Virgin Australia Enters Voluntary Administration

Filed Under: Virgin Australia

Yesterday we learned that Virgin Australia was planning on entering administration, and that has now been confirmed by the company. This is scary and sad news, though I do see a potential silver lining…

Virgin Australia enters voluntary administration

Virgin Australia Holdings Limited has entered voluntarily administration, which comes after a board meeting yesterday. Several administrators have been announced from Deloitte.

Note that while Virgin Australia Group also owns the Velocity Frequent Flyer program, Velocity is run as a separate company, and is not part of the planned administration proceedings at present.

All of this follows Virgin Australia’s request for 1.4 billion AUD in government aid being denied, leaving the airline without options. On top of that, Virgin Australia’s owners have been unwilling to give the airline more funding.

Virgin Australia will continue to operate scheduled international and domestic flights that transport essential workers and offer cargo capacity. Virgin Australia’s current management team, including CEO Paul Scurrah, will remain on at the airline, and will be working with employees, suppliers, and partners.

Administrator Vaughan Strawbridge had the following to say:

“Our intention is to undertake a process to restructure and re-finance the business and bring it out of administration as soon as possible.

We are committed to working with Paul and the Virgin Australia team and are progressing well on some immediate steps. We have commenced a process of seeking interest from parties for participation in the recapitalisation of the business and its future, and there have been several expressions of interest so far.”

Virgin Australia 777 business class

What happens in administration?

The administrators will be tasked with assessing Virgin Australia’s situation, and negotiating with shareholders and creditors for the best outcome:

  • This will likely include trying to find new owners for the airline to keep it operating
  • If that’s not possible, then they will have to sell off all assets to repay creditors as much as possible
  • If the airline does liquidate, creditors will probably only get back a fraction of what they put into the airline

Virgin Australia had suspended all scheduled flights a few weeks ago, though within the past few days has restarted several dozen domestic routes due to government subsidies for them.

Virgin Australia Lounge Sydney

Virgin Australia’s complicated ownership structure

One of the things that makes Virgin Australia unique, and which has made the optics of a bailout complicated, is the company’s ownership structure. In addition to Richard Branson having a stake, three foreign airline groups own a majority of the airline:

  • Etihad Airways owns a ~21% stake in the airline
  • Singapore Airlines owns a ~20% stake in the airline
  • HNA Group owns a ~20% stake in the airline

The optics of Australian taxpayers essentially bailing out a majority foreign owned airline sure are complicated.

On top of that, Qantas and Virgin Australia have been engaged in quite a spat, Qantas management has argued that Virgin Australia had problems long before this started, and stated that the country shouldn’t “look after the badly managed companies which have been badly managed for 10 years.”

Meanwhile Virgin Australia’s CEO had written to the Australian Competition and Consumer Commission (ACCC) about Qantas’ actions, accusing Qantas of engaging in anti-competitive behavior. He accused Qantas of “trying to send a message that Virgin was in trouble and would not survive.”

Etihad has a fantastic track record investing in airlines… not

Is there a silver lining in all of this?

Virgin Australia has essentially been set up to fail. For years the airline has lacked a cohesive strategy, and that’s probably a function of the ownership structure.

Virgin Australia’s most important commercial partner is Delta (due to their transpacific joint venture), while the airline is owned by Etihad Airways, Hainan Airlines, and Singapore Airlines.

Talk about an airline being pulled in so many different directions.

My hope is that Virgin Australia survives, and emerges with a significantly simplified ownership structure.

Virgin Australia 737 business class

Bottom line

Virgin Australia has entered voluntary administration. I’m hoping for the best outcome for the airline here, as this is an airline I really want to see survive. I love Virgin Australia as such, and even more than that, it’s important for Australia to at least have two semi-global full service airlines.

In some ways, maybe this is what Virgin Australia has needed all along. The airline has lacked a strategy, largely due to the complicated ownership structure, and maybe this situation can change that.

I hope that Virgin Australia survives, and comes back stronger than ever.

Comments
  1. I prefer their business class to Qantas, if I’m honest. Personally hoping Qatar will come to the rescue, as they seek to buy their expansion in Australia.

  2. As a regular qantas customer I value having virgin there to keep Qantas fares in check, but the lack of a decent international partner network to the place I wanted to go meant I never flew with them. The ANA partnership might have fixed Th at but I guess we’ll never know.

    The federal government should take an equity stake to keep the competition in the market. They won’t, because Scotty from marketing is an absolute numbskull.

