Virgin Australia Financially Safe under Bain?

[RAM]

Has anyone else noticed how despite all the media time given to the VA alarmists - the sky has not fallen?

Meanwhile there seems to be virtually no interest in applying similar scrutiny to Q.

Amazing how quiet things have gone with Q - given that QFF points are not cash backed in the slightest & Q's cash position is not flash. Certainly at only cents on the $ for QFF points. Interesting tmes indeed.

VA was able to start off with the planes taken at written down valuations, Q on the other hand seems two years behind in adjusting all but the A380s values held on their balance sheet.

Makes VA look even much more relatively sound, especially given the avg age of Q's fleet - amazing at it may seem Q's fleet (ex-A380s) avg age lengthened as the A380s were younger than the typical Q plane. Back in 2019 one of the ratings agencies issued a report about the massive capex requirements Q faced for that reason - older planes with much higher running costs, and significantly higher maintenance costs - both in time out of service as well as part replacement costs.

 

[travelislife]

Well Qantas have an international business haemorrhaging cash still that is outside their control which Virgin have the luxury of not having to worry about.

 

[SydneySwan]

Well Qantas have an international business haemorrhaging cash still that is outside their control which Virgin have the luxury of not having to worry about.

Well Qantas are free to make the same decision as VA - become a domestic only airline.

 

[travelislife]

Well Qantas are free to make the same decision as VA - become a domestic only airline.

Surely you are saying that in jest?

 

[MooTime]

Well Qantas are free to make the same decision as VA - become a domestic only airline.

would they have to take that kind of business decision to the shareholders?

Remembering Qantas is 40% foreign owned via shareholders. Highly doubt they'd want domestic only.

I realise it's tongue in cheek post.
Cheers

 

[SydneySwan]

Surely you are saying that in jest?

 

[eastwest101]

would they have to take that kind of business decision to the shareholders?

Remembering Qantas is 40% foreign owned via shareholders. Highly doubt they'd want domestic only.

I realise it's tongue in cheek post.
Cheers

Yep I took it a tongue in cheek as well.

But is there any specific law that would prohibit Qantas from closing its international division, selling the assets and becoming a domestic only airline? Shareholder approval would be up to the shareholders of course but they could be motivated by a one-off return on capital. They would obviously lose their designation as an ‘Australian International Airline’ but that only affects their ability to operate overseas.

The Qantas Sales Act is basically 'must be called Qantas, cap on foreign ownership, and must be based in Australia' so no legal impediments but obliviously a different story regarding public relations, government relations etc.

Politicians can huff and puff all they like but they can't compel a private company like Qantas to fly overseas if it decides not to.

There must be more to the Qantas Sales act than that though, otherwise Alan Joyce would have asset stripped Qantas and sold/floated Jetstar off as a separate business by now? I'm frankly surprised that they didn't attempt this during the current Covid crisis.

 

[oz_mark]

There must be more to the Qantas Sales act than that though, otherwise Alan Joyce would have asset stripped Qantas and sold/floated Jetstar off as a separate business by now? I'm frankly surprised that they didn't attempt this during the current Covid crisis.

Probably depends on what you mean 'asset stripped', but the planes are mortgaged, many of the terminal buildings have been sold back to the airports, catering has been sold off, etc etc.

 

[dajop]

There must be more to the Qantas Sales act than that though, otherwise Alan Joyce would have asset stripped Qantas and sold/floated Jetstar off as a separate business by now? I'm frankly surprised that they didn't attempt this during the current Covid crisis.

Jetstar is far too important to QF for it to be sold off, they wouldn't want to create a strong third competitor (which is what an independent Jetstar would be). I am sure politicians wouldn't stop Qantas selling of Jetstar if they wanted too, after all I think right now with the weakened VA, QF has #1 and #2 carriers in the Australian domestic market. Not too many other (competitive) industries have one company commanding 70% market share and owns the top two.

 

[coyote25]

Now that VA has taken the necessary and hard adjustments to their operating model and balance sheets they should be in a better place for long term survival and a strong domestic competitor.

