Virgin Australia’s administrator Deloitte has highlighted a “misconceived business strategy” to shift away from being a low-cost carrier as one of the main reasons for the business’ troubles.
The comments were contained in a 192-page report sent to creditors, obtained by Australian Aviation, which includes a section detailing the pitfalls of the business as judged by “widespread commentary” over the last decade.
The document was released on Tuesday alongside a statement to the ASX where Bain confirmed the return different groups of creditors would receive. Significantly, it revealed unsecured creditors, including bondholders, will receive between just nine and 13 cents in the dollar on their investment.
The ‘commentary’ section of the report aims to consolidate what are widely regarded as the reasons for Virgin’s problems over the years based on speculation. However, the administrator’s decision to edit and highlight them will be seen as significant.
It began by revealing the wider Virgin Australia Group suffered a consolidated loss for more than $2 billion between 2009 and 2020 and then stating:
“It was generally held to be underperforming from a financial performance perspective for a significant period compared to its peers, usually Qantas, with the common and interrelated themes as follows:
“Misconceived business strategy to change its business model from a low-cost carrier to a full-service airline. This ultimately resulted in Virgin increasing its capacity on certain routes. Qantas responded by taking action to protect its routes, market share, customer base and ultimately, its business model. Qantas was able to significantly reduce its cost base but Virgin did not have the size and financial strength to sustain this capacity increase without suffering significant losses.
“Higher cost base compared to competitors, including Qantas. One of the common measures used in the aviation industry is cost of available seat kilometre (CASK). This is the unit cost, expressed as cents, to operate each seat for every available seat kilometre. Controlling CASK is critical given the aviation industry is subject to high revenue volatility from a range of external factors including local and global economic conditions, exchange rate movements, fuel price movements and competitor pricing.
“Network strategy and decisions including the continued operation of loss-making services, routes and business segments.
“Operational inefficiencies including high labour costs and the number of different plane types.
“History of under-delivering on turnaround strategies.”
In a statement made to the ASX on Tuesday morning, Bain confirmed the full details of their offer to take control of the airline, which will need to be rubber-stamped by creditors in a crunch meeting on 4 September. It revealed that:
- The total commitment of Bain is $3.5 billion;
- All employee entitlements will be paid in full;
- All customers travel credits will be honoured;
- Bain will repay a “significant portion” of secured debts and aircraft lease debts; and
- Will return between $462 million and $612 million to unsecured creditors.
Deloitte’s Vaughan Strawbridge, who has overseen the administration process, said the deal represents an “excellent outcome” for Virgin Australia.