Virgin Australia Financially Secure? [Now in Voluntary Administration]

[Melburnian1]

I've not read the article as haven't yet bought 'The Herald Sun' (paywalled online) but longstanding business commentator Terry McCrann (Monday 27 April) is another who believes that the VA administration won't end well (for those hoping for some resurrected creation).

 

[Doctore1003]

Terry McCrann is a crank best ignored.

 

[Melburnian1]

Terry McCrann is a crank best ignored.

He has a lot more readers than you or I. Does tend to take too many words to make a point, but often on the money.

 

[jakeseven7]

May i kindly ask does VA fares normally gets more expensive than a comparable QF fare? or the reverse?

It depends on the route, the fare buckets available and if there are any sales available. In GENERAL (please don't scream at me for all the small exceptions people!), assuming no sales, all fare buckets available - most routes QF slots in a little above VA on semi/full flex fares. But QF understand BFOD and know that most BFOD have tolerance and price accordingly that they can still win on corporate BFOD rules. So QF is able to extract a premium in general for most airfares v VA because people believe the difference is worth it.

Then you start getting complicated on routes like the golden triangle where QF has much more frequency than VA, this means they can flank around VA flights (e.g. flying Syd-Mel every 15 mins) and offer lots more fare buckets at the same price / maybe a little more - so they scoop up the BFOD passengers here as well.

Then you get really complicated and most corporates with QF do not pay the advertised price. So you see people on here for example consistantly saying 'well VA is always $200 cheaper for me' not realising a lot of corporates have access to QF fare buckets that are not publicly available AND have rebates etc available that brings the actual cost down.

Then on some routes (lets say - Tassie, Launceston) where QF will fly a Q400, almost full, more frequently, on the smell of an oily rag (petrol wise) and VA because they have little fleet flex have to fly a heavy gas guzzling 737, with lots of spare seats AND charging less for the fares - you get in a really nasty financial situation where VA can't command the same price as QF, have a very similar cost base, and very little fleet flexibility for routes that are a little skinny.

So its no surprise that the running commentary is for VA to reduce costs (move back towards DJ days, try and regain a cost base advantage) and only fly trunk routes, leaving the unprofitable skinny routes - or at least scaling the skinny routes back significantly.

But all in all QF are able to extract a premium price for their product, and have a similar cost base to VA, which is why one is successful and one is not.

 

[Quickstatus]

On all other routes I found VA consistently cheaper and usually cheaper enough to skip the J lounge.

Is that one of the reasons why it is in so much debt

 

[tomlee1986]

It depends on the route, the fare buckets available and if there are any sales available. In GENERAL (please don't scream at me for all the small exceptions people!), assuming no sales, all fare buckets available - most routes QF slots in a little above VA on semi/full flex fares. But QF understand BFOD and know that most BFOD have tolerance and price accordingly that they can still win on corporate BFOD rules. So QF is able to extract a premium in general for most airfares v VA because people believe the difference is worth it.

Then you start getting complicated on routes like the golden triangle where QF has much more frequency than VA, this means they can flank around VA flights (e.g. flying Syd-Mel every 15 mins) and offer lots more fare buckets at the same price / maybe a little more - so they scoop up the BFOD passengers here as well.

Then you get really complicated and most corporates with QF do not pay the advertised price. So you see people on here for example consistantly saying 'well VA is always $200 cheaper for me' not realising a lot of corporates have access to QF fare buckets that are not publicly available AND have rebates etc available that brings the actual cost down.

Then on some routes (lets say - Tassie, Launceston) where QF will fly a Q400, almost full, more frequently, on the smell of an oily rag (petrol wise) and VA because they have little fleet flex have to fly a heavy gas guzzling 737, with lots of spare seats AND charging less for the fares - you get in a really nasty financial situation where VA can't command the same price as QF, have a very similar cost base, and very little fleet flexibility for routes that are a little skinny.

So its no surprise that the running commentary is for VA to reduce costs (move back towards DJ days, try and regain a cost base advantage) and only fly trunk routes, leaving the unprofitable skinny routes - or at least scaling the skinny routes back significantly.

