1 January 2021 © David Eyre
Virgin Australia suffered the most challenging year in its history during 2020, starting with financial losses, travel bans during the Coronavirus (COVID-19) pandemic, entering administration, a difficult sale process, emerge from administration under new ownership, with a reduced fleet and workforce, and closing Tigerair.
Loss and cutbacks
In February 2020, as the COVID-19 pandemic began to affect airlines worldwide, Virgin Australia CEO Paul Scurrah announced a $97 million half-year loss, plans to cut seven Airbus A320s and five unprofitable routes from Tigerair by October 2020, cutting 750 Virgin Australia head office jobs by the end of 2020, and more cost savings through reviewing its supplier arrangements.
COVID-19 capacity, route and staff cuts
By early March 2020, the COVID-19 pandemic affected travel and Virgin Australia asked the government to assist by reducing landing charges at Australian airports. Virgin said it would cut capacity and costs, but considered it was less exposed to COVID-19, being mostly a domestic operation.
On 17 March 2020, the Government advised Australians not to leave the country, and those wishing to return home should do so as soon as possible.
Virgin Australia announced on 18 March 2020 that it had suspended all international flights, grounding five Boeing 777-300ERs, one Airbus A330-200 and 14 Boeing 737-800s. Domestic capacity would be reduced by 50 per cent from 30 March, grounding five Airbus A330-200s, 20 Boeing 737-800s, six Airbus A320s, and two ATR-72s. It would avoid redundancies by staff taking leave.
On 20 March 2020, all non-residents and citizens were banned from entering Australia and the Government urged people to reconsider all non-essential travel.
In late March 2020, the CEO confirmed that 1,000 of its 8,000 stood down employees would be made redundant, including all 220 Tigerair pilots. From 27 March, Virgin Australia cut domestic capacity by 90 per cent, including grounding 125 aircraft, standing down 8,000 workers and suspending all Tigerair flights. Virgin kept 10 per cent domestic capacity for essential services, critical freight and logistics.
Virgin asks for Government loan
On 31 March 2020, Virgin Australia asked the Federal government for a $1.4 billion loan, proposing the government convert the loan into ownership if it is not repaid in the two to three years.
The loan idea was contentious, as Virgin Australia was 90 per cent-foreign-owned, by Etihad Airways, Singapore Airlines, Nanshan Group, HNA Group and Virgin Group. All of these companies were also experiencing their own COVID-related impacts and were therefore unable or unwilling to financially assist Virgin Australia. Qantas said it would also insist on a $4.2 billion loan if Virgin’s proposal was successful.
Virgin Australia share trading halt
On 6 April 2020, the Western Australian Government closed the WA State border.
Virgin suspended all domestic passenger services from 10 April, except one return flight between Sydney and Melbourne, operating 6 days per week.
Virgin Australia entered a trading halt on 14 April 2020, “to consider ongoing issues with respect to financial assistance and restructuring alternatives”. Owing a reported $4.8 billion with little revenue coming in, Virgin appointed US investment bank Houlihan Lokey to restructure its debts.
The trading halt was due to end on 16 April, but Virgin extended it for seven days. Federal Treasurer Josh Frydenberg urged Virgin’s shareholders to assist the airline, and said the Government was “not in the business of owning an airline.” Etihad, Singapore, Nanshan Group and HNA Group all declined to assist Virgin, as they struggled with their own finances due to the pandemic.
The Government funded Qantas and Virgin to operate a minimum domestic network for eight weeks from 17 April, covering all capital cities and some regional routes. Virgin increased flying to 64 return services across Australia and rehired 200 stood-down employees.
Queensland offers conditional funding
On 18 April 2020, Queensland’s government offered $200 million towards a national package to support Virgin, subject to other state governments and the federal government contributing; debt restructuring; shareholder and bondholder support; and maintaining its headquarters in Brisbane. New South Wales hinted that Virgin should move its headquarters to Sydney in return for financial aid.
Virgin Australia enters administration
Late on 20 April 2020, newspapers reported that a number of private equity operators and hedge funds were interested in buying Virgin, but only if administration occurred, since this would eliminate debts. Virgin Australia’s board of directors held an urgent meeting that day, with the media reporting that there was no other alternative to administration and that a decision was imminent.
On 21 April 2020, Virgin Australia confirmed to the Australian Stock Exchange that it had entered voluntary administration, with Deloitte appointed to handle the administration process. Deloitte confirmed a large number of investors were interested in buying the airline and that the airline would operate its scheduled flights throughout the sale process.
Virgin Group founder Sir Richard Branson paid tribute to Virgin Australia’s staff and criticised the Federal government for not stepping in.
The Victorian government considered investing, in exchange for the airline relocating to Melbourne.
Tigerair staff were told in a conference call that they wouldn’t be made redundant and that they were an “essential part of its low-fares offering”, despite all Tigerair pilots being made redundant at the end of March.
