Virgin Australia to be sold to Bain Capital

[Melburnian1]

This surfaced on 'The Oz' site mid evening on Sunday 16 August 2020, so it should be in the paper tomorrow.

The Queensland govt is facing an election shortly and is under a lot of pressure, so this is the unions (TWU) exercising their usual whip hand:

(all for nought if the VA 2.0 deal collapses - the union ought be careful what it wishes for):

'The Queensland government’s $200m investment in Virgin Australia could be pulled if it is not satisfied new owners Bain Capital can maintain a “good relationship with its workforce”.

The concerns arose as a result of Bain’s indication that former Jetstar chief executive Jayne Hrdlicka would be on Virgin Australia’s new board, possibly as the chairman.

The issue is understood to have come up during weekend talks between Bain and the Queensland Investment Corporation (QIC), which is managing the government’s role in the deal.

Ms Hrdlicka had a reputation for standing up to unions in her time at Jetstar, which left her out of favour with many employee groups.

A spokeswoman for Queensland Treasurer Cameron Dick said their expectation in making the investment was that Virgin “remained a full-service airline, serving a full network in Queensland and with a good relationship with its workforce”.

“We expect board members to share that vision and governance to reflect it,” the spokeswoman said...'

(article continues but due to copyright I've only provided an extract).

 

[jakeseven7]

How on earth can the QLD government make their $200m investment in VA2 (a 100% foreign airline) conditional on how it treats its Australian based staff? How would that even work....?

 

[Melburnian1]

This 'Age'/'SMH' article is almost plagarism from 'The Australian'. It's in the papers on Monday 17 August 2020.

Here's part:

"Virgin Australia's owner-in-waiting Bain Capital faces a fracturing relationship with one of the airline's key unions, which could threaten support for the sale at next month's creditors meeting and jeopardise $200 million in government assistance offered to get the airline flying again.

The spat emerged ahead of a hearing in the NSW Federal Court on Monday, in which two major Virgin bondholders will try to force administrator Deloitte to put their alternative proposal for Virgin to a vote of creditors on September 4.

With Virgin and its unions starting negotiations over a restructure announced earlier this month which will see 3000 jobs go, or a quarter of its workforce, Transport Workers Union national secretary Michael Kaine said on Sunday that the union remained concerned about Bain's intention to appoint former Qantas executive and Jetstar boss Jayne Hrdlicka as a board member at Virgin.

He said the response the union had received on the make up of the board was unsatisfactory, which has the potential to threaten workers' support for the Bain deal at the second creditors meeting next month. Virgin's workers will be a crucial voting block at the meeting, accounting for around 9000 of its 12,000 creditors.

"The board of the new Virgin must explicitly recognise that staff are critical to this mission and emphasise co-operation, rather than confrontation," Mr Kaine said.
"Our members are committed to rebuilding Virgin, but we will not expose them to a crude rip-off where jobs and conditions are decimated."

A spokesman for Bain said the firm was surprised by the TWU's comments given the "many hours" of constructive conversation it had with the union about Virgin's future. He reiterated Bain's commitment to treat workers fairly and honour all entitlements.

Unions, and the TWU in particular, have objected to the involvement of Ms Hrdlicka as an advisor to Bain over fears she would bring a budget airline mindset or a "Qantas culture" of industrial relations hard ball to Virgin.

Queensland treasurer Cameron Dick said on Sunday that the state's government pledged of $200 million in equity, working capital and financial incentives was to support Virgin's relaunch, and that he expected its new owners to share its vision to secure and maximise jobs in the state.

"Our expectation is that Virgin remains a full service airline, servicing a full network in Queensland, and with a good relationship with its workforce," Mr Dick said in a statement. "We expect board members to share that vision and governance to reflect it."

One Queensland government source said the government was concerned by the apparent deterioration of relations with workers and that the $200 million in support could be withdrawn.

"If Bain can’t get a deal with the workers, then it won’t get a deal with the Queensland government," said the source, who requested anonymity to discuss confidential matters.

On Monday major Virgin bondholders, Broad Peak Investment Advisors and Tor Investments, will push to have their alternative plan for Virgin put to a vote of creditors next month alongside the Bain deal.

They want the owners of $2 billion worth of Virgin bonds to swap their debt for shares in Virgin, which would remain listed on the ASX, and contribute to a $800 million capitalisation rather than see the airline sold to Bain...'

 

[jb747]

"Our expectation is that Virgin remains a full service airline, servicing a full network in Queensland, and with a good relationship with its workforce," Mr Dick said in a statement. "We expect board members to share that vision and governance to reflect it."

