Virgin Australia’s return from administration to long-haul flying

“Virgin Australia has delivered a very strong performance in FY24,” said former CEO Jayne Hrdlicka last October, after the group posted $5.4 billion in revenue and an EBIT of $519 million in the 2023-24 financial year. “This is our second consecutive year of after-tax profit following the FY23 milestone of returning the business to profitability for the first time in 11 years. This strong performance demonstrates the ongoing success of our transformation journey, despite what has been a challenging year for our industry.

“Continued improvement in profitability means we are well-positioned to deliver great value and choice to Australian travellers. It is essential to our ability to re-invest in our business and customer experience, and vigorously compete with our major competitor. We have together rebuilt Virgin Australia as a profitable, customer centric, value carrier that celebrates its people as the centrepiece of its strategy. There is a well-defined plan for continued transformation which will deliver further customer, team and shareholder benefits.”

So, what went wrong at Virgin in the first place – and how did an unlikely saviour in Bain Capital help get the airline back on a smooth glide path to its rumoured upcoming IPO?

From boom to bust

On its launch as Virgin Blue in 2000, the airline that would become Virgin Australia looked very different to its current form – a pure low-cost carrier with initially only two 737-400s to its name, it looked to fill a niche in the market that had thus far been largely ignored by the (at the time) two major Australian carriers, Qantas and Ansett. While initially popular among leisure travellers, the budding airline was blessed with an astonishing stroke of good luck when Ansett folded a year after Virgin Blue’s entry into the market, allowing it to become Australia’s second major domestic carrier – and forcing Qantas to launch its own low-cost arm, Jetstar, to counter the threat.

Over the next decade, Virgin Blue grew rapidly with the acquisition of new 737NGs, codesharing agreements with overseas airlines, the rollout of its Velocity frequent flyer program, the launch of international Pacific Blue and V Australia arms, and the introduction of business class, among other changes that took it further and further from its roots as a low-cost airline. Eventually, in 2011, under ambitious CEO John Borghetti, the carrier unveiled its new name and strategy: as Virgin Australia, it would take the fight directly to Qantas on its own turf, becoming a full-service carrier in the image of Ansett of old.

“I’m absolutely thrilled with the new look and feel of Virgin Australia’s domestic product and I know it will shake up the Australian travel market on an even larger scale than it did 10 years ago,” Virgin Group founder Sir Richard Branson said at the new brand launch. “What you see here today is a great airline that now represents what the Virgin brand does worldwide – style, innovation, quality and value for money, along with the best service.”

Unfortunately, this strategy would in the end prove to be Virgin’s undoing. The carrier embarked on years of costly “capacity wars” against Qantas, and was never quite able to match the Flying Kangaroo and its dual-brand strategy – though it made the attempt with the purchase of Tigerair in 2012. According to Associate Professor Chrystal Zhang, discipline lead for aviation at RMIT University, Virgin’s market positioning was one of the “most talked-about” factors in its eventual downfall.

“Virgin aspired to become a premium airline, competing head-to-head with Qantas, and so that perhaps dictated all the operational strategies – including its network, its service provision, and so on – into the market. So that created that kind of higher expectation from the market, and also drove up the cost bases, which eventually Virgin could not afford,” she says.

“There was an ambition and the market, perhaps, was in the circumstances that would make it a kind of aspirational goal, but whether that could be achievable or not is really subject to market conditions, subject to all the other circumstances. The airline industry is very fragile, and the fluctuating environment is subject to external events and shocks, and the margins are relatively very thin. So, if you cannot capture the market opportunities, and you cannot control the costs well, then there is a chance that you lose track.”

COVID and collapse

That external shock for Virgin came in early 2020, when the outbreak of COVID-19 shuttered airports and grounded planes around the world. While Qantas was able to keep itself going, Virgin – which had accrued a debt of $4.8 billion and suddenly had little to no money coming in to cover its high running costs – was unable to find a lifeline and went into administration.

“Their fleet was one major cost factor – they had not only the Boeing aircraft, but also Airbus, so the combination of both would definitely have driven up the cost of maintenance, of pilot training, and so on,” says Professor Zhang. “The second, I think, of course, is the service: if you aim to be a legacy premium carrier, with the frequent flyer program and the services that people expect of a premium airline, and the first and business class passengers, the expectations would be very high. So, you have to maintain your lounge – and even the economy-class passengers, they would expect free services such as meals.

“It was that kind of perfect storm, in the media’s terms – the ill-managed operations exposed to the public, the escalated cost base, the expectations of the customer, the service the customer received, and the network expansion ambition, et cetera – and then the demand dropped dramatically, which apparently, you know, no airline could afford to stay in that kind of a situation.”

