Airline Industry Key Factors

By pjain      Published Aug. 25, 2020, 12:55 a.m. in blog Invest   

Case: Virgin Australia VA Fails, Defaulting on $7b

Key: No 2 struggled to go upmarket but failed to compete with No 1 Leader

In Australia, Qantas is No 1 with 60% marketshare

To compete with Qantas, Virgin Australia’s aircraft got a makeover, business class was introduced, and lounges were introduced. It was all very nice, but it cost billions of dollars in money.

Timeline: Ten years of Losses allowed to accumulate to Bankruptcy

2010 - CEO John Borghetti

  • John had lost out in battle for Qantas CEO to Alan Joyce, then came as VA's new CEO with fierce desire to compete with Qantas.
  • 2012 after the new CEO, Virgin Australia made about USD$15 million in both 2010 and 2012. Since then, Virgin Australia hasn’t turned a profit.
  • For most next 10 years Borghetti pushed up-market - high quality, high service

CEO Paul Scurrah - handling a pretty bumpy ride

Mar 19,2020 Covid-19 Struck HARD - Nose Dive to Skeleton schedule!

  • VA had been working on reducing flights in the days before the full lockdown
  • New Zealand PM closed borders due to Covid-19 - really screwed VA operations!
  • Tasmanian PM Gutwein warn Scurrah 14 days quarantine for domestic travellers
  • Australia PM also closed borders to non-residents
  • March 25 VA cut domestic capacity by 90 per cent and temporarily stand down 8000 of its 10,000 workers.
  • Ground our flights everywhere but in Melbourne and Sydney - NZ base closed to ZERO
  • Pilots of its budget arm Tigerair, as part of almost 1500 job cuts.

Bankruptcy Timeline - Covid pushed it over the edge

  • Apr 2020 put into administrator
  • May 2020 Deloitte became Bankruptcy Administrator to resolve VA debts
  • 2 June 2020 Bain Capital and Cyrus Capital to participate in buyout bidding including interim financing of $125m vital to keep business going from 7/1/2020 to completion of sale.
  • 26 June 2020 Confidential sale docs drafted for Bain to take over, and unsecured screwed no recourse
  • end Aug 2020 - get final Deed of Company from Bain Capital - and final creditors

Twisting in Wind - Couldnt cut costs while begging for $1.5b from Aussie Govt

Due to labor laws, etc - could not RIF them

Post-GFC cult of High Debt enabled VA Zombie-fication

LIABILITIES At time of default groups included 10,247 known creditors owed (Aussie dollars!)

  • $0.45b 9,020 employees had highest position - PAST DUES TO BE PAID IN FULL
  • $0.6b Customers Credits for flights which were cancelled due to the pandemic - FULL - vouchers future!
  • $0.15b Velocity business (frequent flyer program) loan rolled over many years - ASSUMED IN FULL
  • $2.28b Secured lenders and aircraft financiers - CUT LEASES/MOTHBALLING/TERMINATE CONTRACTS
  • $0.17b Trade creditors - TO CONTINUE SERVICES/ENABLE OPERATIONS DESPITE ARREARS
  • $1.88b Aircraft lessors, (full value of future claims if their losses are not mitigated);
  • $0.07b Landlords - will support - forbearance, deferrment
  • $2b Unsecured bondholders- led by biggest creditors Broad Peak and Tor - SCREWED get ~10c per $!

ASSETS - About 50% of planes were leased

Bain's Cash on Barrel

  • After 10 years of bleeding, Aussie Govt denied $1.5b requested as handout
  • Banks immediately RESTRICTED CASH ON HAND in business - using them against debt/freezing operations

Bain to manage Limited Cash wisely

  • While employees to get paid in past, Bain is likely to RESTRUCTURE VA to cut costs (headcount/salaries)
  • Bain will want a STRICT LIBERTY to layoff/RIF employees, routes, etc. to cut bleeding
  • Bain will NOT give cash instead credit vouchers for future travel
  • Renegotiate leases, etc. with new aircraft protocols entered into with aircraft and engine financiers, which have significantly reduced - basically mothball most of fleet in Covid era and eliminate payments the operating costs of the business in line with the current level of operations;
  • Bain will limit "new cash" - instead force starvation to get restructuring needed!

High Quality+Low Cost confusion

Just like India's Jet Airways which tried to straddle both stools of High Quality and the Low Cost one, VA

OpEx Abandoned Multiple

Celebrity Promoter Richard Branson had no stake or Control - just High Style Wannabe drive


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