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Value of Virgin's Velocity axed in report

HappyFlyerFamily

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Why does a valuation matter if there is/was cash to back up the points as it was prior to the administration process?

If anything a downward revaluation allows Bain to take out cash out of the Velocity trust. If the points are worth less then less cash is needed in trust to pay out the points.

It does get confusing at times lol
 
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RAM

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It's Ground Hog Day (again!)

End of the world for VA (or close to it).

There is a certain other airline in Australia that had wiped out its total pre-existing equity by June 30 (before counting the new $1.3bn raised on June 26th) this year, but managed to raise $1.3bn through an issue to institutions (aka Fund Managers, most of whom operate a quasi-index basis = hold nearly all companies in their funds roughly the same as their weight in some sharemarket index regardless of their health) on June 26th.

Buried in the back of its 2019/20 Annual Report (pg 103), lists Qantas Airways Limited "Total Equity" as at June 30th of $1,203m.

Now if maths has not changed, they raised $1.34bn just 4 days earlier, doesn't that mean that they'd wiped out their existing equity (prior to the new raising) & then some to otherwise have negative equity (without the issue) of around $130m? Compared with the equity at 30.6.2019 of $2,858m - so after tax etc did Qantas Airways Limited wipe out close to $3 billion or roughly $4,250m pre-tax since CV began to intrude in late February?

Despite this background - Q only cancelled its previously announced interim dividend (pending $201m cash outflow) in June 2020 (pg 91) believed to have been done around the time of the institutional raising.

Q has Capital expenditure commitments of $9,028mn (contracts for new planes) outstanding. These appear to be 'off' balance sheet, and Q states that they have the right to defer (does not say at what cost though) but not reneg on. Given Q demanded compensation from Boeing for the delay in the B787s being delivered....

Putting these commitments into perspective, as at 30 June 2020, Q valued their 300+ aircraft & spare engines at $9,785m.

So if Q's position is reported in the same way that VA's was (by the media & commentators) with ALL liabilities & the sum of all lease payments rather than the PV of leases - then Q would seem to have an excess of significantly >$10bn in liabilities over assets. But, presented in the normal manner, it doesn't. Mind you the remaining newly raised equity seems to be almost entirely represented by 'intangible' assets - things you cannot touch such as goodwill, software or 'contract intangible assets' ($1,050m in total).

Now how does this make sense when Q says it had over $2bn in unencumbered assets as of June 30? Perhaps it is because, unlike VA & VFF, QFF points may not be held in trust & cash-backed. Who knows? Perhaps that is what led to Q restricting redemptions from QFF days before VA did?

However, the spin (sin?) doctors are working overtime to keep the focus on VA Mk II - for a reason perhaps? Has anyone else noticed that a certain CEO &MD has virtually disappeared from view over the last 5 months vs being in the media 5-7 times a week earlier this year - often discussing VA in not encouraging ways.

An extreme 'conspiracy theorist' may suggest that it is not Q nor anyone else but Bain themselves seeding or encouraging all this negative speculation to ensure the deal gets final sign-off by the Courts.

Back to the article & valuation. Towards the end of the article a very well written (& thought out) few words:

"The FTI report would have had to value Velocity at $1.5 billion or more to push the overall value of Virgin's equity into positive territory under a "high" valuation scenario and possibly stall the 444GA application." [My emphasis added]

Enough said.
Not a good look for Bain after seeing VAH actually has little (if any) assets left of any Value. VFF was meant the 'most valuable' out of what's left of VA's un-encumbered assets.
Does make you wonder what value QFF actually has, if indeed issued QFF points are not cash backed? If not cash backed then Q shows a value of $2.8bn for outstanding QFF points (not 100% of outstanding issued QFF points but PV of them). As Q stated repeatedly its total cash & liquid assets totalled under $4bn & they were 'available' would seem to imply that QFF points are unsecured creditors.

When you go to buy a used car do you tell the seller ; "I will pay you $2,000 for your car but it is worth $3,000."
Ouch. Virgin Australia paid $700m to buy back a 35% stake from Affinity Equity Partners just a year ago!

It just goes to show: frequent flyer programs may be a golden goose for airlines, but they can only be successful if you have a strong, appealing airline to back them up.
Or that valuations may well depend on what purpose they serve & assumptions made. A bit like a case currently in the media about the Fed Govt buying land near the Badgery's Creek airport site based on one valuation provided by the seller that just happened to be 10x higher than any previous or subsequent valuation.

Horses for courses.
Is that even remotely possible under current circumstances ?
Sure is.