In a media statement in April 2020, then-CEO Paul Scurrah said the move into administration was about “securing the future of Virgin Australia Group and emerging on the other side of the COVID-19 crisis”.

“In 20 years, Virgin Australia Group has earned its place as part of the fabric of Australia’s tourism industry,” he said. “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. 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 company has access to competitive and high-quality air travel.”

For Virgin, however, COVID may have come as a blessing in disguise. The airline had been in financial trouble long before the pandemic hit, and unlike Ansett twenty years earlier – or Bonza five years later – it had the advantage of government-subsidised flights keeping a trickle of money coming in, as well as a lack of competitors in a position to squash it flat. Absent COVID, some other shock might well have brought the airline low anyway, says Professor Zhang.

“I would say for Virgin, given the cost structure, the aspiration that it had, I doubt how long it would have survive in that situation,” she says. “As we know, airlines are really subject to external environment, a lot of factors, external factors, economic growth. The demand would definitely affect the airline’s operation. So, I would doubt how long it would have survived and how competitive it would have been against Qantas.

“COVID, perhaps, was just that kind of a catalyst to escalate the crisis of the airline where it failed to meet the market demand. But also, you know, the cost was just too high. That became unmanageable.”

Over the next six months, Deloitte kept as many planes flying as travel restrictions and other circumstances would allow, as it searched for a buyer for Virgin. It didn’t need to look far, however: four major bidders emerged, with Deloitte eventually narrowing the field down to Cyrus Capital Partners – linked to Sir Richard Branson himself – and US-based private investment giant Bain Capital. After a bruising brawl, Bain emerged victorious with a $3.5 billion bid, which was finally approved in September 2020, ensuring that there would be no Qantas monopoly.

“There is opportunity in Australia for a second airline, but what kind of second airline would be able to compete in this market is a big question,” says Professor Zhang. “It comes down to the positioning in the market and who the leadership is in the political environment. That kind of a monopoly apparently has no soil to exist because we encourage competition, and also it would be beneficial for the market, for the public, for the business itself to have more than one. So, I would say, from the investment perspective, that Bain Capital perhaps saw the potential in this market where it could create the competition with the support of the government, in that regulatory environment.”

Speaking to the Australian Aviation Podcast in October 2020, six months after the administration process began, and one month after the Bain deal was approved, Scurrah painted an optimistic picture of the airline’s future.

“As a leader, people look to you for that path out, and so I didn’t allow myself the luxury of thinking about preparation for liquidation or shutting down,” he said. “Right at the beginning, we started thinking about, what was the pathway out, what was the journey out? And we plotted all of those paths. As a leader, there’s two things – and I talked to my team about it up front – as a leadership team, we need to communicate regularly in depth, which is always difficult when you’re an ASX listed company, because you have to be really careful about breaching the ASX and asset guidelines around forward-looking statements, but we needed to communicate frequently, honestly, transparently, regularly.

“But what I said is, as leaders, first of all, we need to believe we can get through it, and second of all, we need to show calmness and that we are steadying the ship. And those things, I think, have served us really well through this process.”

Despite Bain’s previous support for his leadership, Scurrah would resign as CEO weeks later.

Out with the old

Paul Scurrah’s exit was not the only change at Virgin Australia under the Deloitte administration or Bain Capital’s new management. A radical transformation program was launched to haul the airline away from a full-service premium carrier and into a more “hybrid” mid-market model focused largely on domestic services. Tigerair got the axe, out the door went the fleet of five long-haul 777-300s. Except for a handful of A320s and Fokkers retained for service with its regional arm, Virgin would become an all-737 airline, which would save a bundle on maintenance and training costs.

“COVID was an opportunity, but Virgin, perhaps, was not the only airline either domestically or internationally that received government funding and had the opportunity to restructure,” says Professor Zhang. “I think, more importantly, it was the repositioning strategies after that, and the bold actions taken under the new leadership. I think that, perhaps, was more important.”

Scurrah himself was replaced with Jayne Hrdlicka, formerly of Jetstar and Qantas Loyalty, who faced the monumental task of implementing the airline’s transformation plan. In a 2023 profile for the Australian Financial Review, Hrdlicka spoke about the first days of her tenure and how COVID allowed Virgin to “get back up on its feet before the music started again”.

“I can’t tell you how hard the team worked in the early days here, because we felt this burning drive to get to a place where we were a credible business by the time travel came back,” she said. “And that meant all of our basic tools – the way we did things, supplier agreements, getting the experience right, pricing and revenue management – had to be completely redone. Every part of the business had to be taken apart and put back together again, and it had to be done before people started flying. We all felt a huge amount of pressure.”

