20 cashed-up buyers are now circling Virgin Australia

Would-be owners of Virgin Australia have two weeks to lodge their first offer for the airline.

By David Flynn , April 30 2020
20 cashed-up buyers are now circling Virgin Australia

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.

Read more: Embattled Virgin Australia's $150m loan from Velocity was "an investment"

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.

Read more: Low-cost Wizz Air, Frontier backer has Virgin in its sights

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

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.

22 Jan 2018

Total posts 83

I understand no one wants a monopoly of Aussie sky but whoever buys this VA is in for a disaster

Qantas - Qantas Frequent Flyer

04 Nov 2011

Total posts 348

Not if its structured correctly and the ultimate buyer adopts a sound business strategy going forward. Virgin Mk2 can easily prosper as the alternate to Qantas.

Etihad - Etihad Guest

21 Jul 2019

Total posts 40

Right you are, Russell. VA is at core a very good airline and long term prospects for profit are more than reasonable. Otherwise these high calibre financial institutions wouldn't be sniffing around in every increasing numbers. What crippled VA was in large measure the messy five airline/aviation group ownership structure. Too many chiefs, not enough Indians! Just look at that spiteful NZ split. Structure it down to maybe two big shareholders and VA could actually have a chance to stretch its wings.

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 144

Any VA mk2 is almost likely not to be full service.

13 Apr 2020

Total posts 12

tm_smile

The plan is to retain Virgin Australia as is, with regional, short and long haul operations, whilst keeping the Tigerair brand to expand. Any changes to the service offering will be up to the successful owner. With many lining up to purchase Virgin Australia, the administrators and CEO (who are working collaboratively) are expected to have the opportunity to be able to choose the owner that best fits current intentions.

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 144

Keeping VA as is or as close to as is isn't happening no matter how positively management and administrators are going to spin it.

13 Apr 2020

Total posts 12

It's not a spin. The current model was weighed down by excessive costs due to poor decisions. The current model was to turn a profit starting in FY2021 due to restructuring. You're statement is just as much speculation as is mine. However mine has more backing.

20 Oct 2015

Total posts 48

Steve24, there is no 'plan' for Virgin Australia right now, Deloitte itself would barely have one just one week after the airline went into administration, so I don't know how you can sound so definite about this. In fact it's almost certain that Tiger will NOT be part of the new Virgin, as the pilots have all been let go, and when Deloitte and Scurrah were asked about this they demurred rather and only said that that Virgin 'would always have a low-cost offering' or something alone those lines, I think I read that in an aviation magazine. So take it as read that nobody outside of a few people at the top of Virgin and Deloitte have any idea what Virgin Mk II will look like, but there's no sign it will include Tiger.

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 122

I love when people are sitting around saying VA is going to be fine. It's not. That's why it escalated from “we have a large cash reserve” to Scurrah asking the feds 8 times for cash and then calling in the administrators 5 weeks into this.

The business made no money. The service it delivered was in no way backed by the revenue people were willing to pay. Yes it was wonderful while they lost money. But unless for some reason a group of people with vast amounts of cash wanted to blow it on business as usual, the idea that VA is going to okay is frankly fanciful. It's going to be a sh*tshow for creditors.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 157

@tmsmile could it be possibly strategic that VA execs used current pandemic to mask the fact that going into VOLUNTARY administration is the best way to go about restructuring a business thats out with the old and in with new. put creditors on hold and rod of the tangl d web of shareholders which didn't do them favours. If anything this is the best that an airline like virgin given its situation could also for. They'll still fly, keep the planes that own, the slots and a pool of their existing staff. No better time to reshape an airline the to do so then now..you make it sound like it's Armageddon and end of the world for virgin. It's really not.

QF

11 Jul 2014

Total posts 467

This all smells like back door deals were done that were outside of Scurrah hands and he had no input into them, you don't do back door deals with out things being fine. The only questions is do the back door deal makers then get trumped.

13 Apr 2020

Total posts 12

TT pilots let go to let VA pilots fly on TT aircraft for cost efficiencies. This has been stated many times publicly. It helped them finalise the never-ending A320 to all B737 transition. Your statement is incorrect, the current intention is to keep TT.

Will check back on this in July.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 157

Are you an expert on business restructuring and administration and - well running a billion (debt or no debt) business? How about just wait and see what happens. The fact that high quality investors are lined up to make a buy in pitch kinda proves your theory wrong even in this early stage..

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 222

If the Indigo Partners LCC comglomerate bid for VAH gets up, you can expect VA mk II to be a straight LCC (Tiger Mk II?) with the existing Airbus A320s (that hasn't been returned to lessors yet), ramping up to the NEOs from the Indigo group order.

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 144

There would be the cost associated with retraining pilots to A320. They could just continue with 737 fleet and then go to Max eventually. Its not like the 737 is a horrifically inefficient plane. Its still fairly competitive and half of them are owned anyway

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 222

Won't be too hard for the Indigo Partners LCC conglomerate led VAH to use VARA's A320 AOC, perhaps even start recruiting for the former TT A320 pilots to join them under the VARA AOC.