  3. Covid 19 or not, it was sadly a matter of time. 7 years of financial losses. So many rumours abound. From the Chinese wanting to buy it, to the federal govt wanting into to go into administration so they can buy a stake in it. Then of course the state govt put in 200m hoping other states would follow. I hope they succeed as we need a full service competitor plus so many people will lose their job.

  4. The airline hasn’t made money for the best part of a decade. Borghetti just piled on the costs and ripped out the profits of what was a very successful airline.

    Australia will have a second airline regardless if VA is saved or not, I just doesn’t really have a large enough market for two large full service airlines. A JetBlue type airline would make a lot of sense.

  5. @ Laura…. May I ask about your flight miles and credits. Who Cares!!!! Over 13000 people are possibly going to lose their jobs and incomes. Wow where have my miles gone? Please put it in perspective.

  6. Sadly another company going bust and we definitely need another player in aviation to keep the cost of flights down and not have one company with no competition and as service stations and supermarkets have to compete with each other.lets hope Virgin Australia gets a loan from the government and when we receive money for compensation of coviid 19 from China it helps virgin stay afloat.
    It’s about time Australia put a class action against China bfor negligence knowing and hiding the pandemic they have caused the world.

  7. Australia’s domestic market will look like Germany’s: controlled by one major airline with little to no serious competition. Too bad.

  8. I used those domestic business last year to cross Australia via Melbourne, was an excellent airline and one of my favourite flights last year. If only European business class could be as good.

  9. I agree with @Alexandar, former CEO John Borghetti went on a spending spree to try and match arch enemy (and former employer) Qantas. While Virgin was spending, Qantas was cost cutting, yet Qantas was able to maintain a price premium. Irony is that Virgin’s best asset, their people, is in itself not a cost, so they should have focused on this as their advantage

  10. “I’m rooting for Virgin Australia throughout all of this.”

    IIRC, “rooting” in Aussie slang means something a bit different than it does in American English.

  11. I recall flying Virgin Blue back in 2010 in Australia and it reminded me a of JetBlue. I’m not an expert here but I think Virgin Australia started off as a simple domestic airline called Virgin Blue.

  12. @Joey. Correct. They made money while Virgin Blue then their losses started almost the moment they rebranded as Virgin Australia and went upmarket.

  13. Primarily, administration should be viewed as potentially a good thing. It will allow the airline to re-negotiate its debt, shuffle its shareholders, and/or be bought by another player. It comes with risks too. For those with memory, Ansett Airways also went into administration, but the buyout deal fell through, and the airline sank without a trace, except that many of its staff ended up at Virgin.

    Private equity vultures are already circling. They may be the key to allowing Virgin to arise like a phoenix.

  14. Wow, Etihad, just wow. So the remaining investments I’m aware of are:
    – Air Seychelles – not sure on the financial health here going into COVID-19, but surely with hardly any tourist volume this is heading for deep, deep trouble
    – Air Serbia – probably OK-ish at the moment but far from risk free if this drags on in Europe

    Pretty strong potential here for Aer Lingus to be the only one of seven(!) investments Etihad don’t lose the entire investment on (Air Berlin, Alitalia, Jet Airways, probably now Virgin Australia wiped out). They would literally have been better just picking random people on the street to give the money to.

  15. Lucky,
    Any thoughts on whether Delta will stay in the LAX-SYD market without a JV partner in the other end?

  16. @tom
    Aer Lingus was sold off to IAG a few years ago so Etihad has nothing to do with them.

    With Air Serbia it’s a joint ownership with the Serbian government which would step in if things got worse.

    With Air Seychelles that’s also a joint ownership with their government which would certainly step in to protect their tourism industry.

  17. I’ve booked an award ticket with partner airline (Singapore Airlines) for 2021, will they still honour if it goes into liquidation?

  18. @Mike

    Regarding your VA miles on partner flights.
    VA goes into administration = likely honor the tickets.
    VA goes into liquidation = definitely not honor the tickets.

  19. If this happens, the idea of Delta buying into VA at an attractive price is potentially one of the better things that could happen to VA.

  20. Laura says:
    April 20, 2020 at 7:20 am

    What would happen to flight credits and miles?

    Ansett used to be the other large Australian airline. When they went under, all the frequent flyer points disappear. In contrast, that didn’t happen with Pan Am, Eastern, US Airways, etc.

  21. “I’m rooting for Virgin Australia throughout all of this.”

    IIRC, “rooting” in Aussie slang means something a bit different than it does in American English.

  22. @UA

    Except you forgot one thing, DL doesn’t have the money to buy VA even at an attractive price.

  23. @Eskimo,

    I did not forget any such thing, and you’ve misread my post – I was talking about DL buying in, not purchasing the airline outright.

