Virgin Australia sold to US private equity group Bain Capital

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The future of Virgin Australia seems secure, at least for now, after Bain Capital agreed a deal to buy the airline from the administrators.

The deal will still require creditor approval but this is likely to be a formality, despite the fact that debts worth a reported A$6.8 billion will be wiped out.

Bain Capital was one of two shortlisted investors.  The other party, Cyrus Capital – which was part of the investment group behind the failed reboot of Flybe – withdrew, leaving Bain as the winner.  Bain Capital is the biggest shareholder in the fledgling Virgin Voyages cruise ship business and the deal presumably has the blessing of Virgin Group, although this is not discussed in the public statements.

The Queensland state Government will also be an investor, with a reported 5% stake, after agreeing to proved A$200m in cash and benefits.  This followed an attempt by the New South Wales Government to encourage the airline to move to Sydney.

Bain Capital has reportedly injected A$125m immediately to keep the airline flying until August.  This will keep it in the air until the formal meeting of creditors can rubber-stamp the deal.

Virgin Australia sold to US private equity group Bain Capital

It is not clear what plans Bain has for the airline.  It is believed that it is not willing to take on Qantas too aggressively, and will focus on being a smaller scale carrier covering domestic and New Zealand routes.  The plan does not seem to include resuming long haul to routes to cities such as Hong Kong.

It will, however, remain a full service airline and will not attempt to copy the low cost carrier model. It appears that Bain  wish to reposition the brand as a mid-market carrier, retaining some of the lounges but focussing lesson corporate and more on the value-driven market, not unlike JetBlue in the US.

The good news on the loyalty front is that all Velocity frequent flyer bookings will be honoured, and the scheme will continue.  Velocity is currently run as a separate business but it appears than Bain wants to integrate it back into the main airline.  The company has also committed to keep existing employee packages intact for those who remain with the business.

If you want to find out more, there is a detailed ABC article on its website here.

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Comments

  1. Mikeact says:

    Reading the Aussie press, it seems RB has a 10% stake.

    • Yes, Virgin Group retained a 10% shareholding prior to administration but that will go in this transaction.

  2. Aston100 says:

    I wonder if they make you wear masks now, Bane masks…
    hohoho, I’ll get my coat.

    • I must have lead a sheltered life cos I had to Google “Bane mask”. 😨

      • Genghis says:

        +1. Perhaps OP uses one while ignoring delivery drivers knocking on their door?

        • Aston100 says:

          Admit you’ve wanted to do just that very thing?
          Wear a bane mask; hands on your hips; glare through your window at couriers.
          Being fully clothed is optional.

          • Lady London says:

            oh dear. I think that’s become a visual form of an earworm for me.

  3. When Bain bought the company I used to work for, their mission motto was to be the biggest, baddest travel company on the planet. After their capital injection investment and 3yrs or so trading, they had got what they wanted from the company and sold their interest on to another capital investment firm.

    • That’s how private equity works. When done correctly, you can take a sleepy business and aggressively move it forward for everyones benefit.

      If you take HFP as an example … you could probably think of 5 easy things we could do to make the site more profitable. Run more ads. Take more sponsored content. Stop replying to emails and social questions to free up more time for making money. Run 10 articles per day, on however trivial the topic, purely to create stuff for Google to rank.

      Would it work? Perhaps it would. I’m not too bothered about prioritising money above everything else so I don’t do it, but perhaps a more aggressive financially-backed owner with no existing loyalties to the readers or the industry could triple our profits in three years before selling the site on. In my private equity days, these are the companies we tried to buy, albeit on a far bigger scale than HFP.

      (There are also companies you buy because you don’t think the current owner is exploiting its customers enough. For example, my ex-employer bought a major UK domain name registrar after I left. I can easily see the attraction here – domain name registration is low cost (£15 on average per year per name) and moving provider is messy with the risk of disruption to your site. If you whack up the pricing sharply, 95% of customers will remain due to the risks of moving and your profits go through the roof.)

      • Bagoly says:

        Astutium by any chance?
        They bought out my long-term competent supplier and were truly awful.

        After enduring various unhelpful hosters I finally found Siteground – like Amex the only people where contacting support is a pleasure rather than a pain. I am dreading their selling out to Private Equity.

    • ankomonkey says:

      Bain bought a majority stake in the company I work for at the start of this year. I’m looking forward to some employment perks from my now sister company Virgin Oz. And a free cruise or two from Virgin Cruises…

  4. Michael Jennings says:

    Qantas is the dominant carrier in the domestic market in Australia. In normal times, it has maybe 30% of the international flights in and out of Australia. If you are one of the airlines carrying the other 70% of the international traffic and you want to sell tickets with connecting domestic flights, you do not want to buy those domestic seats from your competitor on the international legs – ie Qantas. So if there is a second domestic carrier, that traffic pretty much automatically comes to the second domestic carrier. However, it is mostly full service traffic, so you need at least a reasonable service level. (Virgin Australia was originally a discount carrier, but changed to more of a full service carrier after Ansett went bust in 2001, precisely for this reason).

