I have not read the report, just The Australian column in todays paper. It suggest Virgin was free falling from January before Covid-19 hit our shores and would of gone into administration anyway.
Price battle, high debt and killer virus: why Virgin fell to earth
ROBYN IRONSIDE
It was the transformation of Virgin Australia from budget carrier to premium airline over a period of years that set the company on a path to financial ruin.
A 192-page report to creditors by Deloitte’s Vaughan Strawbridge, John Greig, Salvatore Algeri and Richard Hughes has outlined the reasons for the business’s failure that led to their appointment to the airline on April 20.
Ultimately, it was “the inability of the airline’s balance sheet to withstand the immense financial impact caused by COVID-19” that led to its downfall, but the report also examined how Virgin Australia reached that point of collapse.
First, there was a “misconceived business strategy to change (the airline’s) business model from a low-cost carrier to full-service airline”, the report said.
As a result of that strategy, Virgin Australia triggered a damaging capacity war with Qantas, which was determined to protect its territory and had the advantage of a lower cost base to do so.
“Virgin did not have the size and financial strength to sustain this capacity increase without suffering significant losses,” the report noted.
The findings came as it emerged that US private equity firm Bain Capital will pay $3.5bn for Virgin Australia, in a deal that will cover employees’ entitlements but leave bondholders with between 9c and 13c in the dollar.
Other factors that contributed to the airline’s near demise included the “continued operation of loss-making services, routes and business segments; operational inefficiencies and a history of underdelivering on turnaround strategies”.
It all amounted to year after year of losses totalling about $2.2bn, which left the business with a significantly weakened balance sheet.
The report noted that, during the period between 2009 and 2020, revenue had continued to grow, “however it was not profitable growth”.
“This period encompassed the change in the Virgin Group’s business from a budget to full-service airline. As evident by the year-onyear losses, the Virgin Group was unable to derive sustainable profits from this change in strategy,” the report said.
In March 2019, Paul Scurrah took over as CEO from John Borghetti and set about “turning a great airline into a great business,” Mr Scurrah said at the time.
But in the year that followed, Virgin Australia sank deeper into the red, posting an $88.6m loss in the first half of the 2020 financial year. “This was a significant deterioration relative to the prior year period of $87.7m net profit before tax,” the report noted.
A range of measures were implemented to try to turn the airline around, including 750 job cuts and a fleet, network and capacity review, but then COVID-19 struck.
It did not help that shortly before the crisis, Virgin Australia raised an additional $325m in debt from bondholders to help fund the buyback of the Velocity Group.
“This added further debt to the balance sheet just prior to the time when the business would be severely impacted by COVID-19,” said the report.
Revenue and earnings went into free fall from February onwards, resulting in a loss of $763.5m “in just the four months from January to April”.
It was revealed the increasingly desperate board of directors stepped up the frequency of their meetings, sought to exit key contracts and terminated term deposits early to release funds.
With major shareholders unable to provide any assistance, Virgin Australia lobbied the Victorian, NSW, Queensland and federal governments for help, but were again knocked back.
“Given the economic environment created by the response to COVID-19, and without a pathway to secure a source of sufficient new funding, the directors reached the conclusion that the companies were likely to become insolvent if they continued trading, notwithstanding efforts to reduce their expenditure,” the report said. “The directors considered that the appointment of the administrators was the only remaining path available to them to restructure the companies’ liabilities and preserve the business of the companies.”
Despite the dire situation in which they found themselves, directors answered “no” when asked by administrators “did the business fail?” When Deloitte asked the directors to explain why they gave that response, they said the outcome of the administration
— a sale to Bain Capital — had preserved the business.
It was unclear if directors were even aware Virgin Australia was trading insolvent for a short period in March, before a federal law change to protect bankrupt companies in the pandemic.