Virgin Australia Financially Secure? [Now in Voluntary Administration]

[Must...Fly!]

The Australian reports VA will issue statements today regarding the financial side of the airline to reassure investors - the bond price continue to fall. I expect there will be some ultimately prudent decisions too.

Virgin Australia is expected to update the market on Wednesday surrounding its current state of affairs as its debt investors, who have watched the $100 they paid for their bonds slide to $62, remain on tenterhooks.

The carrier is under the spotlight as the aviation industry remains in turmoil due to the coronavirus and the extent of the damage depends how long the health crisis continues.

Virgin Australia is buckling under adjusted net debt of $5bn when its market value is only $675m and it posted an $88.6m half-year loss. Its bonds slid to $62 on Tuesday morning before rebounding to $72 later in the day, only months after investors took up the offer.

Trading is slim in the Virgin bonds, which are listed here in Australia, with only 16,631 traded by Tuesday morning.

Yet some believe a bailout of the carrier by shareholders such as Singapore Airlines would occur before it would be allowed to collapse. Singapore Airlines has been tipped before to be keen to secure a stronger grip on Virgin Australia, and the situation could even be used as an opportunity to take more market share away from Qantas.

Investment bank UBS assisted Virgin Australia last year on its bond raising, which secured $325m to help pay for its $700m acquisition of the remaining 35 per cent stake in the Velocity frequent-flyer program that it did not own.

The challenge for Virgin remains the fixed costs it has for operational leases and asset finance on its aircraft, although some take comfort from its $900m deposit that it has at hand and that the lower oil price will mean falling fuel costs.

The payments for the leases need to be made even though international air travel is plummeting due to efforts to contain the spread of the coronavirus.

 

[HS-TQE]

Yet some believe a bailout of the carrier by shareholders such as Singapore Airlines would occur before it would be allowed to collapse. Singapore Airlines has been tipped before to be keen to secure a stronger grip on Virgin Australia, and the situation could even be used as an opportunity to take more market share away from Qantas.

Going by SQ's mediocre track record, we've heard this "Fake News" many many times before for the past 5 years.
There's a better bet of SQ waiting for "the worst" and picking up some of the assets at a "Fire Sale" than "taking over" VA in its current form.

 

[pauly7]

The Australian reports VA will issue statements today regarding the financial side of the airline to reassure investors - the bond price continue to fall. I expect there will be some ultimately prudent decisions too.

Interesting, clearly all their emergency 1-1’s last week have not done enough the calm the crowds.

 

[pauly7]

Going by SQ's mediocre track record, we've heard this "Fake News" many many times before for the past 5 years.
There's a better bet of SQ waiting for "the worst" and picking up some of the assets at a "Fire Sale" than "taking over" VA in its current form.

I have a small conflict of interest commenting on SQ but let me say this for thought and others can discuss and tease it out

Financial capacity aside as ‘mediocre’ as that may be at the moment... there is something else that SQ sorely lacks that has been a big contributor in a full takeover scenario and that is strategic capability to run an airline like VA (or indeed AN I suppose as well).

 

[Melburnian1]

..Financial capacity aside as ‘mediocre’ as that may be at the moment... there is something else that SQ sorely lacks that has been a big contributor in a full takeover scenario and that is strategic capability to run an airline like VA (or indeed AN I suppose as well).

Interesting, because one surface travel operator I know of in Australia that's owned by Asians a few years back had quite a few of them come to Oz to more or less operate it, but they returned home some time later, allegedly disillusioned. The culture wasn't perceived as similar, especially dealing with unions. For SQ into VA, that may be a smaller consideration.

 

[Must...Fly!]

Fitch Rtgs: Virgin Australia Can Manage Coronavirus Liquidity Pressures over the Short Term

Fitch Ratings-Sydney-10 March 2020: Virgin Australia Holdings Limited (B+/Stable) has the flexibility to manage potential liquidity pressures over the short term that may stem from falling demand for air travel due to the COVID-19 outbreak, Fitch Ratings says. The airline's high levels of...

newsroom.aviator.aero

Long story short, Fitch believe the airline will be financially sound until late 2020 at the earliest.

 

[Melburnian1]

Long story short, Fitch believe the airline will be financially sound until late 2020 at the earliest.

