Virgin Australia may live on as 10+ companies express interest in saving it

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Virgin Australia is the largest airline so far to go into administration due to the coronavirus.

We covered the fall of Virgin Australia into administration in this article last week.  The end was not a surprise, given that the federal Government had refused any financial support and the shares had already been suspended.

None of the existing shareholder base was realistically in a position to help.  You are looking at HNA, the struggling Chinese conglomerate, Etihad Airways, which has been perfectly happy to see its other overseas investments fail, Singapore Airlines, which has just received its own bailout and Nanshan Group, owner of China’s Qindao Airlines.  Virgin Group itself controlled only 10% of the airline.

Although Virgin Atlantic and Virgin Australia have vastly different ownership structures and route networks, Virgin Australia offers a template for what might happen if the same fate were to befall Virgin Atlantic.

Key efforts are currently focussed on re-capitalising the airline and re-booting domestic operations.  The company owes at leasts AU$7 billion (£3.5 billion) to creditors, including around AU$450 million to its 10,000 staff. 

A key part of the administration process will be shedding as much of this debt as possible.

The largest share of of the pot is owed to 26 secured corporate debt and aircraft financers who were owed about AU$2.3 billion.  94 aircraft leases are capitalised for a combined AU$1.9 billion.

The airline has a fleet of 144 aircraft so it could downsize significantly if it wanted to shed some of the leases during administration.  A federal court has given the administrators an additional month to decide what to do about the 94 aircraft the airline has leased.

The leases and aircraft mortgages are, of course, secured on the aircraft.  The lessors are NOT necessarily taking massive losses if the aircraft are returned, as long as the aircraft can be passed on to another operator (admittedly unlikely in the short term).  It is more likely that Virgin Australia immediately signs new leases on same aircraft and takes many of them back.

Virgin Australia is likely to continue in one form or another

There does appear to be widespread interest in the airline. At least 10 and as many as 20 companies are reported to be interested, including domestic heavyweights such as Macquarie Group and Wesfarmers.  Such keen interest suggests that Virgin Australia will live on and not be sold in piecemeal portions.

Whether the Virgin brand would continue would be subject to separate negotiation.  The current royalty payment was reportedly 0.5% of revenue which is arguably good value given the value it brings to the business.

Macquarie is the world’s largest infrastructure asset management group and has previously bid for Qantas, whilst Wesfarmers owns a variety of consumer goods businesses including supermarket Coles.  According to the Sydney Morning Herald the company has shown a “strong interest in loyalty programs” which could make it an appropriate suitor for Virgin Australia and (or possibly ‘or’) its Velocity frequent flyer program.

Government interest remains despite the lack of a federal bail out for the airline.  Numerous states including New South Wales, Queensland and Victoria appear interested in offering packages in exchange for corporate re-location and/or greater domestic connectivity. Rivalry between the states is vicious and Queensland has not reacted well to New South Wales’ suggestion that Virgin Australia vacate its current corporate HQ in Brisbane for one in Sydney.

Even if Virgin Australia manages to reboot itself, there is concern that any recovery will be fraught.  Qantas retains the ability to dump capacity on routes in an effort to force out smaller players.  The Chairman of the Australian Competition and Consumer Commission has said it will work with the government to ensure that Qantas does not use its size to try and limit competition.

Can one market sustain two airlines?

Although Virgin Atlantic and Virgin Australia operate(d) wildly different networks in differing markets – Virgin Australia is primarily domestic with a handful of long-haul flights whilst Virgin Atlantic flies only long haul – both airlines operate as an underdog in markets with a large incumbent airline.

The question Australian and British governments are facing is whether they should assist a second airline in the market. The widespread interest by states and private companies in Virgin Australia’s continued survival suggests that it is worth Government doing what it can to ensure a stable trading environment in order for new shareholders to come in.

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Comments

  1. Very informative and potentially quite encouraging both for VA and VS! Thanks, Rob.

  2. mr_jetlag says:

    Good. Let current shareholders lose their shirt then run the business as a business. This nonsense in the US notwithstanding, we may see a leaner but healthier aviation industry come out.

    • I don’t think that will be the case at all, as you said the US airlines are got huge amounts of money and most over countries are supporting their airlines as Italy is giving Alitalia another go, easyJet got £600 from UK gov, ME3 will/have huge support from their governments, Air France-KLM got €9 billion and Lufthansa is looking for even more.