VFF had over 10m members vs QFF around 13m. QFF managed to pull value out of their scheme more than double the per member amount that VFF did. I wonder if the new CEO has any knowledge of how Q does it. PS certainly did not appear to....
I hope they are not going to come up with 1+1 = 11 instead of 2 . I was always loyal to VA/VFF but slowly looks like I will have to change my friends.
Bain has to sit there biting its tongue until the two dates in November for the court ruling & possible appeal date go by. Otherwise our favourite $2 companies/blowhards could attempt another stalling action.

I would not be in any rush to make a decision on VA or VFF before early December.

Meanwhile the window for those wanting to profit from VA's demise is fast closing - no coincidence on the number of negative 'leaks' coming out in the last 6 weeks.

This time could indeed be different (but 99 times out of 100 backing that outcome sees you lose money) but Bain have not been around for so long & banking billions in profits without a reason. Stupidity is not one attribute you will find associated with Bain though.
 

moa999

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Q has Capital expenditure commitments of $9,028mn (contracts for new planes) outstanding. These appear to be 'off' balance sheet, and Q states that they have the right to defer

....

So if Q's position is reported in the same way that VA's was (by the media & commentators) with ALL liabilities & the sum of all lease payments rather than the PV of leases - then Q would seem to have an excess of significantly >$10bn in liabilities over assets. But, presented in the normal manner, it doesn't.

There is a reason VA had to account for all those liabilities - they went into Voluntary Administration.
At which point by contract they become immediately payable.

In an operating airline it's in the future, and will be offset by future revenue and profit, (and in the case of finance leases you will fully own the asset). And you aren't recognising those either.

Same for future Capex.

Personally in a large company that's been around for a while I don't tend to focus on net equity.
Accounting isn't perfect and it's conservative by nature (eg. Things like historical cost) and it doesn't handle asset light businesses well.
Eg. If you stripped QFF out it probably has zero Net Equity. It's a notional Cash/Investment asset (though in QFs case it's pooled and not in a trust), offset by a Deferred Revenue liability (the points outstanding). Yet even on this revised Velocity valuation, we know QFF is worth billions - you just can't see it in the balance sheet.

And if someone acquired QFF there would probably be a large Goodwill entry.. bamm asset created out of magic.
 

ozstamps

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Bain have not been around for so long & banking billions in profits without a reason. Stupidity is not one attribute you will find associated with Bain though.

Nothing to do with stupidity - but all to do with just terrible timing I'd suggest.

6 months back when Bain started on this, most assumed by Xmas things would largely be business as usual in the airline biz.

A few Billion bucks down the tubes later, and nothing resembling even a moderate return to flying is on the horizon. Anywhere sadly. Bain have lost every cent of that so far.

Qantas seems near technically insolvent, so Bain have no hope I'd suggest in today's climate.

Bain will take a MASSIVE haircut here, no matter how savvy any past deals might have been. You can't win them all. :D
 
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RAM

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There is a reason VA had to account for all those liabilities - they went into Voluntary Administration.
At which point by contract they become immediately payable.
Just doing a like for like comparison. I'm not so sure Q can be described as conservative as far as any of their asset valuations go - with the 11+yr old A380s valued at over $50m each on a disposal basis. As there has not been a single sale of a used A380 ever, & the ones SIA returned to the lessor as soon as they reached 10 yrs of age were sent to part out & scrap but from reports have generated almost zero value in used parts sales. Emirates has announced they're retiring some currently.

QFF appears to have zero assets and a $2,800+m liability - as far as the Annual Report details. There is no asset 'held' specifically to offset that liability - Q makes that clear when it states that all its cash & short term assets are available as liquidity.

Q is months behind in paying out the 6,000+ redundancies that were due to be fully completed by Sept 30th. Credible reports of Q staff who agreed to Voluntary Redundancy & were accepted by Q in July have still not received their payout (all up $600m or more to go out). AFFers continue to report not receiving their cash refunds from flights cancelled in April that were booked directly with Q, realised & soon to be called losses on fuel hedging (mainly) of over $500m is due to be paid out, all in addition to the weekly operational cash burn.

In an operating airline it's in the future, and will be offset by future revenue and profit, (and in the case of finance leases you will fully own the asset). And you aren't recognising those either.

Same for future Capex.
Under the newish accounting standards, the finance or operating leases have been brought on balance sheet but tellingly - Q did not writedown the value of nearly 300 of their aircraft by $1. Now the leases have fixed payments throughout their term and Q takes the risk on the underlying aircraft value. That's despite Q officially announcing that they expect around 100 planes will be grounded for the entire financial year, with some (the A380s) for up to 3 or more years.

All these planes are generating losses for Q not profits, through storage costs, ongoing maintenance, lease or other financing costs etc. Q recently mentioned that QI accounts for $800m of depreciation per annum.

Q also has property leases for around 2,000,000 sqm of space globally, with roughly 90% on airport. That weekly, fortnightly, monthly cash drain continues regardless of not flying. Q has already been trying to sublet approx 40% of their 47,000 sqm leased Sydney HQ space that is only a couple of years into a long term lease.

