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.”