The looming sale of Virgin Australia will be "a very competitive process" involving "high-quality bidders with fantastic credentials and the ability to restructure this business."
That's the upbeat take of airline administrator Vaughan Strawbridge from Deloitte, according to attendees at this morning's first meeting of creditors – a meeting held online rather than in person due to restrictions in place to stem the spread of COVID-19.
"A large number of parties have expressed an interest" in buying Virgin Australia, Deloitte had confirmed. "Eight have signed non-disclosure agreements, and negotiations are continuing with a further 12."
"Our objective is to restructure and refinance the business so it emerges stronger on the other side of the COVID-19 crisis," Strawbridge said. "It’s still early days, yet I’ve been encouraged by the level of sophisticated party interest in the sale of Virgin Australia."
“We remain strongly focused on restructuring and refinancing the business, creating a viable operation that will appeal to prospective new owners, and bringing Virgin out of external administration as soon as possible in an outcome that will retain jobs and the airline’s contribution to Australia and its economy."
The clock is ticking...
Strawbridge confirmed that the first round of "non-binding indicative offers" for Virgin Australia are due by May 15, 2020.
"Binding offers will then be required in June. We remain confident that our target of achieving a sale by the end of June is achievable."
Deloitte has drawn up a proposed 'committee of inspection' including Australia's major airports, Boeing, pilot and flight attendant associations, union groups, Velocity Rewards and at an aircraft leasing firm, to represent the 10,200 creditors owed an estimated $6.9 billion.
Taking selected questions from creditors, Strawbridge reiterated the "security" of Velocity points – in a nod perhaps to the revelation that the airline's own frequent flyer program extended a $150 million loan to Virgin in 2014 which remains unpaid, and now sees Velocity Rewards standing as a creditor.
Strawbridge also noted that Travel Bank credits – issued to passengers on cancelled flights in lieu of a refund – "are still there, they haven't gone anywhere and are intended to be used in the future."
"They are going to be be an important part of the restructure of the business and an important part of loyalty to Virgin Australia" would be customers "being able to access those credits."
Reshaping Virgin Australia
Strawbridge indicated the ideal scenario would see all of Virgin's current staff retained, it's considered highly unlikely that the new Virgin Australia will be a duplicate of the old one, especially given its ten-year journey from the low-cost Virgin Blue to a full-service competitor to Qantas.
Following Deloitte's appointment as administrator on Tuesday February 21, addressing speculation that Virgin 2.0 could have a vastly reduced fleet and headcount, fly to fewer destinations, axe international routes to become an entirely domestic airline or even return to its low-cost roots, Strawbridge 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. 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."
The spectre of a stripped-down low-cost version of Virgin Australia – one which might even take on a new name in order to avoid paying what's said to be annual $10m+ brand licensing fee to Richard Branson's Virgin Group – comes as Indigo Partners, a keen backer of low-cost carriers including Europe's Wizz Air, the USA's Frontier and Tiger Airways, joins the suitors.
Right-sizing the Virgin fleet
With slightly more than half of Virgin's fleet being leased rather than owned – a roster which includes all six of its Airbus A330s – the airline could be restructured to reflect the very different travel market which it's flying into.
The sweeping impact of the coronavirus pandemic is expected to see reduced demand for domestic travel for many months to come, with international travel potentially suspended until 2021, apart from the prospect of a 'trans-Tasman bubble' between Australia and New Zealand.
One model being mooted is a streamlined 'hybrid' or mid-market airline which is positioned between Jetstar and Qantas, while competing against both.
Virgin Australia CEO Paul Scurrah, who will remain at the helm during the administration period, still sees "a role for some international flying," but has allowed that "ultimately what we do in the future will be a decision for those who buy us."
Scurrah has 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.
"We have indicated to Boeing that we want to talk to them about that," Scurrah told media during a press conference following the airline's move into administration.
"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."
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.
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.
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."
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