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The new Virgin Australia is revealed – well at least what John Alwyn-Jones thinks it will look like along with a reminder of how Virgin Australia came into being!

May 4, 2020 Headline News No Comments Email Email

A friend in the USA asked me last week, why do airlines in Australia appear to be owned by companies from overseas? In response to this interesting perspective from the USA, I was able to reassure him that at least Qantas, which was gradually privatised between 1993 and 1997, must be at least 51% owned by Australian shareholders.

In addition, no more than 49% of Qantas [which also happens to owns Jetstar] can be owned by foreign persons and also no more than 35% can be owned by a foreign airline, with no one foreign person owning more than 25% and no more than one third of the directors can be voted in by those representing foreign shareholdings.

So, at least that is two major Australian airlines Australian owned!

So, why is Virgin owned by foreign entities?

Maybe it’s because Australia appeals because of relatively limited competition and also like everywhere in the world, investors see what could be easy revenue and cash to be stripped from the airlines in Australia.

That is what nearly happened to Qantas in the failed $A11.1billion Airline Partners Australia bid for Qantas some 10 years ago, by a consortium of Allco Equity Partners, private equity giant TPG, Macquarie Bank, David Coe’s Allco Finance Group and Onex.  If they had been successful, there is no doubt that Qantas’ cash reserves would have been stripped out.  So, thank goodness the bid failed because it is well know now and even admitted by now Qantas CEO Alan Joyce, that when the GFC came along Qantas would not have had enough cash reserves to survive and would have folded, in a similar way to what is happen to Virgin Australia today!

As Rod Eddington the former CEO of Ansett another great but failed Australian airline said, “great airline, lousy business” – so true!

In any case, so who owns Virgin Australia?

While most airlines have lot of shareholders owning relatively small stakes each, just five companies own over 90% of Virgin Australia Holdings, which owns Virgin Australia, with Abu Dhabi’s struggling Etihad Airways owning 20.94%,[struggling but owned by the royal family of Abu Dhabi and cash rich], Singapore Airlines 20.09%, [backed by Temasek which is the invest arm of the wealthy Singapore Government], China’s Nanshan Group 19.98% [struggling], China’s HNA [struggling] 19.82% and Sir Richard Branson’s Virgin Group 10.42% [struggling].

So not a pretty picture really it terms of the potential of the current owners kicking the can and investing more to takeover Virgin, except perhaps Singapore Airlines or really any of the above, but in a partnership with equity partners.

Before we have a look at what I think the new Virgin Australia will look like, let’s have a quick look at how Virgin Australia came into being!

Virgin Blue as it was known then, took off in 2000, with many will recall Brett Godfrey as CEO, who convinced Branson to give him the money to set it up. I am sure Brett must be watching what is happening today with great interest, with the Virgin Blue model he set up a low-cost carrier and a wholly owned subsidiary of Richard Branson “owned” Virgin Group.

In 2001, Ansett Australia which was then owned by Air New Zealand tried to buy Virgin Blue for $250 million, which Branson rejected and in 2002 the Patrick Corporation in return for 50% ownership invested $260m in Virgin Blue, giving it the cash to grow nationally as by then Ansett Australia had crashed and there was a clear void for another airline.

In 2003, Virgin Blue Holdings Limited was floated on the Australian Securities Exchange and in early 2005 Patrick was not happy with the company’s direction and launched a hostile takeover for Virgin Australia Holding securing 62% of the shares and therefore control, with Virgin Group only retaining 25% share.

In 2006, Toll Holdings took over Patrick Corporation, who in announced a plan to distribute 98.3% of its shares in Virgin to its shareholders, so it as no longer a majority stakeholder and at the time Toll Holdings owned 62.7% of the company and had previously attempted to sell the share without success.

In January 2011, Air New Zealand bought a 15% shareholding in Virgin and in June 2013 it increased to 23%.

In September 2012, along came Etihad Airways who bought a 10% shareholding, which later increased to 20%, with a month later Singapore Airlines buying 10% soon increasing it to 20%.

Virgin also announced that it had purchased a 60% stake in Tiger Airways Australia followed in 2014 by 40% for only $1, which became its low cost subsidiary, to an extent confirming what is believed to be the vision of then CEO ex Qantas’ John Borghetti of Virgin becoming a full service carrier to compete with Qantas, with  Tiger a low cost carrier to compete with Jetstar, with this vision clearly   unsuccessful and the primary cause of the burgeoning debt and also stiff competition from Qantas and therefore Virgin’s collapse.  Many would say that as a former senior executive with Qantas, John Borghetti attempted to recreate or emulate Qantas in Virgin Australia and that was his downfall.

In the meantime, in May 2016, China’s HNA Group, which also owned Hainan Airlines bought a 13% stake in Virgin Australia Holdings causing a dilution, with Air New Zealand’s stake becoming 22.5%, Etihad’s 21.8%, Singapore Airlines 20.1% and Virgin Group 8.7%.