  24. Sad. Always wanted to try their ‘The Business’ product. We are seeing the ruthlessness of the corporate world engaged in ‘never let a crisis go to waste’ dog eat dog. The ending after this, certainly if this drastic drop in passenger levels lasts another 2 quarters) will see the demise of airline names worldwide and the rise of mega-giants such as Lufthansa Group, IAG. This upheaval will see the morphing globally into perhaps 20 or so too big to fail commericial aviation entities: Two for Latin America, two for the U.S., one for Canada, one for Russia, three for Europe, three for the Middle East, two for China, four for the rest of Asia (Japan, Korea, Southeast Asia, East Asia), one for Oceania lead by Australia, one or two for Africa, one for Israel. News also was that Air Asia Malaysia and Malaysia airlines are possibly merging, rolling into one. As a possible scenario I’m writing about: I can see where the new Air Asia Malay/Malay airline merges with Singapore, Garuda, Brunei, Vietnam Airlines and Thai to create a Southeast Asia airline giant. Forget Burma, Lao and Cambodia airlines, they’re finished and will not be absorbed – but perhaps by Communist China which may help as part of their global hegemony offensive to curry favor with pro-China allies. You can kiss the majority of smaller carriers in the world goodbye. They won’t be returning to the skies.

  25. @UA

    LOL, you’ve also misread my post – DL doesn’t have the money, unless your definition of “buying in” is to use love, joy, rainbows, hugs and kisses instead of cash or its equivalent.

  26. @UA

    Or maybe for today only, they use the (mind blogging) negative oil price to buy in VA.
    Wouldn’t it be great if you can go to the gas station and they pay you to fill up gas.

  27. @UA
    I don’t really want to agree with Eskimo but…
    What’s Delta going to buy in with? Bailout money?

  28. OK so they have formally gone into Voluntary Administration. My guess (and it really is a guess) that Singapore Airlines will buy them out (given the SG government backing) or someone like KKR. We in Australia really need a second airline. The administrators “have commenced a process of seeking interest from parties for participation in the recapitalisation of the business and its future, and there have been several expressions of interest so far”.

    For those who have points in VA, their loyalty programme is a stand alone company and is not in administration – but it is not clear on how you could redeem points.

  29. Fond memories of being the only passenger in business SYD-MEL and hosting a really fun cocktail party at FL350 with multiple FAs hanging out and giving me an Australian wine tour. Domestically they absolutely shine and have the “fun” aspect of the Virgin branding in their favor. QF can be amazing (especially long haul) but VA are really sexier as a company.

    Best thing they could probably do is to shrink to domestic-only and let larger foreign owners (SQ/EY/DL) operate the international legs on a codeshare basis. Long haul flying to/from AU requires way more of a premium class flyer base AND a cargo base. VA had neither reliably.

  30. Delta could we’ll see this as a strategic and potentially lucrative investment, particularly at a fire sale price. While debt is high, the AUD is at , or near, its lowest point in 30 years; infrastructure and staffing are in place, public view of QANTAS is far more cynical than the hokey BS advertising suggests.
    It’s noteworthy that Velocity , the VA FFP, is not part of the voluntary administration: it’s a separate company ( and lucrative/profitable); clearly Virgin sees it , rightly, as one of the cornerstones of any sale ( unlike the morons running the Ansett demise, after Air New Zealand had run it into the ground, via their major stakeholding)

  31. I would love to see Virgin Australia succeed but I worry that if they do make it out the other side they may be less competitive with Qantas as they may be forced to shrink to a much smaller size. I would love for them to succeed though.

  32. It’s a sad day for an airline that has almost grown up with me–one of my first aviation memories was the feeling of glamour of walking across the tarmac to the back door of a Virgin Blue aircraft, doing the turn and wave at the top of the stairs to my family back in the terminal. I must have been six or seven years old, and I still have an airsickness bag offering discounted photo printing,–a staple of the old Blue–tacked up at my desk. I turned 15 just as Virgin Blue became Virgin Australia, while I did some rebranding of my own. That’s also the year I qualified for my first status (A3*G, of course). A couple years later, I got my VA Silver, and my VA Gold on my 18th birthday. As I was in university, VA grew into its own, building its partner network and finding a level that worked–just as I used the DL, VS, and SQ partnerships to explore the world. A couple mistake fares and the excellent value proposition got me my first top tier membership back in 2016. In a way I felt that a younger me would have been proud that it was with VA.

