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Shareholders pass up chance to recapitalise Virgin – Reports

written by Adam Thorn | April 15, 2020
Virgin Australia will continue a seasonal Newcastle-Auckland service with Boeing 737-800s. (Rob Finlayson)
Virgin Australia is facing a struggle to survive with a trading halt set to expire. Pictured here, one of its Boeing 737-800s. (Rob Finlayson)

Virgin Australia’s four biggest shareholders have declined the chance to pour in extra funds to recapitalise the business after the troubled airline entered a trading halt on Wednesday.

According to the The Australian Financial Review, Etihad, Singapore, Nanshan Group and HNA Group have all opted out of helping, with the search now extending to outside investors. The Guardian even speculated that one of the options on the table is administration.

Virgin Australia Group is struggling to service its $4.8 billion debt pile with little revenue coming in, and is currently attempting to secure a $1.4 billion government loan to help it survive during the coronavirus crisis. The trading halt is scheduled to end on Thursday morning.

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The AFR report states the four big shareholders, who own 80 per cent, declined to help, but a fifth, Sir Richard Branson’s Virgin Group, was a “maybe”.

Meanwhile, The Guardian speculated that Virgin Australia is considering entering administration in order to force all creditors to take a haircut under a deed of company arrangement.

The move would also allow it to disclaim uneconomical contracts, thereby freeing the company from its more onerous obligations.

However, to succeed, a deed of company arrangement would require support from 50 per cent of its creditors by amount owed and number.

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The dash to find extra funding comes after the company announced it was suspending all regular commercial flights, bar services between Sydney and Melbourne, just before the Easter weekend.

Labor leader Anthony Albanese has thrown his weight behind a government package, arguing the idea that another airline could quickly take over from Virgin was “frankly a fantasy”.

He told the government to “stop the bits and pieces support and provide support for our airline industry”, indicating his preference for the government to obtain equity, rather than merely issuing a loan.

“There’s no reason why a government could not make a financial injection through equity and that to be sold down the track,” he added. “What we know is at the moment … this is an ideal time, if anything this is the bottom of the market.”

In a statement to the ASX, Virgin Australia said it had requested a halt “as it continues to consider ongoing issues with respect to financial assistance and restructuring alternatives”.

The Sydney Morning Herald later reported the airline had appointed American investment bank Houlihan Lokey to try and restructure its debt load.

The airline has already stood down 8,000 employees since the coronavirus crisis took hold and its lobbying push for aid has included placing a full-page advert in The Daily Telegraph warning of the dangers of a Qantas monopoly.

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15 Comments

  • Bernard

    says:

    As a shareholder I’m disappointed at the larger holders behaviour. I believe that since they have played a part in making the shares untradable they should be forced to sell their shares at today’s price of around 8 cents each- how would you like them apples? I’ve said before in other posts the govt could buy out 51% or all of it except mum and dad owners, re configure the airline and then sell 49% later whilst keeping 51%. Or it could withdraw their licences, closing them down and I will take a hit on my miserable holding. Probably won’t be the first of company collapses in this virus period.

  • Phil

    says:

    Would Wesfarmers be a candidate to purchase a stake in collaboration with Richard Branson? After all there already is some sort of relationship Wesfarmers has with Virgin Australia due to its Flybuys program. They’ve just divested some parts of their portfolios and have been looking for new investments.

    However regardless of who buys Virgin or whether it survives it needs to exit the international business and instead launch codeshares with other airlines for international passengers. Domestic I think is where virgins heart is and where it should remain.

  • Rod Pickin

    says:

    We have to understand that this funding debacle over VOZ is a huge game of Poker involving four high rollers and clearly l don’t know what cards they each have have but at this stage they have no time constraints and “the game” will probably go on for a while before a result. As I understand it there are 8,445,218,474 shares on issue at a market value tonight of AU$0.093/share which equates to about AU$7,854,053,100.00 market value for the Airline . I question Sir Richard Branson and Air New Zealand over their share transactions and I think that a full and frank disclosure from both parties should be forthcoming as to why, in the former case, the founding entrepreneur decided to downsize his vital holdings yet retain the high profile image/company name etal to his benefit and in the second instance, clearly there was much boardroom agro between ANZ and VOZ and frankly an investigation should take place as to why,how etc that ANZ offloaded their holdings to a party/s that would not be sympathetic to our commercial needs and countries well being. Another point that bothers me is that I believe some years ago SQ wasn’t interested in maintaining it’s equity in Tiger resulting over a short time Tiger being bought by VOZ so, who is left with the baby now? certainly not SQ. It probably won’t happen but I believe that the Oz Govt should buy out the Chinese share holdings, liaise with Sir Richard for him to increase his equity in his company and somewhere down the track the Govt’s holdings can be released for sale on the market, it will never be cheaper than today. LIke them or not, this country needs VOZ and under my plan the company would be Australian controlled

  • Chris

    says:

    There is no reason why the Australian government which is suppose to be very business friendly, give it A$.4 billion loan with the option of equity in case of default. Just look at the major shareholders other than Singapore Airlines and lessor extent Virgin Group, the other shareholders have major debt issues.