IIRC, these ratings agencies were heavily criticised for failing to foresee some other 'difficult times.'

I don't believe the prognosis for VA is as good as Fitch indicates. Notably it doesn't discuss the A$5.4 billion in debt that the airline carries.

 

[ja1]

IIRC, these ratings agencies were heavily criticised for failing to foresee some other 'difficult times.'

I don't believe the prognosis for VA is as good as Fitch indicates. Notably it doesn't discuss the A$5.4 billion in debt that the airline carries.

So Fitch Ratings is literally rating the debt (i.e the bond notes) - it's not providing an outlook on the share price or any investment one might make into equity..

So far from not discussing it, the whole article should be read in the context of the debt picture and VAH's ability to pay those bond notes as and when they come due.

The bonds aren't of course all of VA's debt as they'd have credit facilities, leases and so on, but they represent a big part of it.

 

[HS-TQE]

..
there is something else that SQ sorely lacks that has been a big contributor in a full takeover scenario and that is strategic capability to run an airline like VA (or indeed AN I suppose as well).

SQ's past track record on investments suggests that as well, being involved in NZ/AN debacle and having to sell VS at a loss. The Tiger Airways attempt in Australia is also another.

The jury is probably still out on SIA's involvement in the Vistara JV with TATA group, even though that has also been largely a money loser for most of their involvement. The recent decision to introduce 787s may or may not be seen as a mistake at Vistara.

 

[jakeseven7]

Interesting, because one surface travel operator I know of in Australia that's owned by Asians a few years back had quite a few of them come to Oz to more or less operate it, but they returned home some time later, allegedly disillusioned. The culture wasn't perceived as similar, especially dealing with unions. For SQ into VA, that may be a smaller consideration.

Culture is definitely a factor, interesting angle. SQ operates under verrrrry different laws and workplace agreements than in Australia.

@pauly7 my guess would be that singapore airlines has zero strategy and experience operating relatively big short haul high turn domestic carriers which is a very different beast to their current business model.... Warm?

 

[eastwest101]

I have a small conflict of interest commenting on SQ but let me say this for thought and others can discuss and tease it out

Financial capacity aside as ‘mediocre’ as that may be at the moment... there is something else that SQ sorely lacks that has been a big contributor in a full takeover scenario and that is strategic capability to run an airline like VA (or indeed AN I suppose as well).

Interesting comment - I would interpret that as SQ can see some potential in the VA business (in 'normal operating environments, and obviously early 2020 is not a normal operating environment for airlines), but can't see any expertise (currently runnning VA or available at the moment in the market) to turn around the business?) Is that what you are saying? They are looking for a person or a team who can turn it around?

Of is it more of the dysfunctional ownership structure and they are simply waiting for an ownership opportunity - say EY, or one of the Chinese owners to become a distressed seller?

Some would argue that it might be 'easier' to wait for the VA business to implode and buy the assets cheaply off the receivers rather than spend time and money to 'fix' the business, the other advantage with this plan is that you get to dictate terms of relaunching the business to staff, governments, airport owners and aircraft leassors. The obvious drawback to this strategy is that VA can survive with its domestic business and reasonable cashflow and cash reserves for quite some time so you may never get the change to pick up those cheap assets from the receiver.

 

[HS-TQE]

Interesting comment - I would interpret that as SQ can see some potential in the VA business (in 'normal operating environments, and obviously early 2020 is not a normal operating environment for airlines), but can't see any expertise (currently runnning VA or available at the moment in the market) to turn around the business?) Is that what you are saying? They are looking for a person?

Of is it more of the dysfunctional ownership structure and they are waiting for an ownership opportunity - say EY, or one of the Chinese owners to become a distressed seller?

SQ's best opportunity for a "take over" was when NZ was selling up after the CL/JB blow up. SQ of course chose not to put a bid (i.e one of the many 'Fake News' articles) and Nanshan ended up taking the NZ stake.

Saying that, An investor proposing to go above 20% normally requires a "take over" bid over under ASX regulations.
The alternative is any existing investor (including SQ) can go above 20% without initiating a formal takeover, but only under 3% "Creep" regulations every 6 months

 

[wannabeinvestmentbanker]

Not to mention that FIRB would most likely get involved. SQ is majority owned by Temasek Holdings which is the Singaporean Sovereign Wealth Fund. So essentially, Singapore 'government' would be controlling an Australian Airline which I imagine would not be that popular politically.