Well, if it's only going to service Queensland, you won't need much of an airline. Nor many staff. Could probably talk to Rex and save about $190 million.

 

[Melburnian1]

Well, if it's only going to service Queensland, you won't need much of an airline. Nor many staff. Could probably talk to Rex and save about $190 million.

Or Alliance Airlines (QQ) , owned 20 per cent by QF.

 

[melb78]

I think what they mean is keeping the amount of flights in Qld prior to covid nothing to do with only flying in Qld

 

[Moopere]

I suspect there is a lot of pent up demand in mid-range travel

I was going to start a thread about this, but probably better here.

I think when we're talking about 'mid range' we need to spell out what that means as its all a bit fuzzy. I started another thread after the speculation of VA going 'mid' between QF and JQ and how I couldn't see where the interest was going to come from.

Mid range to me, over the last decade or two, has almost invariably turned out to mean paying more for slightly less coughty Y class travel. Ultimately though, I've either got the money or I don't. If I don't, then its a better proposition to just travel LCC and wear the annoying traits it presents. If you do have a little bit of means then going proper J (or F!) is much more likely to provide an experience more aligned to expectation.

For a while and with different airlines I experimented with Y+, but unless you travel roughly the same week as new Y+ is offered by an airline and its all shiny and getting the attention, it mostly just turns out to be a pretty normal Y experience with perhaps a couple of extra inches of legroom (though no guarantee). Its all a bit of a con quite frankly.

When VA first came out with their J domestic product, they priced it to get attention. Things varied a bit over the first year or so, but I remember taking many many transcon J flights for anywhere between high $600's to around $800-900 one-way (PER-MEL for example).

J cabins were mostly full. I was happy to pay actual cash for these flights and did so.

Time passed, the old A330's made way for new ones (were the old ones wet leased from emirates?). Fare price climbed and climbed, reaching about 1400-1600 transcon one-way before the collapse. Once the fare crossed the psychological barrier of about $1000 one way transcon I stopped paying cash and started using points for J seats. Perhaps this was VA's plan all along? I heard a lot of talk early on about the 'halo' effect of running J cabins ... I took this to mean that an airline presents a shiny J product and people aspire to fly in it which drives the FF program .... the FF program being the entity that _actually_ makes money in the whole affair.

In any event, for a long time the J cabins where essentially deserted. To be fair, I did notice in the last couple of years that the J cabins were almost always full, despite the high cash price of fares ... my suspicion is that VA opened up a lot more stock for FF redemption. Either way, full premium cabins has to be a good thing ... right?

I don't understand the machine behind yield optimization and the business plan, at its fundamentals, that drove VA J, but it always seemed to me to be a mistake to raise the J price to a level where few people would choose to pay new cash to get a seat. FF points are cash already earned, and one way or another you'll get punters to spend those, whether its toasters or seat redemptions of some type.

By the by, I, for one, was more than satisfied with the 70% angled seating that that old VA 330's used to provide. The lie-flat cubicle style we ended up with in 'the business' was truly fantastic, don't get me wrong, I enjoyed every flight in that seating, but its a bit over the top for domestic and more akin to an 'F' style travel than J imho. I know QF provides much the same, but QF, right now, one-way transcon, $1600 (!!!). Seriously, give me a decent angled lie-back seat for $900-1100 and I'll take that any day of the week.

Anyway, this is a long winded way of pondering what 'mid range' really means when the new potential owners of VA are talking about it. The obvious, above JQ but below QF is fine, but what does that actually mean? On the ground, in the air? I'd have thought that VA1 was for the most a mid range carrier already. Without the global alliance or reach of QF, nor the deep pockets or routes, VA1 was always 'less' than QF, yet provided significantly more passenger value than JQ could.

 

[jakeseven7]

By the by, I, for one, was more than satisfied with the 70% angled seating that that old VA 330's used to provide. The lie-flat cubicle style we ended up with in 'the business' was truly fantastic, don't get me wrong, I enjoyed every flight in that seating, but its a bit over the top for domestic and more akin to an 'F' style travel than J imho. I know QF provides much the same, but QF, right now, one-way transcon, $1600 (!!!). Seriously, give me a decent angled lie-back seat for $900-1100 and I'll take that any day of the week.

Keep in mind, the big corporates that fill the nose of QF's big birds are not paying retail rack rates that you and I would pay using our own CC

My company is a bit of a lightweight compared to some of the big Aussie companies but we get % discounts, access to fare buckets not even available to TA's/public to book and rebates which drops the retail rate right back.

