Virgin Australia Financially Secure? [Now in Voluntary Administration]

[AustraliaPoochie]

Just got that VFF email.
Ooo, they are so caring, telling us they are they are still flying some sectors.
And that VFF operates as a trust, with a trustee.

 

[Bagpuss]

Being reported in an article (if true).

The $2 billion in unsecured debt is spread across five bond issues trading at between 35 and 50 cents in the dollar.

One bond is trading in Australia and is presently at 37 cents in the dollar.

The rest of the debt, around $3 billion, is secured against aircraft and is more complicated to organise, so the plan to is to deal with unsecured holders as one vote and the five equity holders - all foreign airlines and in an equally difficult financial position - as the other group.

$3 billion secured against assets isn't great and I can now only assume that the majority of their aircraft have security over them. This also means a secured lender could place Virgin into recevership.

Unfortuanely, all this debt would be servicable over a period of time. so just escpaing the debt isn't going to provide any immediate financial advantage.

 

[Standby]

The current business fundamentals for all carriers won’t change anytime soon.the Difference last time VA raised some cash for the Velocity buy back , they had to stump up high single digit% to get the money,QF used new aircraft value and got their war chest at around 2%.They appear to be much better placed to last this out.The current issues in Asia will make it easier for QF to move hulls to Aus reassure the govt there will be plenty cheap fares to go around so no need to flush $1.4b for VA. They can even hire ex TT A320 pilots to grow quickly.just some random thoughts

 

[Jack_OC]

I think it's a brilliant move by VA, similar to what QF did when they grounded all planes way back when QF was dealing with labor issues.

The biggest physical assets VA has are planes, right now is literally the worst time to sell planes as everyone is grounded.

So VA is effectively daring the govt and creditors to force VA into bankruptcy, as there will be immense damage to the tourism industry if VA goes broke and only QF emerges from covid-19, and good luck on creditors for getting the money back as I don't think you can get any reasonable price in selling VA planes in this environment.

The VA announcement just relates to a halt of the trading of VAH shares on the ASX for up to 2 days. Trading halts on the ASX are quite common. They are intended to enable companies to deal with things like capital raising, debt restructuring, evaluating new information that might have a material impact on the business, etc, without having to announce all of the details right away. Under the ASX listing rules, they would be required to announce the details immediately if the stock was still trading, and that's not something any company wants to do while they are in the middle of negotiating something and/or before they have had a chance to fully consider the implications of new information.

An ASX trading halt has nothing to do with the company itself continuing to trade or to operate, so it's not in any way comparable to QF grounding its fleet.

 

[ethernet]

Very heavily foreign owned, hardly any local interests, and big risk of dilution. If left to go to the wall, there will be no lack of new entrants wanting a go at the golden boomerang, or the foreigners having to stump up their own capital to retain what they have. Plane leasing costs are expensive, especially since interest rates went south. The MBA Bermuda lease artists will not gain if they repossess planes or send airlines to the chopping block.

What is probably being mulled is lesser routes will be slashed or cancelled, no matter how much bailout largesse is given away free. In terms of electorate vote buying, any rescue package will fizzle after a few token flights. Even if the evil option(no overseas flights allowed, forcing everyone to spend Christmas in aus), that may backfire. Bang for buck, smart political money will be bailing out those who get nothing (excluding trendy art degree socialist set) and WA. And they won't give until Qld is ready for incoming. So advisors should be saying do nothing (While (FIRB says no).

NT and FNQ are ruined, as the coming wet season will cripple their peak season. An unstoppable wall of red ink.

 

[Must...Fly!]

VA have hardly any local interests?

What an interesting statement.

 

[ja1]

Just got that VFF email.
Ooo, they are so caring, telling us they are they are still flying some sectors.
And that VFF operates as a trust, with a trustee.

The sarcasm (I assume it is sarcasm) isn't really necessary is it ?

It's not about being 'caring' but simply communicating to their customer base..

And many people don't realise how VFF is setup structurally so it's not a bad thing to explain that it's part of the VAH group but run independently enough so there are meant to be some checks and balances in place..

I personally don't think VFF means much without VA having a life behind it but as other people have pointed out, it's a brand loyalty system with ~10m (?) people in it so there is some inherent or residual value there in any case..