Thanks for your detailed answer to my query... I understand high usage means more expensive fares - based on supply and demand - I was thinking more on the trunk routes (golden triangle on the east coast) - i was thinking cause VA uses generally 737, but QF uses A330 as well on a lot of their SYD-MEL services too

Post automatically merged: Apr 27, 2020

Is that one of the reasons why it is in so much debt

I would not say cheaper fares = higher debt... I am thinking it is their international flights is the key driver that is almost crippling them with debt... Just opinion without much facts to back up at the moment...

 

[jakeseven7]

Terry McCrann is a crank best ignored.

What has he written? I saw an article a few days ago from him saying VA was worse off than Ansett which is highly disputable (Well maybe corona has a role to play in that analysis)......

 

[grubbidok]

Just people’s opinions. There is no white knight on the horizon - yet.

They are just being given with such certainty, when the issue still seems so uncertain.

Though I guess that's the trend with all opinion these days...

 

[azza_1992]

Over the last 10 years, I have never found a VA domestic fare cheaper than a matching QF fare (i.e. same departure time).

Interesting observation. Of the approx. 300 domestic economy flights I've booked over the past five years, only very rarely has QF been cheaper than VA.

To hazard some numbers, I'd say VA is typically $5-20 cheaper in the early-bird fare buckets, and $50-$200 cheaper in the flexi fare buckets.

In my mind, this is the root of VA's trouble - the inability to get customers to willingly pay this premium that QF commands. Many possible reasons for why this is, but better in-flight catering, alliance joining fees, and lifetime status recognition all start looking cheap compared to giving up $5-$200 on every ticket sold.

 

[jase05]

Then you get really complicated and most corporates with QF do not pay the advertised price. So you see people on here for example consistantly saying 'well VA is always $200 cheaper for me' not realising a lot of corporates have access to QF fare buckets that are not publicly available AND have rebates etc available that brings the actual cost down.

Even with our corporate rates I can never find anything that matches VA but I generally have a set 3 or 4 routes. Others as you say may find that QF is level or even cheaper on their routes. I hardly fly any Golden Triangle routes and I suspect that is where QF annihilate VA. VA just haven’t been able to capture a bigger piece of the pie.

 

[dajop]

People going on about whether VA was or was not cheaper than QF, and whether they have captured enough market share etc etc are all anecdotes, nothing more, nothing less. VA shareholders and creditors are now paying for two major indulgences that it's shareholders originally wanted - a capacity war against QF and an expanded international traffic, including the Trans Tasman, which has always been a bloodbath.

VA domestic itself, should be, and according to most recent annual reports, is, operationally profitably. So anecdotes about the proportion of domestic business given to VA and that being reason for the current situation and not validated by the facts. The fact is their modest domestic success simply can't pay for the hangover of the capacity war earlier in the 2010's decade (which created a huge amount of debt) and the "flush cash down the drain" international network.

 

[burmans]

They are just being given with such certainty, when the issue still seems so uncertain.

Though I guess that's the trend with all opinion these days...

They may only be opinions but one thing is certain, keeping on doing what they have been doing and hoping for a different outcome is a recipe for disaster. If you do any sort of business degree, year 1 you learn there can only be one winner in any particular market and it is clear Qantas is the winner in the business market.

So they need to differentiate themselves somehow, while the Virgin Blue model is only one option it is one they know works, its the only one that has ever been profitable for them too. Am sure there are other variations on the theme than straight LCC but from their own experience the lower cost end of the market worked better than the premium end, so even if not moving fully that way you would expect they will move away from trying to compete head to head with Qantas.

 

[dajop]

while the Virgin Blue model is only one option it is one they know works, its the only one that has ever been profitable for them too

Interestingly the Virgin Blue model in its latter years, is not that dissimilar to the model used by legacy carriers on short haul flights within North America and Europe - with the exception of business class. As far as domestic/short haul travel goes, "full service" is an outlier in the developed world.