    In so many ways it is the little airline that could, going toe to toe with one of the biggest airlines in the world and holding their own. It’s been through good times and tough times before, and I hope we will again. Restructuring the debt, and defragmenting ownership could be wonderful things. More than anything though, I hope that Virgin emerges an airline that the amazing Virgin team can be proud of again–they’re a very special group of people who deserve better than mass redundancy.

    I hope that this is not goodbye. As they said a couple months ago to their focus group list, it should be “see you soon.” But if not, don’t cry because it’s over, smile because it happened, right?

  33. Time to give the “Singapore is Virgin’s saviour” line a rest. Singapore has been planning to “buy out” Virgin for 5 years and it’s turned out to be #FakeNews everytime.

    Also to add, Singapore has a dismal, poor record of operating in the Australian domestic market. *Cough* Tiger Airways *cough.. *cough* Air New Zealand/Ansett *cough*.

    If Singapore was the “so-called saviour” messiah that does ‘no wrong’, those prior companies would’ve not gone bankrupt.

  34. @David
    If I don’t use extreme sarcasm, I’m afraid many people just won’t get it.
    And for those who think you can use love, joy, rainbows, hugs and kisses to get away with anything you should go live in a cell with a puppy and Bill Cosby.

    @Paolo
    And others who think DL will do something, Delta will not, never ever in this situation.
    You do not get a bailout just to bail someone else out, especially another airline. You think share buyback in a good economy is a bad thing, this is like buyback on a sinking economy.

    Simply put, if DL is dumb enough to do it, they will never ever see any bailout ever again in the future.

  35. Virgin had 5 billion in debt and operated solely to compete with Qantas- which of course they could never do. They were, and always will be, the poor cousin airline in Australia. Was a bit of a dogs breakfast internationally and the domestic product while very friendly and professional never really reached Qantas levels or feel. Rather than focus on making money they did the exact opposite-spend it. Coronavirus is a blessing for Virgin in many ways. Now they can execute a restructure without any interference and hopefully stick to a realistic strategy that makes a profit. Stop blaming Qantas and the government; Virgin were the masters of their own fate and failure. Qantas is comparison has always been and is vastly more astute.

  36. All analysts agree that Virgin Australia is 10-15% more efficient than Qantas.

    What we are seeing is that a dominant but inefficient carrier with government support and 65% market share can drive a more efficient competitor into endless losses even before the pandemic struck.

  37. @DavidF

    What a bunch of BS. VA’s unit costs are mere percentage points from Qantas’s but QF commands a fare premium much higher than VA. If anyone is inefficient, it’s VA. Of the two airlines one has show to be far more profitable – qantas. Compare that to years of losses at their own hands in the form of Virgin.

    Also QF gets zero government support.

  38. “I’m rooting for Virgin Australia”

    Memo Lucky: You should never ‘root’ for anything Australian.

  39. DL have enough problems with their existing ‘investments’. No chance they decide to double down any buy into yet another troubled airline

  40. One thing’s for sure – the airlines that come back the fastest with the highest liquidity are gonna have some prime acquisition opportunities.

    While great for those businesses, the unfortunate result for us, as consumers, is likely going to be increased airline consolidation, less competition and higher prices.

  41. My predictions:
    1. The Australian government wants competition on domestic routes, so they will bless some form of recovery, with a reversion to a domestic only airline to provide competition to Qantas.

    2. Tigerair Australia goes away.

    3. Private equity ownership, so no more of the five international airlines having ownership rights.

    3. Fleet simplification follows. The new airline only runs the 737s, which can adequately cover all domestic routes. The remaining aircraft revert to leasors.

    4. The name changes. Right now, they pay Richard Branson for naming rights. This will change immediately.

  42. The airline hasn’t made money for the best part of a decade. Borghetti just piled on the costs and ripped out the profits of what was a very successful airline.

  43. @Eskimo – there are multiple options.

    An all stock transaction, agreeing to assume $X in debt whilst offering a nominal (typically $1) amount for assets, using either of these methods to purchase a subset of assets or a holding in the restructured group (should that occur) are some of the options that come to mind.

    The value proposition is something that the potentially interested parties need to decide. For example, NZ’s CEO commented that they wanted the previous VA CEO to bugger off and for VA to focus entirely on domestic operations, effectively handing the [BNE|SYD|MEL]-LAX routes to NZ.

    In hindsight, perhaps they should have done exactly that however the other shareholders seemingly see value in VA’s choice of model.

