Turbulence ahead as Bain steers Virgin’s recovery
Virgin Australia CEO Paul Scurrah and administrator Vaughan Strawbridge of Deloitte. Picture: John Feder.
- ASSOCIATE EDITOR (BUSINESS)
Bain Capital will begin injecting $600m in cash and taking control of Virgin from Wednesday following a multi-billion-dollar deal struck last Friday which will see a slimmed-down airline come out of administration in September.
The new relationship is expected to be marked by a press conference on Wednesday with Virgin chief executive Paul Scurrah and Bain Capital’s local CEO Mike Murphy.
On Friday Bain agreed to a $1.65bn deal to inject cash and assume responsibilities for Virgin employee entitlements and travel credits.
The total value of the deal, including how much money — if any — is payable to the airline’s bond holders, will depend on decisions by Virgin management and Bain on how many planes to keep in the short to medium term.
With the airline’s financial future apparently secure — barring any last-minute legal action by unsecured bond holders who are owed $2bn — Virgin’s existing management under Mr Scurrah is set to push ahead more aggressively with a restructuring program designed to cut its losses and eventually return to profit.
The deal will inevitably result in the loss of thousands of Virgin’s 9000 staff, but the time frame depends on factors including a potential extension of the federal government’s JobKeeper program for airline workers and Virgin’s ability to ramp up its domestic services in the face of domestic travel restrictions.
While two of Virgin’s unions supported the proposal by Bain’s rival, New York hedge fund Cyrus, the unions have little bargaining power to oppose the plans of the new cashed-up owners in light of continued restrictions on international and domestic flights and the announcement by Qantas last week that it would be laying off some 6000 staff and standing down another 15,000.
Virgin’s restructuring program is expected to include renegotiating a string of contracts with caterers and other suppliers.
“We have a process to do around setting up the cost base of the business,” said Virgin’s administrator, Vaughan Strawbridge of Deloitte.
“There is work to be done around the construct of what the airline is going to look like and how that works.
“We will be working with them (Bain) closely over the next couple of months as we lead up to the second meeting of creditors.
“We will do what is needed to implement the transformation plan which management had in place, but we are going to accelerate that.”
He said Virgin management would be working with Bain to ramp up the airline as much as it could, depending on the level of demand.
“There’s lots of capacity. There’s lot of planes and we have some amazing staff.
“The more flights there are from demand, the more planes there will be, and the more jobs will be retained.”
Mr Strawbridge said Bain was taking its takeover of Virgin “very seriously”.
“They are going to inject significant capital into this business. This is something we took into consideration when we reviewed the bids.”
Mr Strawbridge said the new owners would start having more meetings with stakeholders including unions, staff and representatives of airports, aircraft owners and financiers.
He will formally put a proposal to Virgin creditors at a meeting in late August which will include recommending Bain as the new owner of the airline. He said the exact amount which would be paid out to the bold holders — unsecured creditors including small investors who put money into a Virgin note raising last November — depended on decisions to be made on aircraft leasing deals.
“There’s a lot which needs (to be gone into) which will determine what assets are retained and what liabilities are to be assumed (by Bain),” he said.
“It’s around whether aircraft are handed back or not. There’s a lot of work to be done around that before we can put a firm view around the return to unsecured creditors.”
Mr Strawbridge said the deal would mean all the entitlements of Virgin staff would be “looked after in full”.
“We hope as many jobs as possible will be retained. The overall position will depend on what happens over the next couple of months, including if the airline is able to put on more flights and stand up more staff than it is now.”
Virgin is expected to return to being a mid-market airline, closer to the original Virgin Blue, but including some lower-budget business class services.
Mr Strawbridge said Bain would begin providing “interim funding to fund the business through the ramp up (process) through to the completion of the sale”.
He has been able to say he still has $100m in cash at the bank but this is because of a deal with the tax office to delay tax payments, which are being accrued as a liability on its books.
The airline has been burning through cash with most of its planes grounded and its staff stood down.
A spokesman for the bond holders has denied rumours that they plan to take legal action in a bid to negotiate a better deal than the zero to 10c in the dollar they are currently facing.
The bond holders have said they are “disappointed” that the administrator announced a successful bidder for the airline without considering the recapitalisation program they put forward last week.
“We will continue to push for a genuine consideration of our proposal in the interests of Virgin employees, stakeholders and creditors, including the thousands of Australian retail bond holders and the institutions that have already invested $2bn in the airline,” a spokesman said.
The bond holders are pushing for their own recapitalisation program which would see Virgin returned to the ASX, saying they are concerned that the Bain deal could lead to a “manifestly unjust outcome” for them.
The federal secretary of the Australian Licensed Aircraft Engineers Association, Steve Purvinas, said his union was prepared to meet the new owners, despite its previous support of the rival Cyrus consortium.
He understood that the new owners could want to discuss potential changes to Virgin including to the enterprise agreements to make the airline more profitable.
“We look forward to those discussions,” he said.
He said the unions understood that there would inevitably be some job losses.
His union preferred to see as many engineers’ jobs retained as possible with a reduced workload, rather than redundancies.
ASSOCIATE EDITOR (BUSINESS)