Virgin Australia Financially Secure? [Now in Voluntary Administration]

[Must...Fly!]

On Friday night 12 June (t'll be in 'The Weekend Australian' 13-14 June) an article from Terry McCrann re the administration. Part reads:



What Virgin Australia bidders are really fighting over

TERRY MCCRANN

'The funniest — sick — joke going around at the moment is the idea that we have two groups in an auction to buy Virgin; to take their chances on running a weak second airline against the dominant, financially strong and superbly structured and focused Qantas, into the challenges and monumental uncertainties facing airlines in the post-virus world.

In fact, the only thing they are “bidding” to buy is the right to get a range of other parties to donate their money to ensure that one of these Wall Street vultures can extract the greatest profit with the least risk and indeed the smallest financial contribution from the Virgin carcass.

The latest group who they want to put their hands in their pockets to ensure higher profits for them is you — the taxpayer.

They want the government to give them — either Bain Capital or Cyrus — another $180m or so by exclusively extending JobKeeper for Virgin Two. To have the taxpayer effectively pay the airline’s salary bill for the first six months of its life under its new owner.

The best way to understand what is going on in the auction behind closed doors is by way of this example: consider two people bidding to buy a house worth around, say $2m.

The one offering, say, $2.01m ends up winning over the other bid of, say, $2m flat. The $2.01m is paid; they own the house free and clear.

In the Virgin case the $2m “house” comes with a, say, $4m linked mortgage. It also comes with an order to spend $1m in mandatory repairs.

Clearly no one in their right mind would happily pay the $2m for the house, only to also pick up an immediate $5m liability. They’d in effect be paying $7m for a $2m asset...'

Except that $2m house is one of many with plentiful supply and the only revenue it can generate is the rent which is directly linked to the price of the asset.

On the other hand, Virgin Australia is a business that can generate growth and profit in an industry with probably the highest barrier to entry of any that exist with the possible exception of space flight...

 

[suze2000]

I'm considering booking flights with VA in August. Domestic. Anyone think I'm nuts?

 

[Must...Fly!]

I'm considering booking flights with VA in August. Domestic. Anyone think I'm nuts?

Probably safe. I have a wedding to attend in September in Perth, I'm going to book VA (well already have but have to try and change flights through ANZ without paying fees...) but back up with a QF award as well as insurance (free cancellation at the moment)

 

[RooFlyer]

In spite of the sneers here, McCrann is largely correct. The Private Equity bidders no doubt ARE after a subsidy from the Aust government to facilitate their buying the VA entity. That's the nature of 'Private Equity'. You in fact put the very least equity into a deal that you can get away with, which means selling as much as you can up-front and leasing it back, getting others to put their money in whose interests are subordinated to theirs (such as govt funds to 'save' jobs ), in order to get the maximum rate of return on their equity. Rates of return sought are often in the 30's% over 3-5 years, then exit. Why so high? Greed, of course, but Private Equity does put money into high risk ventures, where others fear to tread.

The headline will be "Virgin jobs saved!". The text will say 'Conditional offeror who got the nod from Administrators from yesterday are in desperate last minute negotiations with QLD/Aust/anywhere government for a $lots loan/cash injection ... etc .... blah blah else they will walk away ..."

Describing Private Equity as vultures is also correct by McCrann. Wikipedia has its limitations, but remember the phrase 'Vulture Fund'?

 

[Spongbob]

Is 'ESB'an abbreviation of 'eastern states' borders' or something else?

I saw this used in other threads by the same AFF member, and also wondered what it means.
My initial thought was Engineer Special Brigade; a non-flying method of travel.

I think it would be useful for readers if AFF posters adopt the practice of using words on the first occasion an abbreviation is used: e.g. ... Engineer Special Brigade (ESB) ...

 

[Melburnian1]

Ah the economist who was so rubbish the only job he could get was with a cough faux news outlet, clearly someone we can safely ignore.

I thought he made some very good points. As RooFlyer said, Mr McCrann is 'largely correct.' While he usually takes 1000 words to state what could be said in 500, the substance of his article is good and doesn't deserve sneers.

You're in Sydney so you may not understand the important role 'The Herald Sun' has played in Victoria for many years.

 

[Melburnian1]

I think it would be useful for readers if AFF posters adopt the practice of using words on the first occasion an abbreviation is used: e.g. ... Engineer Special Brigade (ESB) ...

This is a drawback of specialist blogs. Sometimes contributors assume that jargon or abbreviations they, but few others if any, use "must" be known by all.