  • Craig

    says:

    Hi all virgin share holders bought into the company for feeder traffic it’s should help keep the company going especially Singapore Air after they raised 12 billion from their financing arm

  • The fact that the majority shareholders declined to commit more capital makes it clear that the $5 billion debt burden makes the airline unviable as it has been for 12 months.
    Branson spends his corporate life being a “maybe”. It is suggested he has pulled over $200 million in royalty payments for use of the Virgin name like in all Virgin branded concessions.
    Administration is the only course and after that process all the other options can be looked at. If it was a coal mine it would have been closed 2 years ago.

  • AgentGerko

    says:

    There is no way another airline could quickly take over from VA unless the govt permitted another established international carrier such as Singapore Airlines to have full access to the domestic market. Look at since Ansett closed? We’ve had Compass 1 & 2, Impulse, Ozjet and Air Australia. All failed. VA only survived because of the its global backing and you don’t find another Richard Branson every day.

  • Ronnie

    says:

    Has Virgin AU ever made a profit?
    Why would a Government pour money down the throat of a failure of an airline that was never properly structured or managed and could not generate one cent of return while acting mainly as a domestic arm of some large o’seas airlines. Air NZ wisely got out of their arrangement – why would a Government take up equity in a loss-making badly run airline? In effect the Govt has already donated millions of tax breaks to it already. Frankly, Australia does NOT need an airline that is run and managed the way Virgin is. And yes, another airline could start up in Australia in Virgin’s place when allowed to make a profit after Virgin + Tiger cease distorting the market with ridiculously priced airfares and schedules while trying to take Qantas and Rex down for no good commercial reason. The fact Virgin is in so much trouble now shows how insecure they are and nobody in their right mind would want to invest in them – just other airlines who get additional benefits from feeders and code-shares. That suits them, not investors. I’m afraid Mr Albanese doesn’t know much about investments and the way airlines fit in the commercial environment. The only way out of Virgin’s financial problems is to properly capitalise and manage it and that means a good hard look at Tiger (probably now gone) and international ops and also rationalise domestic back to what makes money. This crisis is probably the best opportunity that has been forced on them to restructure Virgin to operate realistically and profitably instead of just being a cost centre on o’seas airlines balance sheets. The fact they won’t inject more capital speaks volumes about the influence they hold over the Virgin management to distort its operations. Why Branson is part of this abomination of an airline is beyond me. There’s no justification for the Government to complicate the situation further.

    • Ben

      says:

      @Ronnie I think you’ll find VA has made a profit in the past. Maybe not recently – but they have been profitable. To call them an ‘abomination of an airline’ is perhaps a little harsh to say the least.

      Under the present management they have been restructuring and prior to this unprecedented crisis, which was out of their control, they were turning things around.

      Qantas talk about level playing fields – but they’ve been saying that if VA get bailed out, they will need a bigger bailout themselves to level the playing field. However if they’re in a better financial position than VA, a bigger bailout of QF makes no sense whatsoever.

      The fact is QF has been at a distinct advantage over it’s domestic competitors since merging with Australian Airlines in the early 1990s. Ansett had the same size domestic operation, but couldn’t expand internationally to the scale of QF. Virgin was able to expand domestically following the Ansett collapse, however faced similar problems internationally.

      Whereas QF was a merger between a well-established international airline and a well-established domestic airline. Basically any competitor has not had the capacity to match what QF is offering.

      However Ansett was operating for over 65 years, Virgin for 20. Both airlines must have been reasonably well-run to survive in an industry where it is difficult to make a profit.

      If VA were to collapse you might well say that is market forces at work. However QF would then have practically 100% domestic market share – bar some competition on a few regional routes. Watch their profits skyrocket – but watch airfares skyrocket as well. Also good luck to anyone trying to compete in future on what QF term a ‘level playing field.’

