Virgin Australia forced into voluntary administration, as Deloitte says ‘there are no plans to make redundancies’
Virgin Australia has entered voluntary administration, leaving the jobs of at least 15,000 airline workers and connected supply chain workers under a cloud.
- Virgin Australia is now being run by Deloitte administrators, who will work with the company on paying off its debts
- Virgin Group founder Richard Branson has vowed that the airline will be “back up and running” soon
- Airline industry experts say the administrators will now have to make tough decisions, including reducing planes and staff
In a statement to the ASX, the airline said the move would help “recapitalise the business” and ensure it emerged “in a stronger financial position on the other side of the COVID-19 crisis”.
The board of directors has appointed Deloitte’s Vaughan Strawbridge, John Greig, Sal Algeri and Richard Hughes as voluntary administrators of the company and a number of its subsidiaries.
Mr Strawbridge said there were “no plans to make any redundancies”. The airline will continue to operate its scheduled international and domestic flights.
Velocity Frequent Flyer, while owned by the Group, is a separate company and is not in administration.
Treasurer Josh Frydenberg ruled out a rescue package from the Federal Government.
“The Government was not going to bail out five large foreign shareholders with deep pockets who, together, own 90 per cent of this airline,” Mr Frydenberg said.
Former Macquarie CEO Nicholas Moore had been appointed to engage with the administrator on behalf of the Government.
“Our objective is two commercially viable, major domestic airlines operating in Australia,” Mr Frydenberg said.
Virgin saw its cash flow collapse because of tough coronavirus travel restrictions and is saddled with more than $5 billion debt.
It has already stood down 80 per cent of its direct workforce and announced 1,000 redundancies in the past few weeks.
The airline called in the administrators after the Federal Government refused to step in with a $1.4 billion loan, despite repeated pleas from company management.
Virgin has also been in talks with the New South Wales and Queensland state governments, but is yet to secure support.
Credit ratings agencies had already downgraded the airline and had given it until September to survive.
‘Australia needs a second airline’
Administrator Vaughan Strawbridge said several parties had expressed interest in the business and they were “progressing well on some immediate steps”.
He said it would take about three weeks to assesses more than 10 expressions of interest that had come through, and the whole process would be over within “two to three months”.
Mr Strawbridge said he did not plan to make any of the airline’s 10,000 employees redundant, but how many aircraft it kept, and how many routes it continued to fly on, would not be clear until the new owners took over.
He did not indicate if other foreign airlines were among those to express an interest.
“Our intention is to undertake a process to restructure and refinance the business and bring it out of administration as soon as possible,” he said.
“There [are] no plans to make any redundancies. Wages will continue to be paid, and those who have been stood down, and are accessing JobKeeper, the intention is to continue to make those payments available to those staff.”
Virgin chief executive Paul Scurrah said he took comfort from Mr Frydenberg’s comments about Australia needing two airlines.
“In 20 years, the Virgin Australia Group has earned its place as part of the fabric of Australia’s tourism industry,” Mr Scurrah said.
“We employ more than 10,000 people and a further 6,000 indirectly, fly to 41 destinations including major cities and regional communities, have more than 10 million members of our Velocity loyalty program, and contribute around $11 billion to the Australian economy every year.
“Australia needs a second airline and we are determined to keep flying.
“We’ll come back leaner, stronger and fitter.”
Mr Scurrah said when the board met on Monday night it decided that without an end in sight for coronavirus it had no choice but to make the call to go into administration.
“We didn’t trade our way into this problem, we had our oxygen supply completely cut off,” Mr Scurrah said.
It was crucial for a second airline to remain in the market to ensure cheap airfares, he said.
“The bigger our reach, the further we can extend our robust competitiveness; the better the Australian travellers will be,” Mr Scurrah said.
Virgin also has been a sponsor of sport, including the AFL and the V8 Supercars. Mr Scurrah said they would “work through every one of those contracts as part of administration”.
Travel credits to remain in place, but ‘no guarantee’
Mr Strawbridge said it was likely that customer’s travel credits would remain in place.
He said there was a lot of “goodwill” associated with the airline keeping customers’ travel credits, but he could not guarantee it.
“Ultimately that’s for the interested party that buys the business,” he said.
“But we can’t provide a guarantee around those.”
He said Velocity was a separate legal entity but was a key part of the Virgin brand, and people’s points wold still be preserved “at this stage”.
However, there had been an already-announced four-week freeze on redemptions.
Mr Strawbridge said prior to the freeze there had been a run on people using their frequent flyers points, which they were not able to slow down.
He said there was “sufficient cash resources” to continue to operate Virgin Australia, and there were parties willing to give funding if they required it.
The preference was to sell the business as a whole, rather than break off individual assets.
He said the question of whether the airline had been carrying too much debt would be looked at as part of the administration process.
At this stage they were not moving the airline’s headquarters from Brisbane, but would continue to consult with any interested parties.
Richard Branson vows to ‘never give up’, have airline ‘back up and running’
In a statement to staff, Virgin Group boss Richard Branson said the airline had brought competition and lower airfares to Australia’s skies.
Virgin Group is a 10 per cent shareholder in Virgin Australia.