 

[grubbidok]

Even with our corporate rates I can never find anything that matches VA but I generally have a set 3 or 4 routes. Others as you say may find that QF is level or even cheaper on their routes. I hardly fly any Golden Triangle routes and I suspect that is where QF annihilate VA. VA just haven’t been able to capture a bigger piece of the pie.

I always found it weird that - unless you ask otherwise - corporate travel generally always assumed you have a preference for QF over VA and as long as the QF flight wasn't too much more expensive would book you that as a default. I've lost count of the number of times I've had to point out that VA was both cheaper and my preference.

That's a tough cultural mindset to break, and even if you are cheaper it may not mean more business. No wonder VA had such a hard time.

 

[serfty]

I've not read the article as haven't yet bought 'The Herald Sun' (paywalled online) but longstanding business commentator Terry McCrann (Monday 27 April) is another who believes that the VA administration won't end well (for those hoping for some resurrected creation).

He has a lot more readers than you or I. Does tend to take too many words to make a point, but often on the money.

What has he written? I saw an article a few days ago from him saying VA was worse off than Ansett which is highly disputable (Well maybe corona has a role to play in that analysis)......

I do subscribe to the HS and read most of what McCrann writes.

He has been sinking the boot into Virgin Australia for the last two months or more.

Strangely, I found an article of his on VA this weekend the most lenient on them I have seen in recent times. Here's the last couple of paras:

...
Here’s a crude example of how you could get a relatively quick outcome that could keep the business running and get the planes back in the air as soon as they are allowed.

Creditors agree to take an 80c in the dollar haircut, so that $6.8 billion became
$1.4 billion. A Lew-Fox puts in $500 million of fresh equity to own 90-99 per cent. Existing shareholders are cut to 1 to 10 per cent.

The real deal would be far more complicated, with different creditor claims. And then there’s the planes.

Virgin Mark Two has to be cut at least in half and its international routes and associated planes ditched.

And, by the way, Qantas won’t be sitting with its hands crossed making life easy for such a restructure.

 

[RAM]

Some numbers for people to get perspective. Relying on memory for the post decimal place.....

In 2018/2019 VA sold 24.6 domestic seats (one-way trips) and a little under 4 million international. A return trip counts as two seats.

The Top 5 domestic routes accounted for a little over 36% of all domestic seats sold. In descending order from largest:

1. MEL - SYD 3.1m
2. BNE - SYD 2.2m
3. BNE - MEL 1.6m
4. ADL - MEL 1.1m
5. OOL - SYD 1.0m

VA cut capacity by a little over 20,000 seats/week in 2020 compared with 2019 from 1 Jan through to 7 March, where it was about 526,000 per week.

Then subsequent weeks dropped to 512k, 415k, 55k and now is +/- 20k. So overhead costs (call centers, mgmt, systems etc etc) went up 25x per seat capacity. Then when you add in the maintenance cost, parking fees, operational payroll... with 1/25th the ticket sales or less = severe cash flow issues.

ADD the NZ Govt unofficially (through Air NZ' announcement that they putting all, but 1 now converted for cargo B777s into long term storage to at least April 2021) signalling no rush to re-open their borders generally, and to Australia in a managed way - made administration very appealing.

BTW - Q seems to have a 31x overhead cost increase per current seat capacity if my figuring is close.

I was surprised that the top 5 routes only made up 36% of domestic seat sales - I was expecting 50%+.

The domestic international split is quite revealing vs Q. On a revenue basis Q is around 47% domestic $$ and 53% international including QFF redemptions. Using a wet-finger-in-the-air assumption the revenue basis for VA is closer to 70/30, possibly 75/25. The international shutdown can hurt Q much more especially if no vaccine comes along and there's a deterioration in Africa, the Middle East & Asia.

This could actually see, a well run (OK big assumption) VA Mark 2.0000 tempt businesses who now can virtually only fly domestically - give them a try.

VA Mark 2.0000

No LCC - Q worked out how to 'legally' ruin that business model through its imaginative maintenance three-card trick with Jetstar becoming Q's fleet. Funnily enough the person in charge of Jetstar when this was done had the initials AJ, and got praised for its competitive cost structure by many who never looked into the fleet maintenance moves. Q's mainline operation on the other hand saw a substantial rise in its maintenance costs coincidentally, not to mention aircraft carrying-values. That's another treatise in itself. The playbook was a variation on the Intel trick against AMD, and we all know how well that worked!