 

[Moopere]

Keep in mind, the big corporates that fill the nose of QF's big birds are not paying retail rack rates that you and I would pay using our own CC

My company is a bit of a lightweight compared to some of the big Aussie companies but we get % discounts, access to fare buckets not even available to TA's/public to book and rebates which drops the retail rate right back.

Which I'm aware of having contracted with larger businesses in the past. Nevertheless, this reinforces my chin scratching more than anything.

If your 'rack rate' transcon is $1200, but you can actually fly that seat profitably at $1000 or even perhaps $900, what does it mean when your J cabin is empty? To me it means that you've failed to capture the contract market - the reason barely matters because the fact is your cabin is empty. How to fix this? Simplistically ... drop your retail fare price back to $900, which you already know is profitable, and fill the cabin. If 'potential' corporates get miffed because they can't get a discount, well, bad luck, throw in some other form of added value if appropriate. Filling cabins with cash paying customers at a profitable level has got to be a reasonable goal.

Now, if discounted J (contract rates) is _not_ profitable ... then what the heck are we even doing?

Even given that the product was good, and I thought it really was, I won't pay $1200 as a retail customer to fly 3.5 hours PER-MEL one-way. Goodness me, was it 18 months ago one could fly the exact same A330 J MEL-HKG for something like 700-900$ (from memory). I'd pay that! Goodness me. $900 one-way for a 10 hour flight in J? Needn't ask me twice.

Anyway, I understand the theory of discounting routes to gain market share and to test the resolve of other competitors. I'd hazard a guess that MEL-HKG in J at <$1000 would be a struggle profitability wise.

My point though is, whats with the price gouging of the apparently much coveted 'mid range' customer? Mid range customers are probably your most canny. They have some money, but not a lot, so they (we) are looking for tangible value. We're not the ones buying Maserati's and Lamborghini's, we're buying Mercedes.

A failing business model based at least in part on providing nothing but aspirational travel with little tangible benefit at high pricing to a customer base who _is_ going to notice just seems a lot like just deserts to me, and now the proposal flowing on the breeze is what? Take the airline 'mid-range' ... wth?

 

[dajop]

All good points, but historically haven't airlines made most of their money (if not specifically LCCs) from flyers at 'the front end' in J and perhaps to a minor extent in recent years in W class?

It depends on whether you consider profitability on a passenger or real estate basis. There is no doubt, per passenger 'front end' has been quite lucrative, but increasingly airlines are looking at the real estate on the plane ... after all a passenger in J might occupy 4 x room, so you need to account for that. You might allocate the cost of operating a 300 seat A330 across 300 passengers, so each passenger has to pay for lifting and keeping 400kg of metal into the air (assuming empty weight of A330 is 120,000kg), but in reality economy passengers only need to cover the cost of lifting 300kg of metal into the air, whilst business class passengers should have to cover the cost of lifting 1200kg of metal into the air so they can occupy the amount of space they are occupying. Airlines increasingly seemingly are moving to looking at real estate on the aircraft and not just the simple per passenger basis. That is no doubt why there are profitable all economy airlines, but very few RPT services that are entirely business class (that's I guess where small private jets come in).

 

[Melburnian1]

This is an extract from 'The Oz' online re the Federal Court hearing before Justice John Middleton that was scheduled to commence at 1415 hours on Monday 20 August 2020:

(it strikes me that if the administrator from Deloittes adjourned the second creditors' meeting and put the sale through by other means, these two bondholders may take that to court given they've already shown a predilection to such action).

'...Under the DOCA the sale would be implemented via a transfer of shares to Bain Capital.

The court heard if the Bain DOCA was not accepted by creditors, the chairman – administrator Vaughan Strawbridge – would adjourn the meeting and the deal would go through as an asset sale.

Barrister for bondholders Broad Peak and Tor, Ian Jackman, argued that his clients were entitled to put an alternative deed of company arrangement (DOCA) to creditors for a vote.

He said Mr Strawbridge’s claim that if Bain Capital’s proposal was voted down, he would adjourn the meeting was legally flawed.

“The true purpose of the chairman’s powers at the meeting is to facilitate debate, not to stifle debate or ram something through but to facilitate a proper debate on these matters,” Mr Jackman told the court.

“It is not open to Mr Strawbridge to close the meeting down just because he didn’t get his way on the Bain DOCA and any attempt to adjourn the meeting is void and a breach of his duties as chairman.”

But barrister for the administrators, Dr Ruth Higgins, said it was well within Mr Strawbridge’s legal right to adjourn the meeting if the Bain DOCA was voted down.

She said the fact of the matter was the sale had already occurred and it was now just a matter of how that would proceed.