 

[ja1]

Very heavily foreign owned, hardly any local interests, and big risk of dilution. If left to go to the wall, there will be no lack of new entrants wanting a go at the golden boomerang, or the foreigners having to stump up their own capital to retain what they have. Plane leasing costs are expensive, especially since interest rates went south. The MBA Bermuda lease artists will not gain if they repossess planes or send airlines to the chopping block.

What is probably being mulled is lesser routes will be slashed or cancelled, no matter how much bailout largesse is given away free. In terms of electorate vote buying, any rescue package will fizzle after a few token flights. Even if the evil option(no overseas flights allowed, forcing everyone to spend Christmas in aus), that may backfire. Bang for buck, smart political money will be bailing out those who get nothing (excluding trendy art degree socialist set) and WA. And they won't give until Qld is ready for incoming. So advisors should be saying do nothing (While (FIRB says no).

NT and FNQ are ruined, as the coming wet season will cripple their peak season. An unstoppable wall of red ink.

Yes they have foreign ownership (as lots of corporate entities do. Lets pick Ford as an example.

Hardly any local interests ? You mean you didn't see all the VA people hand assembling the planes right here in Australia ? What local interests are you actually talking about other than operating locally, employing people locally, maintenance locally (where that's possible..) and so on ?

And in terms of dilution, there's only a 10% free float so the people most at risk from dilution are actually the same foreign owners you referred to..

I don't have a comment on the rest of your post as I was thinking about it from the VA financially secure topic of the thread..

Where people now seem to have clearly separated into two groups of those who believe VA died a couple of months ago and we're just watching the twitching and another where they think it will survive (and come out of this) in some form but that every airline is going to have to adapt to deal with the changes - it's not the same world in 2021 or 2022 and so on..

 

[ja1]

The current business fundamentals for all carriers won’t change anytime soon.the Difference last time VA raised some cash for the Velocity buy back , they had to stump up high single digit% to get the money,QF used new aircraft value and got their war chest at around 2%.They appear to be much better placed to last this out.The current issues in Asia will make it easier for QF to move hulls to Aus reassure the govt there will be plenty cheap fares to go around so no need to flush $1.4b for VA. They can even hire ex TT A320 pilots to grow quickly.just some random thoughts

Perhaps I am missing some context but is this not the opposite of what's happening ? The fundamentals for all carriers have dramatically changed (or did you specifically mean, after the shutdown the fundamentals are the same?)

There are different political and funding elements at play. Qatar airways still seems to be flying while VA/QAN have shut down their international divisions.

I don't think QAN will 'reassure the government' in any meaningful way around fares being cheap (e.g. putting it in writing). As a business they are driven by business rationale which is fundamentally to charge what the market is willing to pay and the way to figure that out is to charge as much as possible and work downwards, not necessarily charge as little as possible and work upwards..

This is much easier to do when there is no competition and the Government does understand this. Whether it can do anything about it (or sufficiently in time/quantity) is something else again.

Qantas isn't the 'bad guy' in this scenario, while VA is absolutely the counter balance/competition. It's simply that Australia's strategic direction and needs (the national interest) may not be the same or always align with Qantas' strategic direction and needs..

 

[dajop]

I personally don't think VFF means much without VA having a life behind it but as other people have pointed out, it's a brand loyalty system with ~10m (?) people in it so there is some inherent or residual value there in any case..

I tend to agree with this, it does depend to a certain extent, if they can hang onto other travel partners.

One thing, we've talked a bit about the market power of QF in a post-COVID world, but ultimately investors can (relatively) easily start a new airline. The market power of QFF in the loyalty space will be immense if Velocity is not around. Takes years to build that up.

 

[ja1]

Virgin Australia announces trading halt. For those who missed the boat to transfer points to Krisflyer…..should you spend remaining points now in the online store or wait for a bailout miracle ?

There are three scenarios to consider:

- Do you have 'enough' points that doing anything makes some kind of financial sense. Lets put an arbitrary value on this of 100K points and lets say it took $10K of flying to earn the 100K points (when in reality you could have got 100K points with one CC signup and $5K of spend)

This makes it clear that someone with 1M points has a lot more to 'lose' in value and most of those have probably already transferred or redeemed points weeks ago as they had $100K worth of flying tied up.

If VA doesn't come back they've crystallised a loss in value but preserved the 'capital' of their points. Whether they get to use any (e.g. in KF) is another story both in terms of what flying resumes in 2021 and beyond and also in what value those points have.

