Virgin Australia Financially Secure? [Now in Voluntary Administration]

[Must...Fly!]

The (wealthy) owners are less of an advantage as they would (or will) be facing their own cash crisis going forward.

@juddles I do not pretend to understand the market in any way, but Qantas and Virgin are very different in their ownership, for better or worse.

The business that would have plenty of spare cash if required is Etihad. They have snubbed every other investment but I feel like Virgin Australia is more important to them than any of the equity shares they purchased. They themselves lost $800m last FY, however that is a significant improvement on past years (where losses were in the several billions).

 

[HS-TQE]

Sorry to have to reply to this again, but have re-read this.

If the opportunity arises, I have no doubt SQ will take control of VA .

They've had many opportunities over the years, they chose not to do so.
SQ's best opportunity was during the NZ sell-off, but NZ sold to Nanshan Group.
Then there was the "new share issuing" which led to HNA group coming in.

Per the previous reply to this post, there has been many "SQ to takeover VA" news articles over the years, which in all cases have been "fake news". Per SQ's previous track record in the past 5 years, I wouldn't take any further SQ interest in VA seriously.

There are so many strategic reasons for SQ to be the #2 airline operator in Australia.

Not to mention all the A359's they have on hand - replacing the VA 77W's at significant cost benefit.

As pointed out by others, the reason why SQ still has their VA stake is to access their FF base to fill their own planes, rather than be hands-on in the Australian market.

Should SQ still wish to be a #2 airline in Australia, it'll be more likely through a VA "asset sale", should "worse come to worse", as opposed to picking up VA in it's current form.

Picking up the owned VA 738s and some SYD/MEL slots would allow SQ to have their "3rd attempt" (after the NZ/AN debacle and Tiger Australia attempts) at the Australian Market through a bare-bones domestic operation.

Also, SQ aren't going to give/lease their 359s to VA for nothing. The 359s are for the SQ operation, not for any of their subsidiaries or their investments.

 

[ja1]

Sorry if this is way off but my understanding is that due to their ownership structure and the fact they still have roughly a billion dollars cash on hand there is very little (if any) chance of virgin going into involuntary administration in the short term, i.e. next few months. If this assumption is wrong can someone please correct me on it and possibly explain why.

If that assumption is right then my next question would be regarding them going into voluntary administration. At what point does that become a feasible option on the table, could it already be on the cards? how quickly would it happen and who makes the final decision if it does get to that point?

You're right on the cash and cash equivalents based on publicly filed information.

Directors of the company can make a decision to go into voluntary administration (aka "call in the administrators"). They do this specifically where they believe that to continue trading, there is a good chance the company cannot pay its debts as and when they come due. This is defined as 'trading while insolvent'. When a company does this, repayment for debts after this point of 'insolvency' can be pursued from the directors of the company personally. As you can imagine they are very reluctant to have this happen. Australian laws allow for appointment of an administrator to run the company giving them a period of time to create a plan for how to pay creditors. You can then come out of administration or possible wind up the company under administrator (possibly the worst case outcome).

This is all academic as you've pointed out for the next couple of quarters anyway, VA has cash and options. It does need a plan and to execute on that plan as other people have pointed out that when you're making a loss, you're losing that buffer - i.e liquidity. Qantas may be in exactly the same position (are they making a profit at the moment?) but the difference is they have a lot more money in the bank to burn through.. and a lot more assets as well.

 

[moa999]

Except that because the free float is 8% or less, this is like making that diagnosis by inspecting the patients foot.

Not really.
The price is still set by the marginal buyer and seller. Those few shareholders in the 90% haven't traded for some time (and indeed are restricted by creep provisions and insider trading rules)

Cash in an airline can disappear very quickly in the event of a crisis of confidence. Bookings (cash inflow) dry up, people start redeeming FF points for third party airlines or toasters (cash outflow) and suppliers start demanding upfront payment.

Virgin isn't there yet, but it's got a lot of debt (not helped by the recent Velocity acquisition at a hefty multiple) and all airlines face a challenging earnings outlook.

SQ share price is at decades low at S$7.60, down from $9 at the start of Jan.

 

[Must...Fly!]