It is reckoned that Air New Zealand saw the writing on the wall and the demise of Virgin, because only a month later it sold 19.9% of Virgin to China’s Nanshan Group the majority owner of Qingdao Airlines and in October, Air New Zealand sold its remaining 2.5% of Virgin to Nanshan Group.

The vultures were circling with reports claiming that Virgin was approaching insolvency resulting in Virgin CEO John Borghetti writing to Virgin’s pilots reassuring them the airline was in a sound financial position, but the airline was clearly struggling, with COVID-19 the final nail in the coffin for Virgin Australia as it was saddled with well over $5b of debt, which with crashing revenue and high costs made Virgin insolvent and unsustainable!

With the Federal Government rejecting a request for $1.4 billion in assistance in April 2020, I believe quite rightly as it would have been good money after bad and would not have meant Virgin survived, Virgin Australia Holdings was placed in voluntary administration with Deloitte appointed as administrator and the rest is history!

So, where does Virgin go from here and how and in what form do I believe the airline will emerge from administration.

I have worked for the Big 4/5 or whatever the number is now, accounting and consulting firms and I know how they think and work, with firstly, the administrators are the first call for their fees from any funds that can be realised and remember Korda Mentha made many millions out of the administration of Ansett and for the same reason they were very keen to handle the Virgin Administration, but Deloitte had already been appointed.

The first thing the administrators will do will is to reduce debt, with it actually conceivable that that creditors may not recover any or all of their money. Next will be to realise any has they can and potentially sell off what they can to do so!

Interestingly Virgin’s new CEO Paul Scurrah, a high competent and experienced executive, but not really in airlines, had already started a streamlining and refocussing process, which was likely to be pretty severe, and it is also likely that the process of the creation of the new Virgin will continue  under the administrators but of course what will emerge at the end of the process will depend on the buyers.

The next and most critical phase underway right now is securing a new owner or investor and there are a number circling ready to part with their cash, currently around 20 with Twiggy Forrest also now in the running, with the first creditors meeting having taken place on 30 April with 1,300 creditors.

So, with so many players in the frame I am not going to speculate on who or which consortium might end up winning this fire sale to acquire Virgin, but be aware that the majority, even those that might partner with others are equity firms, who have very little interest in what they invest in, but they have an absolute passionate and interest in how little they need to pay, how much they can make and extract for the business…and how much they can sell their shares for at some time in the future and often quite soon!

This also might be the time when the Federal Government will kick the can, whatever else you hear,  either to help grease the wheel of the deal, to get it over the line, or possibly but highly unlikely as an investor and shareholder.

So, what kind of airline do I think Virgin Australia will emerge as going forward?

  • Much more singularly focussed on costs and revenue.
  • Offering a flying product that costs the least to provide and that makes most money.
  • It will move out of Virgin Australia’s battle with Qantas as a full service carrier, at least in economy as they may decide to keep the business class seats [as they will be expensive to remove] and lounges, but reduce and not offer all the expensive frills Virgin has offered to date to compete with Qantas.
  • It will revert to its roots, that is Virgin Blue started off, as a low cost carrier and while that means competing with Jetstar, that is where I believe Virgin belongs rather than the upper end of the market.
  • It will concentrate on profitable routes only and will simply not operate on unprofitable routes.
  • It will make quick decisions about those routes that work and those that don’t and will not operate the latter.
  • It will divest its regional operation unless it makes money to the same levels as the core operation, concentrating on key and high vole, high profit routes and destinations.
  • It will only operate to regional locations if they make money or are subsidised by state, regional or local government.
  • It will drop all international operations but will maintain any alliances it can with international carriers if they make commercial sense.
  • The frequent flyer programme may be retained as it is also a creditor, but it may be sold in due course.
  • It will emulate the model and business operations of the most successful low cost carriers globally.
  • While the administrators have said there will be no redundancies, they did add the caveat “for now” but expect Virgin to emerge with significantly fewer staff especially office and administrative staff and only enough crew to fly fewer aircraft on significantly fewer routes.  It will be a lean machine!
  • It will have many fewer aircraft, with possibly owned aircraft retained although some owned aircraft could be sold to raise cash, but now is not a good time time for selling aircraft, with any leased aircraft not required being returned.
  • The aircraft used on international routes will go, with Virgin Australia operating a fleet of 11 widebody aircraft, including six A330-200s used on transcontinental routes and five Boeing 777-300s, with all six of the A330s leased and one Boeing 777 leased.
  • It will revert as far as possible to being a single aircraft type fleet, most likely to be the Boeing 737 800.

So, there you have it, well my views at least and of course I may be wrong, but let us have your views by adding some comment below.

What is for certain though is that we will all have to wait and see what emerges when the buyers are announced which could be very soon, with the impact far reaching right across not only Virgin Australia, its staff and aviation but also tourism and economies throughout Australia!

John Alwyn-Jones

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