- There are those for whom the value of the points was already written down to $0 on their 'personal' balance sheet - i.e where points were used for discretionary purposes and where they weren't available they were going to spend $$ anyway

There's no reason for this group to do anything. If VA doesn't come back in some form where points can be used they already operated on this basis and if VA does come back that works out OK for them.

- People with specific plans or point allocations for a purpose or targets etc.. These are all going to be out the window in the for seeable future which will drop them into one of the two categories above..


In summary, If you cared enough about the actual value of the points you would have done something by now and if you haven't it is really too late... and see below..

If it wasn't about the points but the benefits of status (and I'm in that category personally) then all you can do is wait to see what happens as what you want is for the airline to survive in a way that status makes sense and you can restart with points collection..

I have no doubt that points inflation (reduction in value rather) is going to be as much of a reality as actual inflation is a risk in an economic sense. In one way the lack of flying might actually increase the remaining value of points as there will be a bunch of expiry and/or inability to use points or where points have been redeemed, in effect leaving a smaller liability on the VFF balance sheet..

 

[drron]

Very heavily foreign owned, hardly any local interests, and big risk of dilution. If left to go to the wall, there will be no lack of new entrants wanting a go at the golden boomerang, or the foreigners having to stump up their own capital to retain what they have. Plane leasing costs are expensive, especially since interest rates went south. The MBA Bermuda lease artists will not gain if they repossess planes or send airlines to the chopping block.

What is probably being mulled is lesser routes will be slashed or cancelled, no matter how much bailout largesse is given away free. In terms of electorate vote buying, any rescue package will fizzle after a few token flights. Even if the evil option(no overseas flights allowed, forcing everyone to spend Christmas in aus), that may backfire. Bang for buck, smart political money will be bailing out those who get nothing (excluding trendy art degree socialist set) and WA. And they won't give until Qld is ready for incoming. So advisors should be saying do nothing (While (FIRB says no).

NT and FNQ are ruined, as the coming wet season will cripple their peak season. An unstoppable wall of red ink.

Hey we're coming to the end of the wet season.NT and FNQ make the majority of their tourism in the dry season which is just around the corner.So you can bet domestic flights will probably resume at the end of the dry season-ie September/October at earliest.

 

[Dr Ralph]

Trading halts on the ASX are quite common.

I wouldn't say that, but they are not unprecedented, especially when associated with a major announcement that is market sensitive.

 

[RAM]

VA has a bigger problem than Q ONLY IF the CV shutdown of international travel ends within a few months say end of June. Otherwise Q is in a worse position.

Q's cash flow situation changed massively once they sold their terminals in a 'Sale & Leaseback' push - all up they raised over $1.4bn through the sales of Brisbane, Melbourne & Sydney. The latest was Melbourne in 2019. That pretty much represents 100% of their entire cash holdings currently.

In other words, whatever free cash flow they've generated since 2013 (when the sell-offs began) they've paid out as dividends, buybacks, and some capex.

In 2018 S&P warned that Q is under-spending on capex and faces a massive increase from late 2020 onwards. They also cautioned about Q having an increasing operating cost base compared with the Q of old. Q, they noted in 2018 is rated as BBB- = the lowest to qualify as investment grade. Many investors cannot hold debt rated below investment grade aka junk bonds.

Q's fleet is much older than both SIA & Emirates for example. This equates to even higher relative operating costs as the older the planes then the higher the required maintenance AND time out of service. As has been seen by many of Q's competitors, such as SIA, where they've given back the A380s as soon as their 10 year leases expire. Q owns most of their A380s. Q boosted Jetstar's 'profitability' by giving them new aircraft and then moving them out to Q just before the first major increase in maintenance costs & replacing them with new aircraft once more.

VA's relative financial position begins to improve massively if the international lockdown extends beyond the end of June. Q can bring forward heavy maintenance but that has a large cash cost with it. If the international lockdown continues then the pressure on Q from the credit card companies will intensify as I suspect more people will seek a full refund instead of a 'credit'.

Q, more than VA, will be hoping this time is indeed different and this is the first Corona virus that has a successful vaccine developed for it - history is not on its side though. Any virus is hard to create a vaccine for, and Corona viruses rank as the hardest.

