyone tried to access the Velocity Membership site to redeem points for anything? I think there is a “run” on them, it's impossible to access.

24 Aug 2011

Total posts 705

Most airlines have susoended conversion of points for the time being to preserve cash. Unlike Ansett's Global Rewards, Velocity is held in a trust so should survive any restructure. Whether the new airline remains aligned with all its current partners is completely unknown.

That is simply not true.

Qantas - Qantas Frequent Flyer

26 May 2014

Total posts 439

Travel vouchers from flights that VA cancelled may also be useless. I guess those may be recoverable from credit card refunds.

Virgin Australia - Velocity Rewards

14 Mar 2017

Total posts 147

Yes, I just ordered a waffle iron. It was fine.

QFF

17 May 2017

Total posts 6

I think there was already enough "waffle" in these comments

Virgin Australia - Velocity Rewards

14 Mar 2017

Total posts 147

I felt more waffles were necessary.

11 Dec 2016

Total posts 30

The future for this airline is as a low cost shuttle bus for business travelers, not tourists -- e.g. Southwest Airlines in the US. Throw in free checked bags and free cancellations/changes. Doesn't need to be cheap, as it's not for tourists (Southwest Airlines is hardly "cheap" anymore, but it's good value for business). Businesses are finally going to be travel cost conscious in Australia and gone will be business class and Qantas fares for most Australians in "normal" companies.

I don't think the business travel market is big enough that VA can win a big enough slice of it from Qantas. A lot of businesses run on 'cheapest fare on the day' and end up flying Jetstar unless the staff have QF specified in their contract. I agree that Southwest is very popular for businesses in America but they also carry a lot of leisure passengers and the US market is MASSIVE, don't forget.

A 'leaner' domestic-only Virgin sounds a bit like JetBlue which has done well in the USA against AA, Delta and United. About time that VA dropped the 'Tiger' brand and all of the old John Borghetti pretensions and started afresh, which is what it seems like it could do under this new ownership and 'reboot'.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 155

The only thing I agree with your comment here @Hewnix is that companies will drastically be reducing their business travel expenses. I wouldn't say finally I think they already were but now technology has proven you can have online meetings whenever and wherever you want. I suspect this will dissapoint a lot of corporate frequent flyers - say bye bye to theit status!

P1
P1

24 Apr 2017

Total posts 49

Got to love the way ScoMo thinks the super funds should bail out a company that he won't do himself. Doesn't he understand they only put money into good investments, not risky ones, they aren't there to bail out the government.

Funny he seems to think the super funds are his own personal bank to withdraw as he pleases....

Maybe he can direct the Future Fund to bail them out.

Qantas - Qantas Frequent Flyer

28 Oct 2011

Total posts 365

It's no the government that needs bailing out, it's a privately-owned company that needs the lifeline!

23 Oct 2014

Total posts 183

John Will you hold that position if Virgin folds and suddenly a Qantas need government assistance ? I'm interested to know now.

LP
LP

30 Jun 2016

Total posts 49

If my super fund thinks Virgin looks like a good investment right now I'm switching funds...

Virgin Australia - Velocity Rewards

14 Mar 2017

Total posts 147

ScoMo talking on the run as usual. His mouth moves faster than his brain sometimes.

I'll leave adding any comments/concerns about redeeming Velocity FF points for another day as I'm sure that would warrant a whole article on its own, but let's get back to the main topic of what happens to Virgin Australia post Covid-19 pandemic.

On a positive note, the prevailing views at least on this site, seems to be that there will be at least some viable competition to Qantas in the future. As to what operating model that airline adopts, LCC or Hybrid is only a matter of speculation, but frankly I'll be looking for value for money rather than frills that I may/not use anyway.

QF LTG

29 Feb 2016

Total posts 19

Suspect this private venture capital story is the first act of a long-ish dramatic event. An accountant/receiver type would be able to confirm this - ustand the cleanest route to re-capitalisation/change of ownership (and to void leases/contracts/borrowings) would be for VA first to enter administration or receivership.

Air New Zealand - Airpoints

05 Nov 2014

Total posts 26

Every disaster in the domestic market goes back to an atrocious Labor decision under Transport Minister Laurie Brereton in late 1994.

Australia reneged (by fax, over a public holiday weekend in NZ) on its agreement that Air New Zealand could operate domestic services in Australia under the EU-like Closer Economic Relations treaty.

That set off the Ansett nonsense and the failed Virgin experiment.

But the best way to secure a competitive domestic market in both countries would have been to have Qantas and Air NZ competing as government-backed flag carriers.

And almost 26 years on it's still by far the best model.

20 Oct 2015

Total posts 45

This really sounds like the best outcome for Virgin and the taxpayer too. I especially like the idea of Virgin being mostly Australian owned although I'm happy for Branson to retain some ownership if he puts his money where is mouth is, and also gives Virgin Australia a break on licensing fees for using his brand. Australian backers would have the very best appreciation of the local market and what Virgin means and how it should be positioned against Qantas.