“I know how devastating the news today will be to you all,” Mr Branson said.
“In most countries federal governments have stepped in, in this unprecedented crisis for aviation, to help their airlines. Sadly that has not happened in Australia.”
But he said he was “never one to give up” and that the Group was “determined to see Virgin Australia back up and running soon”.
“This is not the end for Virgin Australia, but I believe a new beginning.”
Virgin Group CEO Josh Bayliss said the impact of the COVID-19 pandemic had been “unlike anything the airline industry has ever seen before”.
“Virgin Australia has been hit by a crisis completely outside of its control,” he said.
A Qantas monopoly in the Australian domestic market would have “serious adverse consequences” for customers and the industry.
“Our intention is to work with administrators and the management team, along with investors and government, to ensure that Australia maintains two airlines,” he said.
Mr Scurrah was asked why Mr Branson did not step in with his own cash to save the airline.
He said he spoke to Mr Branson on a regular basis and that he “cares deeply about Virgin Australia”.
“Richard’s portfolio has hotels, cruise lines and airlines, so you can understand that Richard is hurting,” Mr Scurrah said.
“But he’s doing everything he possibly can to help us get through this and maintains a strong interest in participating going forward.”
Calls to preserve jobs, workers’ entitlements
Transport Workers’ Union national secretary Michael Kaine said the Federal Government should approach administrators with a plan to ensure the preservation of workers’ entitlements.
“We urge the Federal Government to sit down with the trade unions representing the 16,000 Virgin workers to work out a plan to go before administrators,” he said.
ACTU president Michele O’Neil said the Federal Government would be responsible for the biggest airline collapse in Australia’s history if it did not intervene.
“Sixteen thousand workers and their families have been abandoned by the Government,” she said.
“It is not too late. Virgin Australia can still be rescued. It must keep trading in administration, and then come out of administration with new shareholders that include the Federal Government.”
Narrow Road Capital funds manager Jonathan Rochford said the blame for Virgin’s problems ultimately lay with its management and board, who failed to act during a decade when the airline did not make a decent profit.
He said the administrators would now move quickly to cut costs and preserve cash, while maintaining as many jobs as they could.
“Expect some rapid-fire decisions on reducing planes and staff,” Mr Rochford said.
Current CEO Paul Scurrah would be the first call for any potential buyer, he predicted.
“I wouldn’t be surprised if he’s running the business again in the not too distant future.”
Opposition Leader Anthony Albanese, who has repeatedly urged the Government to step in with a $1.4 billion loan, said Qantas would now be left with a monopoly, which would have “very significant” consequences for consumers.
But Deputy Prime Minister Michael McCormack said there was a path forward under voluntary administration to recapitalise and restructure the business.
He said the Federal Government had given the airlines a $715 million package which included waiving certain fees and charges when they were flying planes.
“It has been a dreadful situation,” he said.
“We understand, we acknowledge that and we want to see Virgin come out the other side.”
Will higher airfares be on the cards?
IBISWorld senior industry analyst Tom Youl said the airline itself may emerge from bankruptcy proceedings under new ownership, and in a better position.
But in the meantime, he said there was no third airline waiting in the wings to fill capacity gaps, which may be bad for consumers.
The Sydney-Melbourne route ranks second for aircraft movements and third for passenger volumes among all global flight paths.
“The most likely outcome of a Qantas monopoly is higher airfares, unless the flag carrier undertakes a strategy to buy the goodwill of the Australian public by keeping airfares stable, knowing that a second airline will eventually enter the market,” Mr Youl said.
StrategicAero Research chief analyst Saj Ahmad said Virgin Australia “never really seemed to monetise its market share in its cut-throat competition with Qantas”, and because of COVID-19, its foreign shareholders were never going to step in.
Virgin Australia is majority foreign-owned by Etihad Airways (20.94 per cent stake), Singapore Airlines (20.09 per cent), Nanshan Group (19.98 per cent), HNA Group (19.82 per cent) and Richard Branson’s Virgin Group (10.42 per cent).
“Etihad’s own losses over the last few years, alongside its own poor investment choices in the now-grounded Jet Airways and essentially bankrupt Alitalia and deceased Air Berlin, meant that Virgin Australia was never really going to receive any more cash out of Abu Dhabi ever again,” he said.
And with Singapore Airlines vying to bolster its own position in Australia, he said Virgin Australia was at the periphery of that airline’s investment focus.
“It’s a bitter pill for investors, but the Australian Prime Minister, Scott Morrison, is absolutely right not to bail out any one specific company amidst the COVID-19 pandemic,” Mr Ahmad said.
“If we start going down that route, who decides which company is viable or not, and which will provide better returns on investment? Critically, would Qantas qualify for a similar financial injection too? Where do you draw the line?”
He said in the immediate term, consumers would not necessarily feel a threat from a possible Qantas monopoly.
“With millions losing their jobs around the world, even if all aviation returns to normal tomorrow, how many are going to have disposable income to fly?” he asked.
He said any airline that tried to raise prices in that environment would face financial ruin.
“For that reason, I see some serious price discounting so that airlines can entice people back on board,” Mr Ahmad said.
“Qantas too will have little choice but to lop fares to get bums on seats.”