In fact they should be in a better place then QF assuming private equity doesn’t try to load them up with debt and sell out for a quick profit. If VA had gotten a Government bailout they wouldn’t have been able to fix some many problems with their bottom line.

This has sucked for their previous workforce but is hopefully good long term for Australian domestic market. The stronger VA the better QF/JQ needs to be.

 

[HS-TQE]

Another question is apart from Velocity, there is basically no other assets (if there are any left) where PE could 'borrow against'.

As pointed out previously, HNA/EY/SQ/etc had already borrowed heavily against the entire owned Boeing fleet, and not suprisingly Bain didn't want to touch the mortgages on the older 737s and the 777-300ER fleet so those were offloaded to the banks/financiers.

VARA is another factor, Bain had looked at selling them a few times but there's a reason why the Fokkers and the sole legacy Skywest Airbus have been left unencumbered. It seems no banks/financiers (or parties) want to either acquire or loan money against those antiquated assets.

 

[RAM]

Well Qantas have an international business haemorrhaging cash still that is outside their control which Virgin have the luxury of not having to worry about.

...and that is exactly my point.

With VA the near endless stream of 'the sky is falling' articles were then followed by 'nobody in their right mind'.

Meanwhile the media seemingly ignored Q's 'enhancement' when they effectively shut down most redemptions some weeks before VA did.

Then, when Q launched its 25 June 2020 equity raising without mentioning that without the raising they would be facing below junk grade leverage ratios nor that they'd be insolvent - nobody, not even the ASX nor ASIC or whoever - asked about full & continuous disclosure requirements.

Perhaps ultimately in may end up being Rex that points out the 'emperor's new clothes' for Q.

One certainty - there is a zero value for QFF points if any Q administration occurs vs full cash backing for VFF points if VA MkII were to fail.

 

[jakeseven7]

Politicians can huff and puff all they like but they can't compel a private company like Qantas to fly overseas if it decides not to.

They won't need to, QF international is akin to a national security asset, has been spoken about and treated this way many many times. It will be protected, it is too important to lose, the government will continue to support it until travel markets start opening up again

 

[jakeseven7]

Then, when Q launched its 26 June 2020 equity raising without mentioning that without the raising they would be facing below junk grade leverage ratios nor that they'd be insolvent - nobody, not even the ASX nor ASIC or whoever - asked about full & continuous disclosure requirements.

I can't even start to reply, it is also so far off-topic to VA's financial security, that ulitmately resulted in the collapse.

In fact this thread should probably close lol - the VA1 financial security was not there, the airline collapsed, thread over Has probably outlived its usefulness now...

 

[RAM]

Yep I took it a tongue in cheek as well.

But is there any specific law that would prohibit Qantas from closing its international division, selling the assets and becoming a domestic only airline? Shareholder approval would be up to the shareholders of course but they could be motivated by a one-off return on capital. They would obviously lose their designation as an ‘Australian International Airline’ but that only affects their ability to operate overseas.

The Qantas Sales Act is basically 'must be called Qantas, cap on foreign ownership, and must be based in Australia' so no legal impediments but obliviously a different story regarding public relations, government relations etc.

Politicians can huff and puff all they like but they can't compel a private company like Qantas to fly overseas if it decides not to.

There must be more to the Qantas Sales act than that though, otherwise Alan Joyce would have asset stripped Qantas and sold/floated Jetstar off as a separate business by now? I'm frankly surprised that they didn't attempt this during the current Covid crisis.

Q cannot afford to allow any external party to look deeply into their accounts IMHO. Woudln't look good for a 'purchaser' to walk away after some due diligence now would it?

Spoiler: More ...

Q's accounts show that Q has near zero (as in NADA) as far as long term assets other than planes of which now all that can be borrowed against or used for 'sale & leaseback' have been used. There are some 25+ yr old planes that nobody will lend against but their value is virtually zero in the real world. As far as Net Current Assets go - well they've gone.