Air New Zealand - Airpoints

05 Nov 2014

Total posts 26

Why is that good?

Qantas will always use their market dominance to destroy any independent competitor. Not to mention the creative accounting of 2013 and 2014.

The only way to guarantee a strong competitor is to allow Air New Zealand (or failing that Singapore Airlines) to operate domestic services. I would prefer NZ to SQ on the basis that we effectively live on a shared economic zone.

Aviation will be a marginal investment for years. State-backed carriers offer competition but also security.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 122

Soooo hmmm reverting to the Virgin Blue model that made money? Who'd have thought...

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 33

Bring on domestic licence to SIA

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 220

SIA tried the Australian market already through Tiger Airways. It ended up as a "epic fail" at the end they retreated by gradually "selling" their stake to VA, with the final 50% stake sold for $1

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 33

If it was full service with a Singapore Airlines livery, Not Tiger, Joyce would be out of business and on the way back to Dublin quicker than you can say Leprechaun.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 122

Hahahhahahaha ah hahahahahahah

Qantas

19 Apr 2012

Total posts 713

Vego I am not so sure. It would be Singapore's regional airline Silk Air that took on the Oz routes as they have the narrow body planes for such a venture, and it has struggled and in the end SQ take a more direct management role. Also SQ itself has not been as successful as QF this past few years. So they can try but I suspect QF will keep them to one third of the market.

Qantas - Qantas Frequent Flyer

22 Nov 2019

Total posts 33

Hi Patrickk

Agreed, although one third would be better than no choice on my Mel Syd and Mel Bris regular routes. I know who I'd prefer to fly. Just not sure if the Singapore girls would be on board domestic routes.

23 Oct 2014

Total posts 183

Silk air is being rebranded to SIA, silk air won't exist, so SIA's narrowbody FSC is SIA

Not gonna happen

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 155

Maybe this statement will keep the Qantas experts quiet in regards to their views on Virgin - "Ofcourse, we will remember back in 2013-14 that when Qantas were struggling, they too wanted some assistance. Fortunately, they were able to get that capital and were able to re-energise and through good management led by Alan Joyce, they were able to get their books back in the back and very healthy.”

The difference is that Qantas have excellent management, Virgin has been managed by jealous school children spending all their parents money to try and be like the most successful kid on the block. The good news is if a VC comes in they'll get rid of the current management and put in business people that understand you have to bring in more money than you spend .. the same is that the Virgin management style will cost 20% to 40% of the current wonderful staff and crew their jobs. Shameful.

23 Oct 2014

Total posts 183

Mitchsydney please focus on reading your Qantas roster and if you stopped Negative posting on Virgin acticles you could have your own influencer website account.

You do know that you've lost the argument when you have to play the man rather than the ball don't you. If you think that Virgin has been well managed then you live in an alternate reality, if you think that a venture capitalist is not going to shred the overheads in the balance sheet then you live in a different reality ... Virgin as you know it has signed it's own death warrant and as hard as that may be for you to take it is a reality.

Qantas - Qantas Frequent Flyer

18 Jul 2015

Total posts 24

Having lived in PQQ from the mid 70s, (that's 1970, not 1870 LOL) I still remember how well the single airline idea worked! PQQ-SYD one way was about the same cost as a 2 week holiday in Spain ex London. It will be much cheaper to keep Virgin alive than to start again

Qantas

19 Apr 2012

Total posts 713

Tony where perchance is PQQ

17 Apr 2020

Total posts 3

PQQ=Port Macquarie.

QFF

17 May 2017

Total posts 6

Just near FSC and LCC I believe

17 Mar 2020

Total posts 4

How about we just sit tight and see what is actually announced as fact. I have no doubt there's a lot going on behind closed doors. Until something is announced by Paul Scurrah, the rest is just pure speculation.

I cannot wait for things to get back to normal and we can get back to flying. I'll be flying VA only as I do now.

I believe VA will come through this and succeed.

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 301

An extraction from News Corp.

CHINESE Government-owned airlines are considering an offer to buy the embattled Virgin Australia Group in last-minute takeover talks that could prevent the carrier's ‘catastrophic' collapse.

Well-placed sources have told The Courier-Mail, the Government, through China Southern Airlines, China East Airlines and Air China, is understood to be in discussions about purchasing the Queensland-based carrier, but no formal offer has been lodged.

Virgin Australia - Velocity Rewards

06 Aug 2017

Total posts 45

If those News reports are correct, it would be Qantas' worst nightmare. Think of how the cashed-up Chinese airlines have muscled Qantas out of international routes to/from China.

It's not totally inconceivable that a Chinese-backed Virgin could do the same thing on Australia's domestic routes.

Irony of ironies: Qantas' opposition to an Australian government bailout of Virgin, and the Australian governments refusal to bail out Virgin, could just possibly result in the death of Qantas!

