Virgin Australia has officially entered voluntary administration, announcing that Deloitte’s John Greig, Sal Algeri, Richard Hughes and Vaughn Strawbridge will take control of the airline as it continues its domestic services.
The company has said in a statement issued to the ASX that “Virgin Australia has entered voluntary administration to recapitalise the business and help ensure it emerges in a stronger financial position on the other side of the COVID-19 crisis.”
Virgin Australia was unable to operate under a growing $5.3 billion of debt, with just $900 million in cash reserves. The future of Virgin’s 10,000 direct staff and 5,000 indirect staff members remains unknown at this point, however, the company has continued domestic services after federal assistance in the past few weeks.
Of that debt figure, a reported $540 million must be paid or refinanced before the end of the year. The company’s board has stated that they would commence work on a “significant transformation program,” adding that this would be made possible by “consolidating its workforce, simplifying the fleet, withdrawing from unprofitable routes and reviewing and renegotiating supplier agreements,” according to the ABC.
Globally, the airline industry is forecasted to lose around $314 billion in ticket sales in 2020, according to data from the International Air Transport Association, meaning the Virgin Group globally could stand to be further impacted by the loss in revenue.
Just a few weeks ago, Virgin looked to the Federal Government for a $1.4 billion loan to secure its short-term future which was ultimately rejected. There have also been reports circulating that a $100 million short-term loan was rejected by the government.
Treasurer Josh Frydenberg said earlier in the week that the company has “some very big shareholders with deep pockets,” and that the government was unwilling to help out because of this.
Deloitte's Mr Strawbridge said that “we are committed to working with Paul and the Virgin Australia team and are progressing well on some immediate steps,” he said in reference to working alongside Paul Scurrah, Virgin’s Chief Executive.
“We have commenced a process of seeking interest from parties for participation in the recapitalisation of the business and its future… and there have been several expressions of interest so far,” Strawbridge said.
Virgin Chief Executive, Paul Scurrah said that the company’s decision was motivated by securing Virgin’s post-crisis future, stating that “Australia needs a second airline, and we are determined to keep flying.”
“Virgin Australia will play a vital role in getting the Australian economy back on its feet after the COVID-19 pandemic by ensuring the country has access to competitive and high-quality air travel.”
“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,” Scurrah concluded.
Virgin Australia is majority owned by Etihad Airways with a 21% stake, Singapore AIrlines with a 20.09% stake, Nanshan Group, HNA Group and Richard Branson’s Virgin Group with a 19.98%, 19.82% and 10.42% stake respectively. None of these shareholders, however, were willing to step in and provide a bail-out for the company.
The Velocity Frequent Flyer company, while owned by the group, remained a separate entity and is not subject to administration.
In the past ten years, Virgin Australia has posted just two annual profits.
Virgin Group founder, Richard Branson has previously stated that Virgin Australia was “fighting” an existential battle, and the company required government assistance to endure “this catastrophic global crisis.”
“We are hopeful that Virgin Australia can emerge stronger than ever, as a more sustainable, financially viable airline,” he said in a statement to staff. “If Virgin Australia disappears, Qantas would effectively have a monopoly of the Australian skies. We all know what that would lead to,” alluding to potential price gouging.
Independent aviation analyst, Brendan Sobie told The West that competition is essential in maintaining low prices.
“Governments just have to be supportive of whoever comes in, whoever the new investor is, and put in place the right policies and the right support to make sure that competition is maintained by whoever fills the void of Virgin Australia or whoever takes over Virgin Australia.”
“They could put in something like a fare cap,” he suggested, reiterating that the domestic market is extremely lucrative when conditions are right over in the long term. “That’s why you see all these investors waiting in the wings,” he said.
Steven Reed of the Flight Attendants’ Association of Australia told The Guardian that it was important for governments to consider what the aviation industry will look like post-pandemic, stating that “we cannot have a complete abandonment of competition. It took 20 years to get Virgin to a position where it was a competitor to Qantas.”
“We need Virgin in some form, so that people can afford to fly on Qantas,” he added.
“People should recall what the airline industry was like when there was no meaningful competition under the two airline policy of the 1970s and early 1980s. Unless the government caps airfares, then the market will set fares and it will be back to $1000 return to Melbourne, or $3000 return to Perth.”
In reference to the possibility of Virgin entering voluntary administration, Reed said that “administration has great uncertainty, and it doesn’t mean that our people keep their jobs, or that their conditions survive… At the end of the day, the only people paying tax at Virgin are the employees.”