PS isn't missing the opportunities presented by COVID-19

Virgin chief calls on government to rein in airport fees as virus take toll

Virgin chief executive Paul Scurrah says lower airport charges would lead to less pressure to cancel flights.

www.smh.com.au

While important, I would suggest the focus of VA also needs to be on planning for very responsive capacity reductions. Despite $1b in the bank, if bookings and incoming cash really do start drying up, then they will need to make sure every cent goes as far as it can, as the world will come out of this and things absolutely will return to normal, in time.

 

[ja1]

You clearly understand these things more than I, so I will withdraw from comment. And I do so taking the hit of not investing in VA...

Don't withdraw @juddles - you're asking interesting questions and I don't think anyone has an issue with that..

And I think the number of AFF members who are investing in VA is probably as closer to zero as possible so you aren't alone! They're not in the ASX200 so there's probably not that many super funds that even have any shares..

 

[ja1]

People start redeeming FF points for third party airlines or toasters (cash outflow) and suppliers start demanding upfront payment.

I think VA would love more people to keep redeeming points for toasters (don't know exactly how it works out for them on third party airlines). It'd be a licence to print money if the basic premise held - that people keep flying but use FF points to redeem items that VA is effectively making money on both sides of the equation. i.e reducing their book liability in accounting terms while clipping the ticket on a sale (redemption) via the supplier effectively rebating VA for part of the value of the redemption.

The whole FF thing really exploded the moment the airline (or an account there somewhere anyway) worked out that rewards didn't just have to be airline seats but could be anything..)

 

[jakeseven7]

PS isn't missing the opportunities presented by COVID-19

Virgin chief calls on government to rein in airport fees as virus take toll

Virgin chief executive Paul Scurrah says lower airport charges would lead to less pressure to cancel flights.

www.smh.com.au

While important, I would suggest the focus of VA also needs to be on planning for very responsive capacity reductions. Despite $1b in the bank, if bookings and incoming cash really do start drying up, then they will need to make sure every cent goes as far as it can, as the world will come out of this and things absolutely will return to normal, in time.

Time for another AFR cover with AJ?

Can't see them winning this one... Unfortunately our corrupt monopolistic airports have the government in their back pocket. Cough, PER, cough, leader of the pack. Ironically, if PER had grown a brain they might have PER-PARIS/FRANKFURT operating now and they would be making a killing. Too bad so sad.

 

[Must...Fly!]

So with QF announcing an immediate 17% group wide capacity reduction in response to COVID-19, and a rumour that loads to Japan (including Tokyo) have completely and utterly collapsed (to the tune of loads being <10% on some flights), is it time that Virgin just admits that they need to postpone Tokyo and hope they can keep the slot later?

Qantas has characterised the impact on their business as "sudden and significant". While their exposure is orders of magnitude higher than Virgin Australia, their ability to withstand the financial headwinds with significant losses on domestic is surely almost nil.

Some big discussions to be had over the coming day or two for Virgin.

 

[jase05]

Time for another AFR cover with AJ?

Can't see them winning this one... Unfortunately our corrupt monopolistic airports have the government in their back pocket. Cough, PER, cough, leader of the pack. Ironically, if PER had grown a brain they might have PER-PARIS/FRANKFURT operating now and they would be making a killing. Too bad so sad.

I have read that the Taiwanese government has put aside US$140m to be used for subsidizing airline landing and airport facilities costs. Would be nice if our government could do something similar. Both airlines need help

 

[ja1]

Time for another AFR cover with AJ?

Can't see them winning this one... Unfortunately our corrupt monopolistic airports have the government in their back pocket. Cough, PER, cough, leader of the pack. Ironically, if PER had grown a brain they might have PER-PARIS/FRANKFURT operating now and they would be making a killing. Too bad so sad.

Might be different this time around.

The usual tussle is essentially around a monopoly arrangement (the airport) vs a captive supplier and when everything is going well, it's really an argument around who gets the larger section of the profit on the table. The airlines eventually end up losing this because of what you've said above and they're pretty pissed about it, sure.

But at the moment these aren't the normal times and there's no way for an airport to win out of this as airlines cutting back will directly affect the bottom line as there will simply be less passengers. i.e it's a situation where everyone is losing in the short term and having a fight about it right now will make the participants look silly and not focusing on sustainability and so on..

