With the confirmation of reports that Virgin Australia is entering voluntary administration earlier this morning, frequent flyers and the Australian public have voiced concern over what lies ahead for the troubled airline.
Virgin Australia Holdings Limited, under the strain of around A$5.3 billion in debt and the Australian Government rejecting its requests for $1.4 billion in financial assistance, appointed Deloitte as administrators in order to recapitalise and realign the business.
The move comes following a string of airline collapses in the Australian airspace, including the shocking liquidation of Ansett in 2002 after 65 years of operation. Virgin Australia directly and indirectly employs approximately 16,000 workers, who now face uncertainty regarding their jobs as a cloud looms over the airline’s future.
The airline has flown in Australia for 20 years, launching as Virgin Blue and has since established itself as Australia’s 2nd major airline, bringing significant competition to veteran airline Qantas that has been highly beneficial for Australian travellers. This rivalry was bolstered following its full-service transformation into Virgin Australia, clawing into the lucrative business traveller market. Industry data indicates that the airline’s presence has lowered domestic airfares by almost 40% over its operational life, with Virgin stating that it contributes approximately $11 billion to the Australian economy each year.
What’s going to happen now?
Virgin Australia will continue operating in the form of its reduced domestic network, underwritten by the Australian Government.
Virgin’s administrators intend to complete the administration process within a matter of months. Velocity Frequent Flyer, a wholly-owned subsidiary, is not in voluntary administration, being a profitable and successful arm of the airline, earning $122.2 million last year.
What does the voluntary administration process involve?
It’s important to note that voluntary administration is not the same as liquidation. The goal and strategy of the Deloitte administrations is one of rapid transformation in order to exit administration as quickly as possible and to stablise a leaner and stronger airline to face the aftermath of the COVID-19 pandemic.
This will involve recapitalising the airline, with an immediate pause on many of the financial pressures it currently faces.
The voluntary administration process is designed to restructure some of the airline’s debt, with the opportunity to abandon much of its estimated $2 billion in unsecured debt and to significantly discount the remaining secured facilities. Additionally, cost-burdening aircraft leases, such as with Virgin’s A330 fleet, are more easily dissolved under the administration process, allowing improved and streamlined cost-cutting in order to establish the airline’s long-term financial viability.
In addition to the transformation of the business, a new owner of the airline will sought under the recapitalising process, abolishing the value of the initial investments by current major shareholders – namely Etihad, HNA Group, Nashan, Singapore Airlines and Virgin Group. Over $6 billion has been invested into the airline by these parties over the last 10 years, who voted against providing more financial support for Virgin Australia, sending it into voluntary administration.
What are the likely outcomes?
With a reported 10 investors circling, a new private buyer purchasing the airline appears quite likely, with the restructuring and reduced debt improving the likelihood of a market solution.
Deloitte administrator Vaughan Strawbridge said that “there has been an extraordinary amount of interest in the business and in the restructuring of Virgin Australia.” Groups reportedly interested include Australian private equity fund BGH Capital, as well as international players.
Many aviation analysts argue that a sustainable Virgin following a purchase will require the closure of its budget arm Tigerair and many marginal or loss-making routes, with a particular refocus on core capital city domestic routes where Virgin already makes significant profit. They expect the airline to be smaller, ceasing most international routes, with the possible exception of Virgin’s profitable trans-Pacific operations. The airline may also change name, and expand to become a hybrid carrier, better competing against both Qantas and Jetstar in the full-service and low-cost segments.
If Virgin was to collapse without a buyer, it would liquidate, likely leaving Qantas (and its subsidiary Jetstar) with a monopoly in the Australian airspace.
Both the Australian Government and Australian Competition and Consumer Commission (ACCC) have stated that it’s essential that Australia has a two-airline system, with a significant risk of price rises if Qantas was to be unchallenged. Some form of government support for Virgin remains possible.
Other airlines, including overseas companies Air New Zealand and Singapore Airlines, have been tipped to be possible entrants into the Australian airspace if Virgin was to collapse. However, both have been given significant government aid due to the major impact of COVID-19, raising questions over their ability to enter.
What happens to Virgin Australia’s employees?
During the administration period, the airline’s reduced domestic network will continue to be operated, and there are currently no plans for redundancies during this period.
Virgin Australia employs 10,000 people directly and 6,000 indirectly.
However, the longer-term outlook for employees lies with any future owner, and their vision and goals for the airline. This may likely involve job losses, with a reduction in both routes and number of aircraft in order to make the airline more viable.