Makes no sense for Indigo Partners to keep the owned VA 737s if they are the successful bidder for VA. They're not a multiple family operator and like most LCCs, keep to the 1 Aircraft Family type.

30 Apr 2020

Total posts 14

I don't think Virgin 2.0 will resemble anything like it is now. People don't realise the severity and depth their problems, it will take a deep pockets to resurrect Virgin. Why would anyone take that risk against a formidable opponent and deteriorating conditions. Cheaper and feasible to resurrect from liquidation. it will be a shell of its former self.

23 Oct 2014

Total posts 183

Who wouldn't want to own Virgin in one of the most aviation lucrative countries in the world - buying at the bottom of the market. only problem it's been a underperforming business for a decade because it's been investing billions to implement this group Australia wide. It's currently in administration, so just like that, the business financial arrangements can ALL be reset and cost bases lowered significantly, and on the other side you would own the best airline with the lowest cost base and have importantly a great money earning business. The domestic market has historically yielded 1B profits each year, this airline group would start grabbing portions of that. This is all here ready to go, Aircraft, J seats already fitted, Velocity, 130 Aircraft, Employees, Lounges, to start from scratch would take 10 years or more, the interested parties will be lined up out Virgins door I would have thought.

10 Apr 2016

Total posts 43

Agree. They can jettison the expenses leased aircraft and can lock in significantly cheaper oil .... against Qantas that has hedged a large proportion of theirs at higher rates

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 157

Deep pockets indeed - for example Wesfarmers if proven to be correct have a turnover of $90+billion - put very simply and I may be challenged on this but what's spending $4b to buy an airline to them? This wil be a long term investment as is most buy ins of this nature?

08 Feb 2018

Total posts 89

With domestic travel ramping up, no international demand and five 777's that no one will want to buy....a daily 777 or two on the transcontinental routes may be a competitive advantage (until int'l travel comes back). The Biz, PE and a 9-abreast cabin might be onto a winner.....

Virgin Australia - Velocity Rewards

21 Feb 2017

Total posts 21

And the bar would be a winner :)

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 144

That's if Velocity won't be used by creditors to get back some of their money. Even if administrators are able to unload half of VA's debts, that still leaves at least $3.5bn. Thats an awful lot of money for an airline that hasn't made money for the best part of a decade.

13 Apr 2020

Total posts 12

tm_smile

The extra debt announced recently comes from things like flight credits, staff entitlements etc... It's no different to someone booking today for a flight in six months' time.

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 144

Yeah... and thats debt that a new owner needs to take into account...

13 Apr 2020

Total posts 12

It's revenue. Unearned revenue (liability until it's earned). Velocity is a separate business by the way.

24 Aug 2011

Total posts 705

Remember $500M of the debt is employee entitlements. This is perfectly normal and unless the employees are terminated is just used as employees take leave in the normal course of business.

13 Apr 2020

Total posts 12

Hi Dan22... An investment in VA will be less than $4B, even to see them through COVID-19 (provided it lasts a short time). Wesfarmers - like all potential investors who have deep pockets - will want to buy Virgin Australia and provide funding but only if they see Virgin Australia as a guaranteed profitable venture to obtain a return on their investment. Their board and shareholders will not allow a risky move, no matter the amount of their cash balance. Their time frame for such a return on investment will be determined by no other than the purchasing private entity. I believe Virgin Australia will be positioned to be a healthy, viable and low-risk investment post voluntary administration, all things going well.

Having said this, Virgin Australia was forecasted to make profit in FY2021 prior to COVID-19. If successfully out of administration, with a lot of debt covenants wiped clean and advantageously restructured - which is the plan - Virgin Australia would be destined to be a profitable entity in normal market conditions.

Keeping Virgin Australia's current model (full-service regional, short and long haul) is the preference as said multiple times. However, this decision is ultimately up to the new owners. Parts of their international network that weren't making money have already been dealt with (New Zealand flying for example). Other parts make money, such as B777 operations. It may take some time for Qantas to make up 40% of their overall revenue from their international flying. And with Qantas taking more in debt recently, and possibly more debt to come, things may look interesting.

A duopoly when done right makes money. I'm confident Virgin Australia and Qantas will be successful post COVID-19, providing domestic air travel increasingly returns soon.

QF

11 Jul 2014

Total posts 467

I think the new Virgin will be a hybrid named XYZ, the front of the plane will be for business travellers followed by economy x style followed by cheaper tickets at the back. I really don't see much changing from lounges and the current set up of planes. The main change will be one major owner hopefully Australian so profits aren't shipped off shore. Qantas will then have to adapt, if anything get rid of Jetstar and follow a similar business model. I could never work out why anyone would want to put their premium passengers on a low cost budget airline.

Air New Zealand - Airpoints

21 Jan 2016

Total posts 185

The LCC/FSC hybrid product model is the better option, as VA would be able to capture the budget/affordable through to the premium markets. It worked well for Air NZ.

I do agree the Tiger will go.

There is no reason why the B77W can not be used east/west transcon services until the international flights can resume,

QF

11 Jul 2014

Total posts 467

The Air New Zealand model is a good one to emulate, it would work well.