True I can not be described as an AJ fan BUT he did not start the asset stripping of Q - James Strong commenced that process long ago. Their's nothing left for private equity as Q's management followed the PE handbook from before Q was floated.

What most do not know or forgot - Q entered into sale & leasebacks of all their airport properties (perhaps bar one small holding) long before AJ got the nod.

Before that there were some very fancy tricks immediate pre & post float that arbitraged their previously tax-free status (at the tax payers expense of course) which allegedly locked in most of their first post-float decades profits. The effect of which was reckoned to mean that the Community (via the Federal Govt) actually lost money by floating Q - aka it cost the tax payer significantly more than was received in the float proceeds.

Subsequently Q used some very clever accounting to generate profits, which some argue was fortuitously 'washed by the grounding of the interational operation & massive write-off in plane values. Strange how the values written down were actually multiples of the cost of the exact same planes. 'Value in use' a great way to create say a 100% gain on purchase price.

What AJ & Co did was to cash in the time remaining on those leases for some of their terminals (one cashed in with around 18 months to go). Of course this could see massively higher new leases written (after all getting a $1bn payout for ending the lease early has to be paid for some way does it not? Macquarie Bank is not renowned as giving money away).

Why? To create some taxable profits to generate franking credits to allow more share buybacks - if not for cashing in every long term lease (of any value) then the bulk of the last 3 years share buybacks would not have happened and senior mgmt would likely not have received more than a fraction of the bonuses/remuneration they did due to meeting EPS & other targets.

If based purely on operational profits then pretty much all related bonuses (including options to execs such as AJ) would not have happened.

Q even miscalculated and gave away more franking credits than they had (in the last buyback in late 2019). They now owe the ATO franking credits & seemingly face zero penalties for doing so. I cannot imagine if you or I owed the ATO something

 

[RAM]

I can't even start to reply, it is also so far off-topic to VA's financial security, that ulitmately resulted in the collapse.

In fact this thread should probably close lol - the VA1 financial security was not there, the airline collapsed, thread over Has probably outlived its usefulness now...

In a duopoly the strength of each company directly impinges on the other. Q continues to suffer the 'death of 1,000 cuts.

Unlike Q's position in Australia - internationally Q is a minnow & a price taker. Q has hundreds of thousands of sq metres of leased space overseas that it is paying full freight on, VA II has virtually zero. Q also has significant leases in Australia & is still trying to sub-let massive amounts & still paying on that vacant space.

Spoiler: Read More

Then there are the ongoing costs of maintenance on the largely grounded international fleet, to meet the FAA requirements (to fly into the US) will likely cost well above $150m just for the A380s which was heralded in various 'notes' to the accounts. Hawaiian Airlines in mid 2020 put out a very good explanation piece on FAA requirements for grounded aircraft, which goes a long way to explain why the Q A380s were definitively put into long term storage very quickly otherwise the Q cash burn would have been significantly worse based on just the required expenditure on the A380 fleet. To bring them back my cost more than their true market value (including scrap value).

If there is anything specific you believe I made an error about - please identify it for me to correct.

VA's position was not that dis-similar to Q's, as Q's cash flow statements from 2017/18, 2018/19 & 2019/20 demonstrate.

You'll find page references to Q's 2019/20 Annual Report in earlier posts I made (from early 2020) substantiating every point.

In some of Q's own notes to the accounts are some very revealing (appalling to some) confessions.

Or perhaps you'd prefer to read the report put out by S&P about Q's capex nightmare (published in 2018). The cupboard was even emptier by early 2020. Even to the point of paying out more franking credits (for the Nov 2019 share buyback) than Q actually had. That really is a bare cupboard.

"Since its financial turnaround in fiscal 2015, Qantas has used surplus capital to fund shareholder returns rather than to grow invested capital. We do not view this as sustainable," says S&P credit analyst Graeme Ferguson.

The report also highlighted that rival Virgin Australia has a much younger fleet.

Post administration the fleet age differential is even greater which has major ramifications for operational costs, reliability & unscheduled downtime. Equally the time taken for age/flight cycle checks is significantly longer & more costly.