As a new CEO, Professor Zhang says, Hrdlicka’s task was undoubtedly both large and multifaceted.

“From the operational perspective, it seems like you are building everything from scratch. You need to determine, the positioning strategies, the market strategies,” she says. “You need to determine the top leadership. You need to work with your team to determine the network – and also, from the operational perspective and the employee management perspective, you really need to build and develop the confidence from the employees to strengthen morale and commitment. We know that the people, the human resources, are vital to the success of the business, so focusing on the capability development of the employees, to ensure that they’re all committed to be in the same boat as the leadership, that’s really critical.

“But also, more importantly, is to build the confidence from the general public – you have an investor externally who has that kind of trust, but how exactly you materialise that trust and deliver what was commissioned to you, that would be really, really challenging. There are lots of different layers and labels – it’s a huge-scale task.”

Bain also started pumping money into Virgin to fund the transformation program – including, significantly, investing in a substantial order of new 737 MAX aircraft, including both the existing MAX 8s and the in-development MAX 10s, to both complement and phase out its large fleet of 737-800 planes, many of which still date back to the days of Virgin Blue. While the 737 MAX deliveries have been held up by supply chain shortages and the ongoing crisis at Boeing, Virgin now has eight of the MAX 8s in operation alongside its 79 737-800s and seven 737-700s.

“It has surprised our competition because they didn’t expect that we would be spending money investing in the transformation of this airline,” Hrdlicka told the AFR in 2023. “From the day we came out of administration we started buying new aircraft, hiring more people, investing in systems … investing in talent. We were spending money from day one to build for the future. I think that’s exceptional private equity. That’s the very best of private equity.”

Riding the tailwinds

With a simplified fleet and network, Virgin has now carved out for itself the role it set out to find at the start of its journey back to profitability: as a mid-market carrier, more upscale than Jetstar but without all the premium accoutrements of Qantas. A return to the ASX is now rumoured to be on the horizon, and the airline also last year scored a significant coup, striking a deal with deep-pocketed Qatar Airways to wet-lease 777-300s for flights to Doha – its first foray into long-haul international services since it went into administration.

“For Virgin itself to operate this using its own fleet would not be feasible – at least for the moment, or maybe in the next two to five years – because you have to place the order, you have to analyse the market, the route, and then determine where you want to fly. So, that is a kind of a medium to long term strategy, and then you can decide your fleet,” says Professor Zhang. “I think for Virgin, it would take a very cautious approach to determine to what extent it wants to expand its fleet – but if you want to address the current demand from the market and to expand your network, that kind of a partnership with the other airlines who are also interested in Australian market would give an advantage.”

Domestically, now that its financial position has stabilised, Professor Zhang also thinks Virgin will continue to be a major player in its middle-market niche.

“I think Virgin will definitely consolidate its positioning in the domestic market, where it really is doing well – it’s minimised head-on competition with Qantas and Jetstar, and found a well-balanced niche middle-ground market to satisfy the travel demand from the public. That’s something I think they need to hold onto – but it’s not easy to do, because if you move upward, you are competing on the premium market and service, and if you move a little bit downwards, then that would be a low-cost carrier. So, that kind of a well-balanced market positioning is really critical, and it requires strategic management to ensure it sticks to its aspiration and satisfy the market demand.”

The strategic management in question will not be that of Jayne Hrdlicka, however, who stepped down this year and turned over the reins to chief commercial officer Dave Emerson, saying in a valedictory post on LinkedIn that she “could not be more proud” to have helped lead Virgin out of the wilderness.

“Among the things I am most proud of includes the purposeful pace, focus, resilience and unwavering belief we demonstrated as a team. Today we are Australia’s most loved airline, most trusted, most punctual and reliable airline and we are delivering record financial performance and results that many thought impossible,” she said.

“It is extraordinary just how far we have come. It is a testament to the importance of having clarity on where we were headed and real conviction to deliver it. Today we are 8,000 people strong and growing from strength to strength. It has been a real team effort with all of us clear about our purpose and passionate about our ultimate success. We know we are never done getting better and we work hard every day to do better than the day before. This has been a core part of Virgin Australia’s success post-COVID.”

And according to Professor Zhang, Hrdlicka can definitely take a fair share of the credit.

“I think Jayne Hrdlicka played a very critical, pivotal role – the bold leadership, the strong leadership, was really important – but I think also we should not underestimate the market environment post-COVID where we’ve seen the booming of the air transport market, the demand increase,” she said.

“I think there are a lot of factors contributing, but there’s definitely no denying her leadership. That’s for sure. She definitely has had one of the most outstanding turnaround strategies for the airline industry.”