  3. RussellH says:

    Wesfarmers? Really??
    If they know as much about running an airline as they did about running Homebase here, VA might as well fold now.

    • They have a lot of successful Australian businesses, including a major supermarket chain and DIY store. You have to look beyond Homebase…

      • RussellH says:

        Homebase is a good indicator of their inability to adapt to something different!
        Running an airline is completely different from supermarkets and DIY.
        If they can make a complete pig’s ear of running a business they thought they understood, just because it was in a different country, I would expect them to do the same with a business they know nothing about.
        Unless they make Michael O’Leary an offer he cannot refuse and, crucially, let him get on with it.
        🙂

        • Maybe, but on the other hand they have significant experience in the loyalty market including flybuys, a loyalty/data company

    • Lady London says:

      +1. Love Wesfarmers but Homebase must have been a terrible, terrible mistake for them. They own Bunnings which is my favourite DIY store in the world (their own ones in Australia and New Zealand not the UK businesses if that name). But unfortunately even Wesfarmers hasn’t been able to fix Homebase – which was a good company but became a horrible company with low standards.

      • That’s not why they got Homebase wrong. Historically B&Q was ‘hard’ DIY and Homebase ‘soft’ DIY. Homebase had a lot more female customers and far fewer trade customers. The plan was to turn Homebase into B&Q, which failed – partly because B&Q is better at being B&Q than Homebase, and partly because they never really explained it to the customer base. The new Homebase owners have put back all the kitchens and decorative stuff and are apparently doing OK.

        • Lady London says:

          I’m prejudiced as for work I did workups on B&Q, Kingfisher for one role. Big fan of B&Q and really rate the success of theScrewfix model. Was very excited when I got invited to interview with Bunnings. I love Bunnings. I wish it was practical to ship stuff they do in NZ and Oz, to Europe.

          The interview with Bunnings was one of the worst experiences of my life. It was basically Homebase staff that hadn’t changed. Their standards felt the lowest of the low including safety standards. I couldn’t get out of the room fast enough, and decided for once in their life Wesfarmers must have bitten off something they couldn’t chew and they would have to exit.

          Coincidentally I went back to work for an old client that happened to be the lead tenant in the same building and heard informally that getting Bunnings (Homebase) to operate according to things like fire safety regs was a struggle. I would say Wesfarmers were well out of it. This kind of inside view is often informative financially depending on when you think the market will catch up.

          • RussellH says:

            > I wish it was practical to ship stuff they do in NZ and Oz, to Europe.

            I read somewhere that that was one of the big mistakes that Wesfarmers made with Homebase – they were supposed to be pushing huge Aussie BBQs at massive prices.
            Most customers not interested – and those that were could not afford them

          • Peter K says:

            The voice from the floor at Homebase on the other hand is similar to what Rob said, but adding that there was an element of snobbery around Homebase. A lot of the money came from fitting kitchens and bathrooms to those better off or soft furnishings/fittings to those who felt Homebase was classier than other DIY stores.
            When it was taken over it was aimed at a low price market and lost its main edge over the likes of B&Q, Wickes etc and so the plan failed.

          • I worked as a student at Texas Homecare, and then Homebase. As a student it was a great job, and at weekends almost all the staff were undergrad students (with zero knowledge of DIY). Homebase never wanted to be the cheapest in the market, they wanted to be the equivalent of MnS – but that needs a lot of investment in staff (training and numbers) and stores which never happened. There were some shifts when I was the only person on the (massive) shop floor. It’s a long time ago now, but they were only looking to achieve a weekly sales target of £100k.

        • Spaghetti Town says:

          In my head Homebase was for outside the house and b&q inside.

  4. Lady London says:

    Wages must be very good in Australia if that’s what’s owed across the board to airline staff for such a short period of insolvency.

    • Speedbird676 says:

      They are.

    • Relative to other airlines across the world airlines in Oz and NZ remained decently paid.

      JAL used to be good too, I knew someone who used to commute from the UK to Tokyo on standby flights to then crew flights from Tokyo. It was pretty common too.

    • Spaghetti Town says:

      It’s the same in New Zealand. When i went over there to work, the £8.50-£9.50 an hour job in the UK was £12-£13.50 over there.

  5. Homebase aside, Wesfarmers, in Australia, have been adept at turning around under-performing companies – Kmart, Coles and Bunnings (ex BBC Hardware)

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