There is no guarantee that Q will survive long enough to start making a profit on international flying again.

Personally in a large company that's been around for a while I don't tend to focus on net equity.
Accounting isn't perfect and it's conservative by nature (eg. Things like historical cost) and it doesn't handle asset light businesses well.
Eg. If you stripped QFF out it probably has zero Net Equity. It's a notional Cash/Investment asset (though in QFs case it's pooled and not in a trust), offset by a Deferred Revenue liability (the points outstanding). Yet even on this revised Velocity valuation, we know QFF is worth billions - you just can't see it in the balance sheet.

And if someone acquired QFF there would probably be a large Goodwill entry.. bamm asset created out of magic.
Hmm, well known companies can provide false sense of security.

How many Top 50 Australian listed companies had to be bailed out or went bankrupt, not just into voluntary administration, every economic downturn? One or two of is it up to 15 or 16?

Since the 1980s, the figure is closer to 15 or 16. Then add in State Govt or unlisted 'well known names'. Heard of AMP?

Woolworths, Fairfax, Bell Resources, Bell Group, Ariadne, Qintex, FAI, HIH, GIO, Bond Corporation, Optus, OneTel, Network Ten, BankWest, State Bank Vic, Estate Mortgage, State Bank SA, Dick Smith . BTW Woolworths & Fairfax were in the late 80s early 90s. Add in a number of property developers, shopping centre groups, real estate chains, all listed stock brokers at one point of time. Even "Official Money Market dealers" with the RBA as lender of last resort.

If a company cannot generate the cash to cover its liabilities as & when they fall due then it fails. Q is not only failing to generate cash, it is rapidly burning through what cash it has. Does that explain why it issued a $500m unsecured bond in July/August with a 5.50% coupon (cost) when 'good companies' can borrow cash at below 0.70% in Australia currently?

With the value of VFF being called into question & people wondering what they should do with their points etc - that makes the viability of Q very relevant. Q would have have had no choice but to go into administration (not voluntary) if the June 26th equity raising had failed however nowhere did Q reveal to the market that they expected to have negative shareholders funds by June 30th given the writedowns they were required to make - or at least I cannot find any sign of this relevant disclosure.

That raising & the failed retail offer in July/August merely provided some breathing space - not solved the problem.

Zero or negative shareholder funds normally provides lenders the right to demand repayment of their loans, in some cases they have no choice (such as bond issues).

With Q's cash burn continuing at a minimum of $40m/week (last figure Q mentioned as a target to reach) - that would wipe out Q's remaining equity by around late December/early January. Remember that Q had received over $500m from various Govts through to June 30th, and received more since then - and still it is likely to exhaust all its $1.4bn of June & August equity raised.

That is in approximately two months.

As Q's QFF scheme appears not cash-backed - then the idea of seeking to build QFF points in preference to VFF points appears a bad choice.

Of course I can be completely wrong - but the numbers suggest otherwise.
 

RAM

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Bain have not been around for so long & banking billions in profits without a reason. Stupidity is not one attribute you will find associated with Bain though.

Nothing to do with stupidity - but all to do with just terrible timing I'd suggest.

6 months back when Bain started on this, most assumed by Xmas things would largely be business as usual in the airline biz.

A few Billion bucks down the tubes later, and nothing resembling even a moderate return to flying is on the horizon. Anywhere sadly. Bain have lost every cent of that so far.

Qantas seems near technically insolvent, so Bain have no hope I'd suggest in today's climate.

Bain will take a MASSIVE haircut here, no matter how savvy any past deals might have been. You can't win them all. :D
Sure can't win them all (yet!) but I think you may be "Mark Twain'ing" Bain here. After mid-November the news flow will be very different.

Not sure if by 'a few Billion bucks down the tubes later' you mean that Bain has lost that. If so, then you'd be mistaken.

Bain bid $3.5bn for everything, including VFF. That $3.5bn covers paying off all staff & honouring flight credits. As VFF is/was supposed to be fully cash backed in a separate vehicle (trust) - then Bain gets the 10 million account database for nothing effectively. Big data is what makes money these days - just look at Google's (Alphabet) results released overnight. BTW that was not $3.5bn of equity either.

Bain, just like Q, has had the Fed Govt JobKeeper paying most of its wages bill. All of the former property leases have either been cancelled, or renegotiated on favourable terms. No sub-letting & paying the difference for VA unlike Q. VA now has the lowest cost fleet of any airline in the world. Possibly at just 40-50% the effective cost that Q currently has due to Q's existing leases & contractual obligations.