  44. @ed… Talk about a numbskull. Why would the federal govt buy a stake1. In an airline that in 90% foreign owned 2. When the airline’s current stakeholders won’t even put funds in 3. The govt is not in the business of airline ownership 4. Qantas refinanced by itself 5. A totally mismanaged company by previous ceo borghetti who spent big to try and attack qantas when he didnt get that airline’s ceo job ??? Shall i keep going? And if you liked virgin so much why not fly them whenever you could?
    The person asking about the loyalty program, it is not part of the voluntary administration as its a profitable business but it is suspended for next 4 weeks. To the person criticising someone asking that, nothing to do about perspective, its a simple question. Im sure others might think you’d need perspective on something else possibly.

  45. Frankly, I’d like to see some serious competition with a second airline in Australia. Maybe on some routes Virgin had the odd reasonably priced fare but out of the capital cities it ran parallel scheduling and similar pricing to Qantas, almost like a duopoly. Very often there was literally nothing to choose between the pair of them, that’s not competition.

    I’m platinum with both but I’d love to see another airline come in and offer flights and prices that actually give QF a run for its money but as a taxpayer I would not support the govt putting a penny into an airline that is already predominantly foreign owned. Let the billionaires who own Etihad, SQ, & the HN Group along with Richard Branson dig into their pockets first. However today the administrators say there are already 10 expressions of interest so it doesn’t look like there is any danger of losing it completely! Time will tell.

  46. Let’s be absolutely clear.

    This is a highly efficient airline – 10-15% more efficient than Qantas is. It has a modern, highly rationalised fleet and sustainable costs.

    And it has been driven to bankruptcy because it is in a pseudo-monopoly in which one carrier has 65% of the market and uses that Market Share combined with political patronage to steamroller all opposition.

    The Australian government has elected for renewed foreign ownership instead of taking an NZ/SQ style strategic stake.

  47. @DavidF

    Explain how then it was highly profitable as Virgin Blue, then suddenly started haemorrhaging money when it changed business strategy and rebranded as Virgin Australia?

    Baseless and completely fictitious explanation not based in reality.

  48. @Alexander
    If you compare the domestic fleets, networks and cost bases of VA and QF there is no advantage of any sort for QF.

    What they have is market dominance, and that in this case has been the difference.

    We have two remarkably similar carriers, but the big one has squashed the small one. When NZ exited VA they had some concerns about the international network and failure to pick an alliance, but were clear that VA was a bad investment because QF has total market dominance and the political patronage to ensure that it cannot fail.

  49. @DavidF

    What you don’t understand is VA had a cost base close to JQ when it was DJ. They then piled on costs to compete with QF so that yes their cost base is basically identical to QF.

    As a consumer, Qantas domestically often isn’t a lot more expensive than VA (for example, shuttling to MEL, OOL, ADL or BNE as I and may others do often. I personally (and it seems a majority of customers do so to) prefer Qantas even if its a few dollars more, because the experience of flying them for me is better value (food, wine and beer etc). And even when Qantas is much more expensive than VA, people for whatever reason *still* choose VA – that should tell you something.

    If you’re gonna start from a low cost base as an airline and increase your costs, you gotta be sure you can compete with the other guy. VA have clearly shown they weren’t capable of providing a superior product, particularly in Economy where it most people sit (Domestically, I would agree if comparing 737 to 737, VA was superior).

  50. I see what they’re doing here.

    Australia really didn’t need a 2nd airline domestically, just internationally.

    With Emirates Qantas essentially in cahoots with Cathay Qatar BA, Star Alliance flanking UA/NZ via Auckland for flights to the east/transpacific, and via SIN for west/Asia, Europe bound; SkyTeam on Delta/LATAM to the Americas and China Eastern-China Southern and Xiamen Air group, China Airlines, KE etc to Northeast Asia.

    By forcing Australia to just a monopoly domestic, the state can press Qantas to lower domestic fares and offer all airlines regardless of allegiance favorable domestic interlines.

    Don’t forget, Australia is not as large a market as we believe. It is the same size as Taiwan in terms of market size.

  51. @ed… Ps. If you pay next to no tax, as has been the case with Virgin Australia, why would you expect the government to provide a handout, even a loan? Nothing numbskullish about that from the Australian PM. Next time research before pitching.

  52. @UA

    Your suggestion doesn’t work for DL. You see DL paying $1 doesn’t solve the cash flow problem by taking in more liabilities, it hurts more. Further more, VA taking $1 means they are liquidating not trying to survive under administration. Instead of 1 failed airline you might get 2. Now if VA does have some very very highly prized assets (they don’t) for a very very cheap price that might be the case to consider taking in more debt, but in general for airlines those are either planes or slots, neither would be worth much in the near future.

  53. As a VA platinum I feel so sorry for all the staff. I’ve had some great time aboard VA domestic and international and hope for the best for airline and employees in the future

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