I suspect the airports will be pretty quiet in this conversation and signal to the government that if they made short term arrangements to cut everyone some financial breathing room this isn't a bad thing but in such a way that it sets no precedents for the future negotiations around charges..

 

[Must...Fly!]

I would heavily suspect this is a part of their new investor relations strategy that they had to quickly roll out last week - they did back to back briefings with investors, financiers, financial press etc

Could you explain this point a little further, @pauly7 ?

 

[Mr Pumblechook]

I have read that the Taiwanese government has put aside US$140m to be used for subsidizing airline landing and airport facilities costs. Would be nice if our government could do something similar. Both airlines need help

I don't know if giving taxpayer money to an airline with the highest paid CEO in the world, and another 90% owned by foreign governments, to subsidise their payments to airport operators (themselves famous for overcharging and underinvesting) would be a popular policy.

 

[dajop]

an airline with the highest paid CEO in the world,

This is fake news. Yes the guy is paid extremely highly, probably way too highly.

But it has been proven again and again that quite a few airline CEOs are “paid” more handsomely than AJ. The guy did very well because he cashed in some shares that he was granted at $1 when they reached $6, like many investors I bet. But his “pay” (including base pay, bonuses, stock options and stock grants) is definitely below the CEOs of Delta, United and American. There was a figure of $24m floated around -that was for one specific year - and 60% of that figure was due to one off stock market gains.

I detest a lot of executive remuneration. I’m not a fan of AJ or what he’s done at QF(from customer point of view). But above all the I detest distortion of facts.

 

[ja1]

This is fake news. Yes the guy is paid extremely highly, probably way too highly.
...

I detest a lot of executive remuneration. I’m not a fan of AJ or what he’s done at QF(from customer point of view). But above all the I detest distortion of facts.

Agreed.

The specific figure quoted and it's worth noting that 'pay' and 'remuneration' are two entirely different things. AJ's annual salary is $2.1m which makes him nowhere close to the best paid CEO in the industry.

His remuneration (package) is entirely different and the discussion around that should take that into account (not saying it shouldn't be discussed but like dajop, prefer to have facts).

At this point you have to say that AJ and the exec team and the board have done everything right so far by way of optics. Taking a salary cut (to presumably $1 between now and Jun 30) is symbolic but exactly the right symbol when he's asking staff to take leave or LWOP or knows they might have to make redundancies depending on what happens. Same for the board with the 30% cut.

What was interesting is that he stated QAN have ~$2.1b in cash and liquid assets, which when you think about relative size to VA is not that much more proportionately than VA's ~$1b equivalent.. VA's market cap is $730m vs QAN being $8.4b !

Goes to show that in this business you need to have a chunk of cash to deal with issues but noone can afford to leave too much cash lying around either..

 

[Must...Fly!]

Agree re: cash reserves.

If VA do the right thing and announce delay of Tokyo and official rationalisation of capacity across the network, I can see the market panicking further and dropping the price to 5c within a few days. If so, I might be convinced to roll the dice.

 

[ja1]

Agree re: cash reserves.

If VA do the right thing and announce delay of Tokyo and official rationalisation of capacity across the network, I can see the market panicking further and dropping the price to 5c within a few days. If so, I might be convinced to roll the dice.

You think the market will panic if VA does the _right_ thing ? Wow, that's confusing..

I don't think I can roll the dice on an investment in VA at any point but I'm happy to roll the dice in being a customer - which I think was the main point of this thread? To allow for discussion in a transparent way for people to think about whether VA's financial stability meant it was OK to keep using them and what it meant for FF status, points and so on. Lots of people have long memories of Ansett.

I think that's been well and truly put to bed in discussion so far?

 

[Must...Fly!]

Well I guess I think it's the right thing for them to do. But perhaps those with shares that can actually be traded may take it as a sign that the airline is in very bad shape, which I can also understand.

 

[dajop]

Do we think that VA will use COVID-19 as an excuse to pull international completely? With QF's substantial reductions to US, surely VA's 18 services must be facing difficulties too?

 

[jase05]

Do we think that VA will use COVID-19 as an excuse to pull international completely? With QF's substantial reductions to US, surely VA's 18 services must be facing difficulties too?

The 777’s are all scheduled for heavy maintenance from July to September currently and services were due to be temporarily reduced during that time. Perhaps they can bring that forward?