“The administrators cannot be compelled to put the Broad Peak and Tor DOCA on the ballot which would impermissably fetter their statutory discretions as administrator,” Dr Higgins said.

“There is a not a circumstance in the procedures as we understand it for the bondholders’ DOCA to be voted on at that second meeting and we want to avoid the impression that could occur.”...'

 

[HS-TQE]

The courts rule in favour of Bain. I think the ol 'Singapore* to taek ovah VA !!!!11!!11!" line can be put to rest for the foreseeable future.

Source Virgin ownership dogfight: court ruling favours Bain over bondholders

* and by Singapore is any firm that has any relations (or ownership stakes by) to Temasek Pte Ltd, and not necessarily Temasek or Singapore Air Pte Ltd.

 

[RooFlyer]

The unsecured bondholder’s action is deceased; it has ceased to be; it is a dead parrot; it’s pushing up daisies; Polly has fallen off his perch etc etc etc.

Apologies to MP.

 

[moa999]

The nature of a technical legal process.

That said I do have some sympathy for the creditors in the middle in administration.

In this case, these bondholders (some hedgefunds who have bought in for cents, but also plenty of super funds and retail investors who paid 100c) still don't know what they are going to get.

And whether it's 10c, or 90c, other stakeholders (by value and number) who are getting a better deal will likely vote it through.

 

[antycbr]

And that’s the nature of unsecured bonds paying 8% when interest rates are less than 1% - they were priced with a risk premium for a reason.

 

[jakeseven7]

I smell a union v Bain showdown looming. *Gets popcorn*

----------

TWU CALLS BAIN’S SILENCE ON VIRGIN BOARD ‘UNDERWHELMING’



The TWU has called ‘winning’ Virgin bidder Bain’s reluctance to state exactly who will be on the new board “underwhelming” as relations between the parties appear to strain.

Australian Aviation understands the union’s relationship with Bain is unravelling because the group will not publicly comment on speculation former Jetstar chief executive Jane Hrdlicka could be the new chairman. Hrdlicka had a notoriously fraught relationship with unions in her role at the Qantas Group.

The comments are significant given the business’ employees together account for 9,020 of the total number of creditors and are owed $451 million.

TWU calls Bain’s silence on Virgin board ‘underwhelming’

The TWU has called ‘winning’ Virgin bidder Bain’s reluctance to state who will be on the new board “underwhelming” as relations between the parties’ strain.

australianaviation.com.au

 

[Melburnian1]

The courts rule in favour of Bain. I think the ol 'Singapore* to taek ovah VA !!!!11!!11!" line can be put to rest for the foreseeable future.

Source Virgin ownership dogfight: court ruling favours Bain over bondholders

* and by Singapore is any firm that has any relations (or ownership stakes by) to Temasek Pte Ltd, and not necessarily Temasek or Singapore Air Pte Ltd.

Probably best in the future not to link to that site given the concerns expressed by Mattg about its behaviour.

 

[RAM]

The nature of a technical legal process.

That said I do have some sympathy for the creditors in the middle in administration.

In this case, these bondholders (some hedgefunds who have bought in for cents, but also plenty of super funds and retail investors who paid 100c) still don't know what they are going to get.

And whether it's 10c, or 90c, other stakeholders (by value and number) who are getting a better deal will likely vote it through.

Any institution who paid full fare (100 cents on the dollar) to buy the unsecured bonds is not an institution I would want to ever have managing my Super!

One of the common rules of thumb in corporate credit (101) investing is "Fly, don't buy airlines."

That's regardless of their credit rating as historically they're the industry group with the worst default record globally. To buy one trading at a 7% margin over CGLs has to border on negligence. Damn - more money for lawyers!

 

[kookaburra75]

'The Queensland government’s $200m investment in Virgin Australia could be pulled if it is not satisfied new owners Bain Capital can maintain a “good relationship with its workforce”.

Hmmm. So if the Queensland Government chooses not to invest in VA2 for whatever reason, then VA2 isn't obligated to have its headquarters in Brisbane - I seem to remember NSW throwing around some money to get them to Sydney. Even Victoria might want to have a piece of the action, to help restart things there. That might not end well for Queensland then.

 

[jakeseven7]

Hmmm. So if the Queensland Government chooses not to invest in VA2 for whatever reason, then VA2 isn't obligated to have its headquarters in Brisbane - I seem to remember NSW throwing around some money to get them to Sydney. Even Victoria might want to have a piece of the action, to help restart things there. That might not end well for Queensland then.

Bain/VA2 have already signed contracts to downsize and move into an office tower in Southbank from the Virgin Village in BH, so they would need to back out of that....