Aids has been around 'publicly' since 1979, caused by a virus, and now over 40 years later - no vaccine. Cynics would suggest that's because big pharma makes 50+x more by selling the drug combination to sufferers for the rest of their lives = far more lucrative. Less suspicious individuals suggest this just demonstrates how hard it is to develop a vaccine for a virus.

The common cold (rhinovirus) also remains without a vaccine....

If VA does get this re-organisation done, then Q may well get some unwanted scrutiny.

As for any 'new entrants' to rush to fill the void if VA disappears - well let's just say that in this CV world - I put the probability of a CV vaccine being developed & international tourism resuming within 12 months as a better bet.

 

[Jack_OC]

I wouldn't say that, but they are not unprecedented, especially when associated with a major announcement that is market sensitive.

If you mostly only follow ASX20 companies and the like, you won't see them very often, but they are quite common across the ASX as a whole. For example, 12 different ASX listed companies went into trading halt today alone. The company that I work for has had 5 trading halts in the past 4 years (without anything bad happening - all due to cap raises and M&A activity).

 

[jakeseven7]

The current business fundamentals for all carriers won’t change anytime soon.the Difference last time VA raised some cash for the Velocity buy back , they had to stump up high single digit% to get the money,QF used new aircraft value and got their war chest at around 2%.They appear to be much better placed to last this out.The current issues in Asia will make it easier for QF to move hulls to Aus reassure the govt there will be plenty cheap fares to go around so no need to flush $1.4b for VA. They can even hire ex TT A320 pilots to grow quickly.just some random thoughts

Even if domestic travel restrictions are lifted, PRE-ANTIVIRAL and PRE-VACCINE I think its fair to assume demand will still be quite soft.

I think the government is letting VA go right to the edge and perhaps over it before they do anything, which is probably appropriate.

In a soft demand environment, there may actually only be enough to go around for one - default of course this will be QF.

And VA is simply not too big to fail.

I'm beginning to now come to terms with there is a very good chance VA will not come through this and the government is probably realizing now that perhaps for the next 2 years or so they don't actually need 2 carrier groups. So why shell out money propping up both? Supporting the stronger player with the largest domestic reach - and ability to crank up international when required, and leave a second player to enter in a few years might make sense...

I sense the government is going to let VA go the wall, and then decide what they want to do....

 

[UP4014]

Being reported in an article (if true).

<<snipped>>

$3 billion secured against assets isn't great and I can now only assume that the majority of their aircraft have security over them. This also means a secured lender could place Virgin into recevership.

Unfortuanely, all this debt would be servicable over a period of time. so just escpaing the debt isn't going to provide any immediate financial advantage.

Anyone owed more than $2000 can issue a statutory demand. If your the guy who pumps out the toilets and you're owed money I say go for it. The court will wind up the entity if it is insolvent and can't pay. You don't need to be secured to do this, but you likely won't get anything except your name in Wikipedia as the guy who bought Virgin down.

It is surprisingly simple and effective at getting business to pay, the thing is to get in early while there is some cash to pay it if you're unsecured.

 

[moa999]

Age of QFs and VAs fleet has more to do with tax depreciation policies in Australia (20 years on aircraft) and growth..
Faster growing airlines will by their nature have lower fleet ages.

The government can do certain things to support the airlines, but indirect support is limited compared to places where the government owns the airports and could reduce leases and rents for example.

Aircraft lessors are also in a tough position.
12 months ago if an airline went broke that aircraft was released as soon as you could fly it away.
Call a lease for non-payment today and you might be sitting with an empty aircraft for years. They are arguably better off agreeing to lease reductions.

Simarirly much of the secured debt. What use to the lessor is a plane that you can't sell.

Will only work if all of the various parties come to the table, and would think it will take a combination of lease restructures, debt to equity conversions and additional equity injections

 

[woodborer]

I sense the government is going to let VA go the wall, and then decide what they want to do....

If VA goes, then they cannot later save QF.

 

[hydrabyss]

Anyone owed more than $2000 can issue a statutory demand. If your the guy who pumps out the toilets and you're owed money I say go for it. The court will wind up the entity if it is insolvent and can't pay. You don't need to be secured to do this, but you likely won't get anything except your name in Wikipedia as the guy who bought Virgin down.

It is surprisingly simple and effective at getting business to pay, the thing is to get in early while there is some cash to pay it if you're unsecured.

I thought the Government changed these laws recently for the next 6 months and assume it applies to all businesses but have not read all of it.