06 Jan 2017

Total posts 10

What the same way they destroyed Ansett?

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 222

International Travel won't be building up for a while due to COVID-19, and the market for passenger widebodies is pretty dire, so it'll be up to the 'new' owners of VAH (whoever it may be) to decide whether if it's cheaper to park/mothball the 77Ws or use them twice a day on Domestic TransCons.

Other alternative for use of the 77Ws is for the 'new' owners to bid for freight contracts and temporarily convert them to freighters so the 77Ws are still out there earning revenue.

30 Apr 2020

Total posts 2

Have seen Ansett, compass mark 1 , compass mark 2 , Virgin mark 1 go under . When will we learn ? So how long will virgin mark 2 exist or make a profit . Even when we had the 2 airline policy's both airlines had trouble making a profit.

24 Aug 2011

Total posts 705

So what are you suggesting as a solution? We have a monopoly and all get ripped off??

08 Feb 2018

Total posts 89

Given they've all failed for different reasons I'm not sure what you're getting at.

Singapore Airlines - KrisFlyer

08 Jun 2018

Total posts 92

There is only one reason any business has ever failed, because it isn't generating sufficient cash. Period.

24 Aug 2011

Total posts 705

Initial bids are due tomorrow fortnight which isn't a long time. The first 8 parties already have access to the data room for their due diligence. The other 12 are really going to be short of time to process and prepare a bid if they are intending to be serious contenders.

30 Apr 2020

Total posts 2

We have 2 airlines owned by qantas but another is alliance airlines . They are all capable of gearing up to take the slack long term. Alliance airlines is a very well run airline with good cash reserves. All airlines will be scrambling for market share ,plus the sympathy vote will go the virgin mark 2

24 Aug 2011

Total posts 705

Alliance Airlines is not capable of gearing up for trunk domestic services. They are a very good airline in their chosen segments which are regional and FIFO. It would be a huge step to transform into a mainline provider.

Having QF and JQ take up the slack is a monopoly. They would not take the slack as it would be in ther interest to shrink the supply and charge higher fares. Such an outcome would be a disaster for domestic tourism.

10 Apr 2016

Total posts 43

we would see the return of the Qantas 747's on domestic routes (east west) if it became a monopoly. Maybe even the A380 doing a Sydney to Melbourne during peak (as it turns around from international routes)!

Qantas - Qantas Frequent Flyer

25 Sep 2013

Total posts 1219

That seven-point list sure is a compelling sales pitch.

QF

11 Jul 2014

Total posts 467

It's not about the pitch it's about the purchaser. It will be how all the banks, service stations operate where about to have another market operate the same way.

Etihad - Etihad Guest

04 Mar 2018

Total posts 23

Please don't sell to the CHINESE. I have been watching the threats made by the Chinese Ambassador to Australia, as they do NOT want an investigation into CV 19. They are treating us like scum, so I dont think we need them in Australia.

Qantas - Qantas Frequent Flyer

25 Sep 2013

Total posts 1219

LOL be prepared then to give up 90% of the stuff that you currently use as you won't like where they are made.

Etihad - Etihad Guest

04 Mar 2018

Total posts 23

YES I know. Its sad cause I cannot buy any Plastic Bottles, socks, undies, shoes, shirts, trousers nor computers.

Hope I can find enough wood to burn in my cave, cause everything else is made in China.

Sad days.

Rxm
Rxm

Jetstar Airways - Qantas Frequent Flyer

14 Jan 2017

Total posts 44

I never experienced this great virgin service. Everyone keeps talking about. It's like you create a myth by repeating something over and over again. My experience with them was quite negative. They have always retained their budget airline mentality you just had to scratch the surface.

Etihad - Etihad Guest

04 Mar 2018

Total posts 23

I have flown Business Class domestically and internationally with Virgin. Service and attitude was at least twice better than Qantas. But cattle class is cattle class is cattle class.

At least virgin cattle class pass your food to you. Was on a United economy from SFO to SYD. Had a window seat and the food was thrown at me to catch. Last United flight I ever took.

08 May 2020

Total posts 44

I am looking forward to see the wonderful teams of Virgin Australia again. They have been fantastic and don't deserve the current situation. All the way Ground staff, baggage handlers and Service desks and Velocity Thank you for the past 20 years. I hope that the new Owners don't change too much on the Structure of VA. I can absorb the 180 000 points to lose but hopefully still have similar benefits with the Platinum Card which I have for the past 10 years. I wish & hope that there will be still some arrangement with Singapore Airline in the future, as my preferred long distance Airline to Europe and Asia. Gone straight from Ansett airline to Virgin Blue to VA not interested in the alternative.

08 May 2020

Total posts 44

We all like Bargains, however they need to be earned. I see Qantas are already sending messages to a potential Buyer of VA that any new Entity will have to fight against their War chest. $19.00 Melbourne to Sydney to come. What will be needed is that ACCC must stop Airlines selling fares below cost. If a break even cost Mel- to Syd is $100.00 it has to be the min. cost for a Ticket. Selling for 19 Dollars is called dumping and unfair competition.


Hi Guest, join in the discussion on 20 cashed-up buyers are now circling Virgin Australia