Airline Industry Key Factors
- Case: Virgin Australia VA Fails, Defaulting on $7b
- Key: No 2 struggled to go upmarket but failed to compete with No 1 Leader
- Timeline: Ten years of Losses allowed to accumulate to Bankruptcy
- Twisting in Wind - Couldnt cut costs while begging for $1.5b from Aussie Govt
- Post-GFC cult of High Debt enabled VA Zombie-fication
- Bain's Cash on Barrel
- High Quality+Low Cost confusion
- OpEx Abandoned Multiple
- Celebrity Promoter Richard Branson had no stake or Control - just High Style Wannabe drive
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