    On top of that, domestic aviation is hugely important in Australia because the country is huge, and there is another pretty easy market of just pricing yourself a few dollars less than the dominant carrier and taking the price sensitive customers.

    If Bain’s plan is to just do these two things, well that makes sense.

    • Harry T says:

      Agreed. Domestic flight redemptions are often a very good use of Avios (diminished slightly with recent partner devaluation) because domestic flights are so expensive in Australia. And flying from Perth to Sydney can take five hours, allowing Qantas to even justify flat beds on that route in business.

      With borders closed to international visitors, I imagine the domestic flight market is only going to get more lucrative we domestic tourism becomes more popular. Bain could do well here.

      • Lady London says:

        I was amazed to see in the recent article with Qatar that QR said Australia has a very good Competition & Markets Authority. Maybe towards international competitors but they definitely look weak with the daylight robbery prices Qantas is getting away with for domestic flights

        Which as you’re all saying, if Oz internal flights remain in a duopoly of QF and VA then the Australian domestic flyers are still going to get ripped off. QF prices are so high even moderately close in, there is a big space under their price umbrella for No. 2 airline to make some money.

        The new owners are reported as saying they are
        not chasing the high end business market they are going to stay in the middle. so Club lounge closing, ordinary VA lounges staying. Dumping the nice A330 that was nice for long domestics. so much less comfort potentially for only a slightly reduced price.

        • Speedbird676 says:

          Personally, I think canning the A330 is a mistake. Even positioning themselves as a mid-market carrier they will be able to pull in some business class traffic if they can undercut Qantas. However, it would need to be significantly cheaper for me to consider a VA B737 vs QF A330, particularly on a PER-SYD/MEL/BNE sector.

          Keeping the A330 around also gives them the opportunity to restart international routes down the line.

          The B777 should go and be replaced, if they ever need something with longer legs, with more efficient B787s which could also replace A330s down the line.

        • Michael Jennings says:

          The Australian government has protected the domestic market from competition in various official and unofficial ways for as long as I can remember. Qantas has many friends with power. There is a place for a second player to take a cozy second position in a duopolistic market – and if the second airline is managed well, lots of money can be made from this position – but really aggressive competition isn’t going to happen.

          There’s plenty of competition on international routes in and out of Australia. I can’t remember when I last flew Qantas in or out of the country though. (Actually I lie. I can remember. It was early 2004. I have flown Europe-Australia return on other airlines about a dozen times since).

        • Louie says:

          @LadyLondon – Can’t say I’ve found Qantas’ prices for economy particularly high. For business, absolutely, but you are paying for getting business class, not economy with extra tier points like BA. Acres of leg room, lovely staff, great food, even if you are only on an hour’s flight SYD – MEL. With a fixed amount of seating rather than a moving curtain, you would expect prices to be higher and I find the business cabins are usually full or nearly so. Prices are eye-watering though; I don’t ever pay for business, just getting it as an Avios redemption or domestic leg of an international ticket. And then it is a real treat.

          If you don’t mean business class, then you’ve still got Jetstar (and presumably Virgin and Tiger) plus smaller regional carriers like Rex. All much of a muchness.

          I just wish Qantas’ FF scheme was better…..

  5. babyg says:

    Bain bought Worldpay for £2 billion in 2010, vantiv bought that same company for £10 billion in 2017. I wreckon they know what they are doing… time to buy some Virgin Aussie shares….

    • Bagoly says:

      Unlikely to be possible – the usual structure is that Bain will own all the shares, except for those such as 5% mentioned here for the Queensland government.
      *Private* Equity usually doesn’t want Joe *Public* to participate!

      • Lady London says:

        Perhaps Rob might like to explain the meaning of ‘the carry” in private equity as well…

        • That’s not actually how it works. You’d typically give the management team 20% and keep 80%. This doesn’t mean that management get 20% of the profit though.

          Quick example: buy for £100m, sell in three years for £150m

          Original: £100m = £1m management for 20%, £29m private equity for 80% (but at 12% interest, rolled), £70m bank for 4% interest
          Sale price: Bank gets its £70m back, private equity house gets £41m (£29 * 1.12 cumulative) leaving £39m for equity holders

          Total return: Management puts in £1m, gets £8m back (20% of £39m) for 3 years work
          Equity house puts in £29m, gets back £41m + £31m equity gain = £72m back for 3 years work (IRR of 35%)

          The employees of the equity house share a 20% cut of their gain (rest goes to the investors who provided the cash) so they share (£72m-£29m * 20%) £6.6m from this single deal, and there will be multiple deals done each year. This is offset by losses on deals which go bad however.

  6. harry hv says:

    Thanks for the nice explanation, you just missed out the bit where Private Equity makes the company take out the maximum possible loan and the funds are used to pay themselves a walloping bonus.

    • You can’t do that, because the company is already mortgaged due to the original purchase price being secured on the assets.

      It is possible 4-5 years down the line, but this is no different to someone doing an equity release on their home.

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