 

[ja1]

Not to mention that FIRB would most likely get involved. SQ is majority owned by Temasek Holdings which is the Singaporean Sovereign Wealth Fund. So essentially, Singapore 'government' would be controlling an Australian Airline which I imagine would not be that popular politically.

But as politics is about weighing up alternatives and the Australian government has no interest in any direct financial stakes in airlines

1) Which government would they rather have as a controlling shareholder?
2) Is it better to have a government shareholder or to see the airline wither from lack of investment..

 

[dajop]

I don’t get the discussion of SQ. Strategically, as I’ve mentioned before surely their interest in VA is not necessarily about generating a significant profit stream through an investment, but rather to feed their many services (pre-COVID19 it was almost 150 a week).

I don’t mean just via Velocity overall membership base - but to capture corporates and high frequency domestic travellers for north/westbound travel in the same way that QF captures its own “domestic” SGs and WPs internationally. If you took VA out of the equation, all of those domestic road warriors would be flying QF and their carriers of choice (the ones they’d choose internationally) would in many instances be QF or it’s oneworld or other partners.

 

[jakeseven7]

I don’t get the discussion of SQ. Strategically, as I’ve mentioned before surely their interest in VA is not necessarily about generating a significant profit stream through an investment, but rather to feed their many services (pre-COVID19 it was almost 150 a week).

Consider though, that a sharpened up VA domestic (junked / got rid of Tiger, VA International and most of VARA) and a healthy Velocity could actually be a relatively significant profit stream to an owner PLUS the ongoing feed you mention.

 

[HS-TQE]

Consider though, that a sharpened up VA domestic (junked if Tiger, VA International and most of VARA) and a healthy Velocity could actually be a relatively significant profit stream to an owner PLUS the ongoing feed you mention.

As argued previously, would it be a more "profitable" scenario, if VA in it's current form was to get administrators sent in, where SQ (and perhaps a partner) picked up the VA assets (namely the 737s and SYD/MEL slots) to start a new domestic operation with lesser financial liabilities and new staffing agreements.

Some of the management at NZ that was around during the Luxon era may be onboard with the idea if SQ was to approach NZ about forming a JV to pick up some of the VA assets for a domestic operation (including buying the VA's Velocity arm to attach to the hypothetical new domestic operation) if administrators were to be sent into VA.

Edit: Saying all that, it's unlikely VA will get to the administrator stage at this time. Although that has been mentioned as an option many times before. It's unlikely there will be a "white knight" situation from the current (or any future potential) shareholders this stage considering most have financial difficulties of their own or are currently writing down losses from investments (including those that may have a VA stake).

 

[Max Samuels]

I just came across this post now... and interesting to see how much has changed since this was first posted!
I think the same question could be asked of any airline at the moment...

 

[Plutonus]

SQ and VA are very different - the way they operate, their target market, etc not to mention the political side of things being a majority government owned flag carrier.

SQ realised they couldn't make Tiger Australia work and it wouldn't be a stretch to think that means they wouldn't be able to manage Virgin.

Although, if they got the right people in place, who knows.

 

[HS-TQE]

SQ and VA are very different - the way they operate, their target market, etc not to mention the political side of things being a majority government owned flag carrier.

SQ realised they couldn't make Tiger Australia work and it wouldn't be a stretch to think that means they wouldn't be able to manage Virgin.

Although, if they got the right people in place, who knows.

The "right person" also needs the backing of the workers in addition to the shareholder board support. Without that support, the person can't do too much.

Case in point would be Sir Rod Eddington, former AN CEO prior to the NZ takeover.

Whilst Eddington was credited with the turn-around of AN to make it attractive for the buyer of the News Corp stake, he had headwinds from many places.
Whilst Eddington had the support of the board, but he was facing headwinds from both the higher ups at NZ (which at the time had their "Borghetti" like chairman in Selwyn Cushing) , as well as the unions at AN. A legacy agreement between AN and NZ which allowed the higher ups at NZ to veto any buyer (namely SQ) of News Corp's AN stake was pretty much the final straw for Eddington.