 

[jakeseven7]

On the other hand, Virgin Australia is a business that can generate growth and profit in an industry with probably the highest barrier to entry of any that exist

Well this remains to be proven

But hopefully one of the new Wall Street PE funds that will be the new owner won't crash and burn it by hollowing it out over 3-5 years, selling it then it collapsing (again) like some articles are suggesting!

 

[Melburnian1]

...On the other hand, Virgin Australia is a business that can generate growth and profit...

I prefer to look at the lessons of history. Not perfect, but it shows that VA has overall made huge losses. Basket case!

 

[Must...Fly!]

Well the business can make a profit, I'm not saying it will.

I prefer to look at the lessons of history. Not perfect, but it shows that VA has overall made huge losses. Basket case!

If VA didn't have a free float and the accounts public, this assertion would be entirely different because each major shareholder had a strategic and not financial reason for investing in VA.

 

[HappyFlyerFamily]

Well the business can make a profit, I'm not saying it will.


If VA didn't have a free float and the accounts public, this assertion would be entirely different because each major shareholder had a strategic and not financial reason for investing in VA.

Can strategic mean loss-making? Yep, if it feeds bigger profits elsewhere....

 

[dajop]

I prefer to look at the lessons of history. Not perfect, but it shows that VA has overall made huge losses. Basket case!

Myer was purchased from ColesMyer was it not, by private equity, and then listed again? It’s doing really well now of course .... not.

It was however a tremendous transfer of wealth from Australian investors to Wall St! It was terrific success, depending on your point of view ....

 

[eastwest101]

I thought he made some very good points. As RooFlyer said, Mr McCrann is 'largely correct.' While he usually takes 1000 words to state what could be said in 500, the substance of his article is good and doesn't deserve sneers.

You're in Sydney so you may not understand the important role 'The Herald Sun' has played in Victoria for many years.

Yeah - for the administrators and potential bidders its all about getting sector specific assistance from the Federal Government (i.e. Jobkeeper), so far the Federal government seems unmoved by the possibility of allowing a monopoly to eventuate if there is no-relaunch of VA2, or another viable competitor but may be inclined towards sector support for tourism and aviation which have bourne the brunt of the Covid19 restrictions. We all know unsecured creditors will lose their shirt, aircraft lessors will also be taking a buzz cut because aircraft are pretty much worthless at the moment, its complicated by various state governments who are holding the travel industry hostage, and there will be opportunities/arbitrage in getting state borders open and when.

Barriers to entry in the industry are normally huge, right now there is a supply of aircraft, money is cheap (record low interest rates), fuel is cheap, a qualified workforce who are unemployed, the infrastructure is in place and the airport monopolists will be unduly motivated to do business with anyone thats not Qantas. The major problem now is that with international and state travel restrictions its difficult to estimate what size and scale a new or relaunched VA2 should be, to have the economy of scale but still not be too much of a financial hurdle to surmount.

The whole idea of shortlisting from 4 down to 2 bidders is a stupid way to sell/dispose of an asset/business and is purely for the convenience of the administrators, rather than to maximise returns for creditors. If I was selling an asset I'd want as open and transparent process as possible, and then an open market auction where every bidder is on the same playing field, with the same information and has one chance to put their best bid forward.

 

[Melburnian1]

... The major problem now is that with international and state travel restrictions its difficult to estimate what size and scale a new or relaunched VA2 should be, to have the economy of scale but still not be too much of a financial hurdle to surmount.

The whole idea of shortlisting from 4 down to 2 bidders is a stupid way to sell/dispose of an asset/business and is purely for the convenience of the administrators, rather than to maximise returns for creditors. If I was selling an asset I'd want as open and transparent process as possible, and then an open market auction where every bidder is on the same playing field, with the same information and has one chance to put their best bid forward.

Haven't ever had the pleasure of meeting eastwest101 but this is the usual scintillating analysis we've come to expect from him on AFF.

One small omission. Small business men and women who've either lost everything or had months of little, or less, revenue may be unwilling/unable to travel for leisure. Much as it'd be good for their mental state, the effect on the pocket may be more concerning.

Similarly, once JobKeeper stops (and even assuming JobSeeker rises, but becomes less than $1100/fortnight), there'll be a pool of unemployed/underemployed who in many cases may not be as quick to travel for holidays as in the past when they had ongoing employment.

Retirees' incomes may have become lower through ongoing low interest rates (even if in some cases they received that $750 bonus). And others who are younger may be reluctant to travel due to coronavirus, even if still OK or good financially.

