https://www.afr.com/chanticleer/virg...0200501-p54oyz
Virgin won't be a repeat of Ansett
May 2, 2020 – 12.00am
It is now apparent Virgin will survive under new ownership and continue to provide robust competition to Qantas.
Before the Virgin Australia collapse last month your Rooster warned the insolvent airline could end up in the same sort of messy liquidation as Ansett Airlines in 2001.
This dire prediction is turning out to be totally wrong. It is now apparent Virgin will survive under new ownership and continue to provide robust competition to Qantas in the domestic market.
Administrator Vaughan Strawbridge from Deloitte still has to find a buyer but it is clear that a deal can be done once the $1.99 billion unsecured debt owed to bondholders is either converted to equity or written down to 2¢ in the dollar.
Some close observers of the insolvency process believe a market solution could involve as little as $300 million in working capital being pumped into the business. The proviso to this is Strawbridge having tough negotiations over airport leases and airline leases.
There are many reasons why the Virgin collapse is totally different to the Ansett implosion which put 16,000 people out of work and left Australia's transport infrastructure in a mess for years.
First, Ansett went under with no money in the bank. Steve Parbery, who with David Crawford was an adviser to the Howard government on the Ansett collapse, says there was barely enough money to last one weekend.
Virgin went into administration with more than $500 million in cash. Its board of directors was conservative and prudent.
They made sure there was more than enough money to cover the $450 million in liabilities owed to the company's 10,000 employees.
When Ansett went bust it owed $800 million to its employees. The government ended up covering this debt through the Howard government's creation of a scheme called the General Employee Entitlements and Redundancy Scheme (GEERS).
GEERS was replaced by the Fair Entitlements Guarantee (FEG) scheme in 2012. It sits in the background as a reminder that there is a $450 million debt that must be covered by the federal government if Virgin goes into liquidation.
Ansett was so badly run, so complex and so poorly prepared for collapse that there was really nothing of substance for the administrators to sell. Parbery says its best asset was an investment in property at Sydney Airport.
It sounds bizarre but there could hardly be a better time for an airline to go into administration. COVID-19 means most of its planes have been mothballed, no one is buying tickets and the largest secured creditors – airline lessors – are not in a strong bargaining position.
The new owners of Virgin will have a perfect opportunity to restructure the business by reducing the numbers of planes it leases and likely cutting the workforce by about 25 per cent. The loss of 2500 jobs will be devastating for those concerned but the accompanying chart shows why this is necessary.
The federal government clearly wants Virgin to remain a full service airline but the company was unable to make money from this strategy under former chief executive John Borghetti.
In its earlier iteration as Virgin Blue, the business was consistently profitable under chief executive Brett Godfrey. But it is unlikely Prime Minister Scott Morrison will be happy for Virgin to return to being solely a discount airline.
The government's adviser on the Virgin collapse, former Macquarie Group CEO Nicholas Moore, has the tricky task of assessing all the bids and making recommendations that fit the national interest.
Whoever takes over the Virgin cockpit not only will have to meet the requirements of the government, they will have to fight tooth and nail against Qantas, a company with strong free cash flow and double the market share.
The question is: to what extent will the government intervene to ensure Qantas does not radically expand its market share and capitalise on Virgin's cathartic change in ownership?
Last edited by Senior Pilot; 2nd May 2020 at 08:14.
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