Not unlike what happened to Australia’s car manufacturing industry, Virgin Australia has been allowed to collapse into administration thanks to a conscious decision from the Coalition government. It was formally announced to the ASX at 8.51am this morning.
The 11 person Virgin Australia board has lost control and four administrators from Deloitte are now in charge, although the management team remains in place under CEO Paul Scurrah.
The government formally rejected Virgin’s $1.4 billion loan request and will now have to own some of the consequences which flow from that.
Through this deliberate act, the government has decisively removed five foreign airline shareholders from the equation, crystallising collective losses for them of more than $1 billion:
- Etihad: 20.94%
- Singapore Airlines: 20.09%
- Chinese conglomerate Nanshan Group: 19.98%
- Chinese tourism conglomerate HNA: 19.82%
- British billionaire Richard Branson: 10.42%
Frankly, the presence of three different sovereign governments — Singapore, UAE and China — on the register made it much harder to justify a bailout. If those governments weren’t prepared to save Virgin in its current form why should Canberra?
All have bigger battles to face closer to home — Richard Branson has written a plaintiff letter seeking UK government support to save his 51% owned Virgin Atlantic, plus the wider Virgin group.
Amongst the current shareholders, the government’s preferred owner of Virgin Australia is probably Singapore Airlines, but that will now be in the hands of administrators, who are seeking “to restructure and refinance the business and bring it out of administration as soon as possible”.
As was the case when Ansett collapsed, Virgin’s 10,000 staff will be a powerful player in the administration process and will have first dibs on the $500 million-plus in cash still sitting on the Virgin Australia balance sheet. But any new owner will have to be persuaded as to precisely how many planes, staff, airport leases and the like that it is prepared to take on.
So what happens next? The parties owed the $5.3 billion in debt — plus the additional huge sums that will be owed to staff, creditors, frequent flyers, airports and aircraft manufacturers — will need to be identified and quantified in the weeks ahead.
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A creditors committee will be formed and the creditors, including staff, will ultimately decide who owns Virgin going forward.
The federal government will no doubt be influential. It is already a large and growing creditor which is directly funding Virgin’s skeleton service at the moment. Virgin may also be one of the largest participants in the JobKeeper scheme.
If the company’s new owner is foreign, it will need approval from the Foreign Investment Review Board, and that would certainly be unlikely for any bidder associated with the Chinese government.
A quick sale is hard to comprehend because it’s unclear who would be prepared to pay serious money for Virgin until it is clear how long travel bans will last, how much cash this COVID-19 crisis will burn through and how much cost has been permanently taken out of the business during the administration process.
The Ansett administration process was very much driven by the Australian Council of Trade Unions, other unions and the workforce. Its frequent flyer creditors were dismissed as silvertail creditors who could be ignored.
It may be different this time — Virgin’s Velocity frequent flyer business was valued at more than $2 billion just last year when Virgin agreed to pay $700 million to buy back the 35% stake it didn’t own from a private equity firm.
Today’s ASX announcement stressed that Velocity is a separate business which hasn’t gone into administration and is not branded “Virgin”.
However, without an associated flying airline that has a 32% market share in Australia, the value in that business would clearly be much diminished. To preserve maximum value, the empire needs to be kept together.
Qantas was last night capitalised at $5.3 billion — the same nominal number as Virgin’s debt. Realistically, the entire Virgin business should be worth around $4 billion, once the travel restrictions are lifted and assuming the federal government retains its policy position of supporting a domestic duopoly in the Australian aviation market.
However, whoever buys the business won’t necessarily have to keep calling itself Virgin. After all, a change to Ansett or even Australian Airlines would end the excessive $10 million a year that Richard Branson pocketed for many years just for the use of his Virgin brand.
Whatever happens, 17,000 small shareholders in Virgin have lost the lot, the lenders will clearly drop more than $1 billion in any restructure and thousands of staff will be negatively impacted.
Virgin has paid a heavy price for the controversial decision of former CEO John Borghetti to invest heavily in trying to match Qantas as a full-service airline, including cranking up its international offering. This will now be partially unwound — it is just a question of how much.
Qantas will be a clear winner as yet another of its competitors bites the dust.
The federal government is briefing out that Virgin will continue under new ownership and there is no way Qantas will be allowed to become a dominant monopoly.
Having green lighted today’s collapse, it will need to ensure that is the case.