Meanwhile back to Virgin Mark 2.0000

The bargaining power of any potential successful bidders will be massive as airports face at least 3 years before any foreign airline would even consider trying to establish a new beach-head in Australia if VA does not rise again. No service provider wants to face Monopoly Q, they have a hard enough time with the current version, nor do they want to see fewer flights using their airport. The few who were around immediately post-Ansett will remember just how hard Q played.

Perth airport may well have shot themselves in the foot with their grandstanding - time will tell.

The ability they have to renegotiate aircraft leases should not be underestimated. Nor should the global interest rates that feed into new leases being the lowest since jet passenger planes have existed. They can take a 30 or 40% cut or face the prospect of VA liquidating with the result of negative cash flow as they have the costs of parking and maintaining the last generation planes that nobody really wants. Equally none of the major lease companies are rolling in surplus capital that they wish to write-off the entire lease against.

Coming at a time when there are likely to be over 900 widebody and 1,000 or so narrow bodies handed back off-lease or from failed ventures as well as the overhang of around 300 B737 Max and the much closer to when needed B777-9. With A380s being returned by several of the larger operators as soon as 10 years come around - the relative economics for long haul international will be stark (no Boeing mishaps excepted). Remember Q has previously committed to using them for 20yrs+ (and rumoured to have signed a generous parts deal with Airbus as a result).

So how large the discount will the new leases be at is the question NOT if they'll get a significant discount.

IMHO VA Mark 2.0000, unless State Govts pay them suitably, will see VA pull out of say 14-20 of the lowest margin domestic routes. This is unlikely to be done immediately - more likely the State Govt that plays the hardest against them will see that State's routes canned first - laying down the gauntlet to both Q and the other States. After all VA owes them no favours do they? For example, Western Sydney Airport's feasibility REQUIRES two full service domestic airlines.

Will Q maintain pricing at competition levels or not? Will that State's tourism industry cry blue murder about their State Govt sending their domestic tourists to ABC, DEF or GHI? What date is their next State Election (which may decide which state has its routes cut first on the other hand). Never let politicians self-interest get in the way of rational decision-making. Just look at how the States bid against each other for concerts, sports, conferences etc, and I will not mention the payments for movie making.

PS: Anyone know a reality TV producer who wants a new series idea?

 

[hydrabyss]

I found this earlier in a news article regarding aircraft lessors and the position they are in.

One advisor to aircraft lessors, who declined to be named to protect relationships with clients, said they had nowhere to park aircraft and nobody else to rent them to, meaning Virgin's buyers could pick and choose which planes they want and renegotiate contracts for them on much better terms.

"Almost every airline in the region is going bankrupt - that means there’s no demand for aircraft," he said. "The lessors have no leverage".

 

[jakeseven7]

I do subscribe to the HS and read most of what McCrann writes.

He has been sinking the book into Virgin Australia for the last two months or more.

Strangely, I found an article of his on VA this weekend the most lenient on them I have seen in recent times. Here's the last couple of paras:

OK, well thats pretty basic analysis from the reporter, I don't think I've read his work but I wouldn't be one to read the HS anyway!

What on earth are QF going to do about it anyway, they are in exactly the same boat. No flights = No flights for all!

 

[tomlee1986]

OK, well thats pretty basic analysis from the reporter, I don't think I've read his work but I wouldn't be one to read the HS anyway!

What on earth are QF going to do about it anyway, they are in exactly the same boat. No flights = No flights for all!

In a way yes - but Qantas have other ways to earn their income such as the insurance scheme, and more likely to be credit cards compared to VA

 

[Must...Fly!]

"Almost every airline in the region is going bankrupt - that means there’s no demand for aircraft," he said. "The lessors have no leverage".

Which on the flip side creates a very interesting and not at all positive scenario for an airline that owns most of their fleet. Like Qantas.