All this feeds into a lower level of demand. There'll be some pent-up demand as jakeseven7 has previously opined but it's difficult to see it at the same level as the same month a year ago, even if QFd strikes gold with a (mostly) monopoly as VAd folds.

 

[jakeseven7]

The whole idea of shortlisting from 4 down to 2 bidders is a stupid way to sell/dispose of an asset/business and is purely for the convenience of the administrators, rather than to maximise returns for creditors.

From all the commentary on how poorly Deloitte have managed the process, some are pointing cynically that they designed the process to maximise their own fees...

 

[melb78]

well all I hope is that Bain does not get in as they will turn VA is a basket case. I think for VA to survive and thrive will be with cryas.

 

[RAM]

Can strategic mean loss-making? Yep, if it feeds bigger profits elsewhere....

Hit the nail on the head.

As far as the overseas airlines were concerned - VA was a loss leader to funnel people onto their respective international (& their own domestic networks if applicable). They took the naive-investor-thought-implication that they'd stand behind unsecured debt - something that is the exception NOT the rule in reality.

A bit like the JV between Intel & Micron making USB memory. Virtually always losing money or just breaking even BUT Intel used it to perfect manufacturing of next node nanometer chip-making. Get out all costs/issues with someone else footing 1/2 the bill. Once everything solved Intel then moved that IP into their CPU FABS. Got away with it for nearly 20 years. Micron thought getting access to the 'bleeding' edge tech would make them money - took a long time to learn that no one makes money out of Intel.

VFF is a money making machine that if VA did not resurface would sign up as a stand-alone partner with a number of international airlines together with the around 100+ Australian based 'partners' aka donors to the coffers.

On another linked qn on the VA process - Very hard to successfully dispute what an adminstrator charges in Australia. I am not sure there has EVER been one successful case - a worse closed-shop than the legal or medical fraternities IMHO. Fast & efficient is not a successful Administrators' business model.

Somewhat akin to the oft-quoted 'too many levels of Govt in Australai' yet no level of Govt & accompanied bureaucracy offer to vote themselves out of a job. Funny that!

 

[HS-TQE]

It could be argued that the EY and HNA investments in VAH were "ego-driven" (e.g JH from Etihad) to feed into their own networks which were later exposed as "failures" financially down the track. It probably didn't help that the person running VAH at the time was also strongly argued to be driven by the E word rather than make careful decisions.

While NZ's investment in VAH (under different management in the pre-Luxon era at the time) was considered strategic, the different NZ management in the later years could also be argued to be driven by the 'E' word later on as well, as evidenced by the 'battle of the egos' between Luxon and Borghetti.

 

[Borisdog]

Except that $2m house is one of many with plentiful supply and the only revenue it can generate is the rent which is directly linked to the price of the asset.

On the other hand, Virgin Australia is a business that can generate growth and profit in an industry with probably the highest barrier to entry of any that exist with the possible exception of space flight...

How come it didn't then?

Generate profit and growth that is.

 

[OATEK]

Hit the nail on the head.

As far as the overseas airlines were concerned - VA was a loss leader to funnel people onto their respective international (& their own domestic networks if applicable). They took the naive-investor-thought-implication that they'd stand behind unsecured debt - something that is the exception NOT the rule in reality.

A bit like the JV between Intel & Micron making USB memory. Virtually always losing money or just breaking even BUT Intel used it to perfect manufacturing of next node nanometer chip-making. Get out all costs/issues with someone else footing 1/2 the bill. Once everything solved Intel then moved that IP into their CPU FABS. Got away with it for nearly 20 years. Micron thought getting access to the 'bleeding' edge tech would make them money - took a long time to learn that no one makes money out of Intel.

VFF is a money making machine that if VA did not resurface would sign up as a stand-alone partner with a number of international airlines together with the around 100+ Australian based 'partners' aka donors to the coffers.

On another linked qn on the VA process - Very hard to successfully dispute what an adminstrator charges in Australia. I am not sure there has EVER been one successful case - a worse closed-shop than the legal or medical fraternities IMHO. Fast & efficient is not a successful Administrators' business model.

Somewhat akin to the oft-quoted 'too many levels of Govt in Australai' yet no level of Govt & accompanied bureaucracy offer to vote themselves out of a job. Funny that!

Hard to know though whether those overseas airlines ever made money out of the arrangement. I suspect they did not after accounting for the losses on their investment in VA.