VA & VA II had/have fully cash backed VFF points, Q does not. If the cash value required to fully back all QFF points as at 30.6.20 was taken out of Q's balance sheet (as was done for VA) then Q would have ceased trading & gone into administration.

However, Q does not protect the value of QFF points for QFFers like VA did & VA II does.

If border closures continue much longer than the idea of Q becoming more like VA II is much more than 'tongue in cheek'.

Will REX play the role of the young boy in 'The Emperor's new clothes' & be the upstart to call this out?

 

[Franky]

In a duopoly the strength of each company directly impinges on the other. Q continues to suffer the 'death of 1,000 cuts.

Unlike Q's position in Australia - internationally Q is a minnow & a price taker. Q has hundreds of thousands of sq metres of leased space overseas that it is paying full freight on, VA II has virtually zero. Q also has significant leases in Australia & is still trying to sub-let massive amounts & still paying on that vacant space.

Spoiler: Read More

Then there are the ongoing costs of maintenance on the largely grounded international fleet, to meet the FAA requirements (to fly into the US) will likely cost well above $150m just for the A380s which was heralded in various 'notes' to the accounts. Hawaiian Airlines in mid 2020 put out a very good explanation piece on FAA requirements for grounded aircraft, which goes a long way to explain why the Q A380s were definitively put into long term storage very quickly otherwise the Q cash burn would have been significantly worse based on just the required expenditure on the A380 fleet. To bring them back my cost more than their true market value (including scrap value).

If there is anything specific you believe I made an error about - please identify it for me to correct.

VA's position was not that dis-similar to Q's, as Q's cash flow statements from 2017/18, 2018/19 & 2019/20 demonstrate.

You'll find page references to Q's 2019/20 Annual Report in earlier posts I made (from early 2020) substantiating every point.

In some of Q's own notes to the accounts are some very revealing (appalling to some) confessions.

Or perhaps you'd prefer to read the report put out by S&P about Q's capex nightmare (published in 2018). The cupboard was even emptier by early 2020. Even to the point of paying out more franking credits (for the Nov 2019 share buyback) than Q actually had. That really is a bare cupboard.

"Since its financial turnaround in fiscal 2015, Qantas has used surplus capital to fund shareholder returns rather than to grow invested capital. We do not view this as sustainable," says S&P credit analyst Graeme Ferguson.

The report also highlighted that rival Virgin Australia has a much younger fleet.

Post administration the fleet age differential is even greater which has major ramifications for operational costs, reliability & unscheduled downtime. Equally the time taken for age/flight cycle checks is significantly longer & more costly.

VA & VA II had/have fully cash backed VFF points, Q does not. If the cash value required to fully back all QFF points as at 30.6.20 was taken out of Q's balance sheet (as was done for VA) then Q would have ceased trading & gone into administration.

However, Q does not protect the value of QFF points for QFFers like VA did & VA II does.

If border closures continue much longer than the idea of Q becoming more like VA II is much more than 'tongue in cheek'.

Will REX play the role of the young boy in 'The Emperor's new clothes' & be the upstart to call this out?

There was a good article in this morning's Oz with the story of the 4 Deliotte's adminsitrators who got Virgin back on their feert, from what was then considerd to be an impossible position.

 

[jonboixxx]

Makes VA look even much more relatively sound

VA will be sound; BAIN will make sure of that.

 

[jakeseven7]

VA will be sound; BAIN will make sure of that.

Yes VA2 will be operating for a while we don’t have to worry about that because to sell it, Bain will want it running.

How ‘sound’ the operating model is will be completely and 100% hidden from public view with only good news PR sound bites used from here on in - and Bain they don’t really care how sound it is as long as it looks good enough to a suitor in 3-5 years for the on sell.

 

[jonboixxx]

Bain they don’t really care how sound it is as long as it looks good enough to a suitor in 3-5 years for the on sell.

Surreptitious, for sure. I won't be an investor.