Higher debt revealed
Deloitte revealed that Virgin Australia’s debt was actually $6.8 billion. Creditors include 50 aircraft lessors, with 69 aircraft, owed $1.88 billion; 26 lenders with secured loans of $2.28 billion; unsecured bond holders owed $1.98 billion; 9,000 employees owed $450 million in entitlements; 1,070 trade creditors owed $166 million; and 81 landlords owed $71 million.
On 24 April 2020, Perth Airport, owed over $16 million in outstanding airfield and terminal usage charges, impounded four Virgin Australia aircraft. The aircraft were not being used for flights and had been parked at Perth Airport for some time.
Numerous interested buyers
At a meeting of shareholders on 30 April 2020, Deloitte advised that 20 parties were interested in buying the airline, including Perth-based mining magnate Andrew “Twiggy” Forrest.
On 4 May 2020, Deloitte announced that it would need to borrow $200 million to keep Virgin flying during the sale process. By 21 May, it was reported that Virgin was using $15 million per week to maintain operations.
On the 15 May 2020 deadline for indicative offers, Deloitte said it expected eight offers. The Queensland Government did not lodge an offer, but was willing to invest, to keep the airline’s base in Brisbane. From these offers, Deloitte shortlisted four: Bain Capital, BGH Capital, Cyrus Capital Partners and Indigo Partners. Three of the four short-listed bidders planned fleet reductions.
On 29 May 2020, Deloitte shortlisted Bain Capital and Cyrus Capital Partners. Queensland indicated it may team up with one of the bidders, to ensure their base remains in Brisbane.
Virgin announced it would double capacity on domestic routes from July 2020, adding 30,000 seats.
Winning bidder: Bain Capital
On 26 June 2020, Deloitte officially announced that Bain Capital was the winning bidder for the airline. Bain said it was committed to protect jobs and would establish an employee ownership and profit-sharing scheme. Creditors would vote on Bain’s bid in August 2020.
Bondholders attempt to take control
Bondholders were advised that they were unlikely to be repaid their full $2 billion. The official bidding deadline expired on 22 June 2020, but bondholders lodged a bid two days later. They attempted various unsuccessful legal actions in early July, to force Deloitte to release details of the Bain deal and allow their own bid to be offered to creditors before a vote in August.
On 20 July 2020, Deloitte told creditors it would not accept the rival bid from bondholders and confirmed that Bain has already provided $125 million into Virgin to keep it operating. Bain also criticised the bondholders’ attempted bid.
In mid-August 2020, a Federal Court judge ruled that Deloitte did not have to put the bondholders’ bid to a shareholder vote, leaving bondholders with no choice but to withdraw their challenge for control of Virgin.
Bain Capital later confirmed that unsecured creditors, including bondholders, would receive between just nine and 13 cents in the dollar on their investment.
Tigerair shut down, Virgin cuts 3,000 jobs and reduces fleet
On 5 August 2020, Virgin announced to the ASX, that it was to cut 3,000 jobs, cease the Tigerair brand, and operate as a mid-market hybrid (not low-cost) carrier, continuing to offer business class and domestic lounges. Long-haul international flying would be suspended until the market recovers.
The fleet would consolidate on Boeing 737s for domestic services. Its regional and charter fleet would be maintained. However, the ATR 72, Boeing 777-300ER, Airbus A330-200s and Tigerair Airbus A320s would be withdrawn. The new airline would employ 6,000 people when the market recovered in two years.
Deloitte outlines the cause of Virgin’s problems
A Deloitte report identified reasons for Virgin Australia’s problems:
- misconceived strategy to shift from low-cost to full-service carrier;
- increasing capacity on some routes, causing Qantas to reduce their costs and use its strength to compete against Virgin;
- poor network strategies, including continuing loss-making services;
- operational inefficiencies, including high labour costs and too many different aircraft types;
- underperforming financially for a number of years;
- history of under-delivering on turnaround strategies.
Bain deal completed
Unions and Sir Richard Branson expressed their support for the Bain deal before the final creditors’ meeting on 4 September 2020. At this meeting, creditors voted in support of the deal.
In October 2020, Sir Richard Branson was reportedly planning to acquire at least 5 per cent of Virgin Australia. The Queensland Government announced a 10-year deal to acquire 2 per cent of Virgin Australia, to ensure its base remains in Brisbane.
Shareholders lodged a legal challenge in the Federal Court to stop the sale of Virgin Australia to Bain, but this was dismissed on 10 November 2020.
Leadership change
On 15 October 2020, CEO Paul Scurrah resigned, which he later said was a mutual decision. Bain appointed their former employee Jayne Hrdlicka (also ex-Qantas and Jetstar) as the new CEO.
Virgin Australia exits administration
On 17 November 2020, Virgin Australia officially exited administration and Jayne Hrdlicka worked her first day as the new Virgin Australia CEO.
Virgin Australia had been operating solely from Perth Airport’s Terminal 2 during the pandemic, but with the easing of travel restrictions for interstate travellers from 8 December 2020, Terminal 1 Domestic was re-opened.