Qantas - Qantas Frequent Flyer

09 Feb 2015

Total posts 301

I am sure Alan Joyce's preference is to not have a Virgin Australia backed by the Chinese airlines. Only time will tell what unfolds.

As a loyal Qantas customer, I very much hope for two strong airline groups in Australia.

As stated by others, Virgin have not had the best management team for the best part of the last decade. They have however been making the tough decisions over the last 12 months to turn the airline around under Paul. They don't deserve to go under as the situation they find themselves in is no fault of their own.

They'll rightly be sacked and experienced fiscally responsible management will be put in there regardless of which "save" solution is deployed. The current management team have simply been putting lipstick on a pig and haven't taken any real hard decisions at all - reduce staff by 30% ... nope, too hard - withdraw from flying international and codeshare instead ... nope, too hard - remove the wasted money on lounges ... nope, too hard. Just watch the quick decisions a VC investment team will make and it will be even more obvious that Virgin have had their head in the clouds.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 122

For one it's not like the Chinese airlines have particularly pockets at the moment. Chinese cash does have its limits. Also Virgin itself is 40% or so Chinese owned, that isn't making much of a difference now is it. Yes there would be an initial pressure on Qantas, but unless whoever is backing the new airline has the money to keep dumping into VA, it's current form isn't really sustainable.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 122

*particularly deep pockets.

23 Oct 2014

Total posts 183

This article and issue has absolutely nothing to do with Qantas. This article and issue is about finding capital for Virgin to come out the other side in a SOUND position (not dominant or any other extremely worded position) SOUNDLY as a stable second national Australia wide Carrier. Now other Carriers have asked for resistance in the Government extending financial assistance, and so for the Government has stated at the moment their preferred option for Virgin is to accept ANY capital via a commercial arrangement (and that's what this article is about). They have not ruled out Direct financial assistance (for now) but they prefer as they have said “our job is not to get in the way of ANY commercial solution” ie - they will facilitate that, and from what they have said they need to. This is about Virgin, Australian, the industry it has nothing to do with how a solution effects Qantas.

04 Dec 2017

Total posts 54

Where is the Virgin 'bored'.... surely they have blood on their hands approving endless strategies and budgets on Borghetti's road to nowhere? They should sack them and ensure none of them ever sit on any board again!

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 220

The board and shareholders will be "sacked" from VAH should VAH decide file "Voluntary Administration". Basically the administrators take over if administration is filed.

Qantas - Qantas Frequent Flyer

01 Nov 2016

Total posts 134

As stated by many in previous commentaries, the poor management of the airline going back to many years has clearly had an impact. If there was a likelihood of being saved, the new owners/shareholders need to have a big say on the management team that is going to run the airline. Going back to basics with a strategy focusing on firstly a profitable domestic operation would be a start and leave the international routes to work off code share arrangements with partners. Do feel SIA and Delta are long term partners. Not sure about the rest.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 220

Whoever emerges as owner of a "VA mk II" post-administration would come up with their own plans for the carrier going forward. As stated there has been plenty of plans from various "equity parties" including going 1-class LCC, 1-class Hybrid and so forth.

A few proposals had taking 'VA mk II' over the TT or VAi AOCs and placing the parent VA AOCs into liquidation.

Let's see what comes forth should VAH file (highly likely) voluntary administration.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 155

I think thats what would happen to the board and sideline of major shareholders if Virgin go into a (strategic) voluntary administration..

Dan there is no such thing as a strategic voluntary administration - it is nothing like Chapter 11 in the US. I hope you understand that in Administration, voluntary or otherwise, they lose total control of the finances and total control of how the airline is run. Virgin will never ever be the airline they were before going into administration which can only be a good thing - Virgin were most successful when they were positioned as a domestic airline with a pricing and service model in-between a full service airline and budget airline and that is the only position they can possibly be successful in.

10 Jul 2015

Total posts 13

Borghetti's ego and desire to compete against Qantas has a lot to answer for but their biggest downfall has been their continuation in the international market. Just look at the destinations that have been and gone, Jo'burg, Abu Dhabi, Hong Kong. Even LA has been an on again off again affair. Now they have 1 slot into Japan just so that Qantas didn't get it.

Virgin's domestic 737 product is good, maybe just tweak some planes to be economy only for the more leisure orientated routes.

10 Apr 2016

Total posts 43

Now impossible for Virgin to go into Administration to clean up their balance sheet given there are so many offers on the table. This has forced Virgin's hand to stay as a going concern. They have enough cash for a couple of months and a few State Governments now trying to outdo each other. The Corona Virus appears to have flattened also which means their modelling can be shortened in terms of when the ramp up will start as well as the curve it will take.

If they did go into Administration then the Directors risk a class action.

Virgin Australia - Platinum

26 Jun 2011

Total posts 73

Since they've now gone into voluntary administration it'll be interesting to see what/who remains to fly the Australian domestic skies.


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