      QF may be a national icon and they may be about to celebrate their 100th birthday. I don’t downplay their iconic status at all. However you’re kidding yourself if you can’t see the extent of corporate greed at work. Don’t forget – it wasn’t so long ago that Alan Joyce was asking for government help when QF was in trouble.

      I think the solution is to bail out both airlines. The government has practically bailed out the rest of the economy, so I doubt an extra few billion dollars will matter. At least then we stand a chance of having a viable and competitive airline industry when this is all over. Better still – if VA are so badly run, nationalise them (and QF if need be). At least that would give everyone some certainty as to the future of aviation in these uncertain times.

    • Dean

      says:

      Yes actually they did make a profit, when they were Virgin Blue, but I’m not sure if ever when they were Virgin Australia.

      • Ben

        says:

        Made a profit in 2013 financial year I’m reasonably sure. Like a said, a while ago – but they were VA at that point. Regardless Virgin Australia/Virgin Blue are the same company. The Virgin Australia change was essentially a re-branding so to say anything prior is not the same company is splitting hairs. Much like QF was re-branded over the years years (QANTAS -acronym, Qantas Empire Airways, Qantas – Australia’s overseas airline , spirit of Australia, the Australian Airline etc) Not to mention mergers, different colour schemes etc. Similar re-branding and mergers with Ansett as well over the years. At the end of the day they all remained essentially the same company – as has Virgin Australia.

  • Geoff

    says:

    I suspect when TAA was rolled into QANTAS, the former Government owed enterprise had very different cost structure dynamics than that of a private equity company commencing business. Qantas could set the fares where ever they choose, knowing that the other private entity would struggle to make a profit, if ever. To keep Qantas ‘honest’ in their fare structure, they need some sort of realistic competition with similar cost structures. While I do not favour a Government bailout, it may be needed to help balance the books with Qantas.

  • Meepa

    says:

    VIRGIN HAS NEVER PAID AUSTRALIAN TAX!!!
    So sick of this argument that its in Australia so it pays all the various taxes like fuel taxes and employment taxes etc. Come on, are we 12 years old!?
    The Airline is a tax write off, and shifts profits like any other large corporation, but with this industry somehow its “to big to fail”. NO WAY.
    I don’t wish for them to go under, but tell that to the 700+ people they sacked at Tigerair recently, only to get Virgin Pilots and staff to do the same job! Another illegal move under the guise of a “crisis”. Tell that to the pilots and staff at tigerair on the unemployment line with mortgages and kids.
    Well done Virgin, you cannot have my tax payer money only to possible fail if your BILLIONAIRE investors dont wont to use their own cash.
    YOUR A PRIVATE COMPANY and therefore have to make money, until then, go pound sand!
    Oh, and for the “Qantas will raise airfares” argument; What a load of trollop, yes it may happen to a point, however, dont you think that the amount of people watching this would cause massive backlash!? Come on! And if airfares air high all that does is make incentives for another competitor to enter into the market!

    • Ben

      says:

      @Meepa – wow you really have it in for VA. Not sure why: Great airline, modern fleet, friendly staff. After today however you may well get your way – good luck with that.

      I’m not a tax expert – but I think you’ll find they have paid tax in Australia. Fair enough they may be able to write some of that off – but they’re the same rules that any company registered in Australia is subjected to. Tax minimisation is perfectly legal and every Australian person and company has the perfect right to minimise their tax. Your beloved Qantas does it themselves. If VA was doing anything illegal re: taxes – I’m pretty sure the ATO would be on to it fairly quickly. Also, every VA employee pays individual income tax – or at least they did – but then again you may (sadly) have your way.

      Well if QF does get an absolute monopoly, just watch the airfares rise. Yes, I see your argument about it encouraging competition – but have you any idea how difficult it would be to establish an airline of that scale from scratch? Any airline would most likely be foreign owned, unless you can find an Australian investor with a few extra billion dollars in their pocket – I can’t think of anyone who would take on QF. I dare say VA’s billionaire investors are busy dealing with their own issues right now. This is a global crisis – affecting every airline. Granted VA may not be in the best financial condition to battle this crisis, but, they did not cause the crisis.

      By the way, when you say/yell ‘your a private company’ the correct grammar is ‘you’re a private company’

      Sorry – couldn’t help pointing that out 🙂

  • Well said Ben. I am surprised that with the PM’s background in tourism and marketing that he seems to not be grasping how crucial it will be to avoid having a domestic airline monopoly on the other side of the pandemic.

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