On any route, for the same ticket price - VA Mk II will make multiples what Q will before any overheads are taken into account.
 

jakeseven7

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Just doing a like for like comparison. I'm not so sure Q can be described as conservative as far as any of their asset valuations go - with the 11+yr old A380s valued at over $50m each on a disposal basis. As there has not been a single sale of a used A380 ever, & the ones SIA returned to the lessor as soon as they reached 10 yrs of age were sent to part out & scrap but from reports have generated almost zero value in used parts sales. Emirates has announced they're retiring some currently.

QFF appears to have zero assets and a $2,800+m liability - as far as the Annual Report details. There is no asset 'held' specifically to offset that liability - Q makes that clear when it states that all its cash & short term assets are available as liquidity.

Q is months behind in paying out the 6,000+ redundancies that were due to be fully completed by Sept 30th. Credible reports of Q staff who agreed to Voluntary Redundancy & were accepted by Q in July have still not received their payout (all up $600m or more to go out). AFFers continue to report not receiving their cash refunds from flights cancelled in April that were booked directly with Q, realised & soon to be called losses on fuel hedging (mainly) of over $500m is due to be paid out, all in addition to the weekly operational cash burn.


Under the newish accounting standards, the finance or operating leases have been brought on balance sheet but tellingly - Q did not writedown the value of nearly 300 of their aircraft by $1. Now the leases have fixed payments throughout their term and Q takes the risk on the underlying aircraft value. That's despite Q officially announcing that they expect around 100 planes will be grounded for the entire financial year, with some (the A380s) for up to 3 or more years.

All these planes are generating losses for Q not profits, through storage costs, ongoing maintenance, lease or other financing costs etc. Q recently mentioned that QI accounts for $800m of depreciation per annum.

Q also has property leases for around 2,000,000 sqm of space globally, with roughly 90% on airport. That weekly, fortnightly, monthly cash drain continues regardless of not flying. Q has already been trying to sublet approx 40% of their 47,000 sqm leased Sydney HQ space that is only a couple of years into a long term lease.

There is no guarantee that Q will survive long enough to start making a profit on international flying again.


Hmm, well known companies can provide false sense of security.

How many Top 50 Australian listed companies had to be bailed out or went bankrupt, not just into voluntary administration, every economic downturn? One or two of is it up to 15 or 16?

Since the 1980s, the figure is closer to 15 or 16. Then add in State Govt or unlisted 'well known names'. Heard of AMP?

Woolworths, Fairfax, Bell Resources, Bell Group, Ariadne, Qintex, FAI, HIH, GIO, Bond Corporation, Optus, OneTel, Network Ten, BankWest, State Bank Vic, Estate Mortgage, State Bank SA, Dick Smith . BTW Woolworths & Fairfax were in the late 80s early 90s. Add in a number of property developers, shopping centre groups, real estate chains, all listed stock brokers at one point of time. Even "Official Money Market dealers" with the RBA as lender of last resort.

If a company cannot generate the cash to cover its liabilities as & when they fall due then it fails. Q is not only failing to generate cash, it is rapidly burning through what cash it has. Does that explain why it issued a $500m unsecured bond in July/August with a 5.50% coupon (cost) when 'good companies' can borrow cash at below 0.70% in Australia currently?

With the value of VFF being called into question & people wondering what they should do with their points etc - that makes the viability of Q very relevant. Q would have have had no choice but to go into administration (not voluntary) if the June 26th equity raising had failed however nowhere did Q reveal to the market that they expected to have negative shareholders funds by June 30th given the writedowns they were required to make - or at least I cannot find any sign of this relevant disclosure.

That raising & the failed retail offer in July/August merely provided some breathing space - not solved the problem.

Zero or negative shareholder funds normally provides lenders the right to demand repayment of their loans, in some cases they have no choice (such as bond issues).

With Q's cash burn continuing at a minimum of $40m/week (last figure Q mentioned as a target to reach) - that would wipe out Q's remaining equity by around late December/early January. Remember that Q had received over $500m from various Govts through to June 30th, and received more since then - and still it is likely to exhaust all its $1.4bn of June & August equity raised.

That is in approximately two months.

As Q's QFF scheme appears not cash-backed - then the idea of seeking to build QFF points in preference to VFF points appears a bad choice.

Of course I can be completely wrong - but the numbers suggest otherwise.

Who knows if you are wrong but the topic is VA and VFF....
 

RAM

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Who knows if you are wrong but the topic is VA and VFF....
Spot on!

Just backing up my opinion (with too many facts) about why the people suggesting they & others should bail out of VFF & concentrate on earning QFF points may be very misguided.

With VA's pre-CV operation - were all lounges in Australian operated by VA staff?
 

HS-TQE

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Not sure about the regional domestic lounges, though the 'International' terminal lounges on the East Coast were operated by the third party company 'No 1 Lounges'
 
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ozstamps

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I'd always had the impression front line staff at Capital City domestic Lounges were all Virgin employees.
 

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