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AFR - Virgin Administrators come under fire for doubtful forecasts

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AFR - Virgin Administrators come under fire for doubtful forecasts

Old 11th May 2020, 22:32
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AFR - Virgin Administrators come under fire for doubtful forecasts

Potential buyers of Virgin Australia have questioned the bullish profit forecasts issued by Virgin's administrator, Vaughan Strawbridge. Now buyers have to think about Regional Express Holdings potentially flying capital city routes.

May 12, 2020 – 12.00am

The already loopy Virgin Australia sales process got a little crazier on Monday when the administrator, Vaughan Strawbridge, put demands on the potential buyers that are frankly ridiculous.

Strawbridge sent a letter to potential buyers demanding they break their bids into 20 separate components including the amount of the airline's $6.8 billion debt they will roll over, the level of employees being retained and the support from government.

After seeing the letter, one potential bidder told Chanticleer: "This is nuts".

The reaction is understandable given that indicative offers have to be lodged with Strawbridge by Friday. This time line barely allows any time for potential buyers to engage with creditors, government or unions.

Virgin's administrator Vaughan Strawbridge has flummoxed potential bidders with his latest demands. David Rowe

Even before this missive was sent by Strawbridge the Virgin sales process was detached from reality.

Potential buyers were told that an airline that lost $2 billion over the past decade was suddenly going to shoot the lights out within three years.

Incredulous potential buyers were asking themselves how could an airline that made EBITDAR of between $843 million and $900 million over the past five years suddenly make $1.5 billion in 2023?

EBITDAR is defined as earnings before interest and tax excluding costs associated with aircraft rentals and depreciation and amortisation.

What was even less plausible was the breakdown of the underlying profit numbers for fiscal 2023 issued by Strawbridge.

Ex-Virgin Australia contender would run Virgin Mark II

He forecast Virgin Mark II would earn $1.1 billion EBITDAR from its domestic operations and from its short haul international operations, $150 million from its long haul international business and $150 million from a new low-cost carrier in the domestic market, which would compete with Jetstar.

The idea that Virgin could develop and launch an entirely new discount airline service while trying to extract itself from insolvency is implausible, especially considering it has not been able to make a profit on group revenue of $5.8 billion.

The new discount airline is represented in the documents as a blank aircraft.

Also included in Strawbridge's forecast for 2023 was about $40 million in EBITDAR from cargo flights. This deserves to be treated with great scepticism given cargo is one of the most competitive aspects of aviation and has very thin margins.

Strawbridge's business plan for Virgin Mark II does not contemplate large-scale job losses. It seems to want to preserve complexity rather than pursue simplification of the business.

Another wildcard in the Virgin sales process is the sudden intervention of Regional Express Holdings, which has revealed to The Australian Financial Review it wants to spend $200 million launching new capital city services.

Rex deputy chairman John Sharp says the Virgin collapse has provided an opportunity for the regional airline to lease 10 narrow-bodied jets and fly between the capital cities including the highly profitable "triangle" between Sydney, Melbourne and Brisbane.

ACCC boss says Virgin Mark II needs to be full service

Rex's plan was greeted with scepticism in some quarters of the aviation industry simply because it only has about 1 per cent of the domestic market.

But it is worth remembering that the cumulative net profits of Rex over the past six years exceed the combined net earnings of Virgin and Qantas over that same period.

A move from being a purely regional airline to offering capital city flights would be a big step up for Rex. But it can build its business upon its existing infrastructure.

A new entrant in the domestic market offering a service between capital cities that is pitched somewhere between Qantas and Jetstar is bound to be positive for consumers and not so great for Virgin Mark II.

Rex is facing a potential capital expenditure bubble in the future from the cost of replacing its fleet of 60 Saab 340 aircraft, which are more than 20 years old.

But executive chairman Lim Kim Hai told The Australian Financial Review last week Saab has committed to support the aircraft for another 10 to 15 years.

"In terms of support from Saab they have given an undertaking and they have continued to have military customers and with a military customer any time you sign on with them you have to undertake to provide support for 20 years," Lim said.

"So, in terms of support from Saab, we can be assured that over the next 10 to 15 years there is going to be the support as long as Saab is still going to be around. There is no hard deadline for the Saab."
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Old 12th May 2020, 00:21
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But it is worth remembering that the cumulative net profits of Rex over the past six years exceed the combined net earnings of Virgin and Qantas over that same period.
That's cute! We bundle in the financial train wreck that was VA and then stretch the period under consideration back just far enough to include QF's motza 2014 loss. Look at the past five years and it's a markedly different story.
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Old 12th May 2020, 09:36
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More bullshit story writing by so called journalists. I refer to same in another thread. They cant help themselves.

I am sure they were told "this is nuts".

F$%k Off. Maybe I should get into writing for the papers, seems you dont need to verify, justify or even be truthful with what you put in writing and in print.
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Old 13th May 2020, 07:29
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Why is this article "bullshit"? Do you have any proof it's not? The media seem to be all over this and the AFR obviously has connections everywhere.
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Old 13th May 2020, 13:25
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The AFR is one journal that does have reasonable credentials, so I don’t think this story is bullshit Servo.
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Old 13th May 2020, 22:16
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Servo - You might have to re-think the term "bullshit". The AFR has a fairly good track record on drilling deep into these types of issues and getting the answers. It's fine to disagree, but they are certainly not as you describe.

Being told to 'F$%k Off'' isn't really eloquent mate.
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Old 13th May 2020, 23:38
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Originally Posted by Denied Justice View Post
The AFR is one journal that does have reasonable credentials, so I don’t think this story is bullshit Servo.
Agreed. AFR is generally a pretty respected journal with a lot of contacts.

I have to agree with what they are saying, those earning forecasts for the next few years are pure fantasy and utterly ludicrous. If any of the buyers anxiously jump on board believing the hype from the administrators on these numbers and think they can actually make that sort of money so quickly, I think VA Mk2 is already headed towards a swift end.
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Old 14th May 2020, 00:05
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Taken from news.com.au

Virgin Australia customers owed refunds to be offered ‘conditional credits'

Quote:

"He said the administrators were considering whether Virgin Australia would need interim funding to allow the business to keep operating until a second meeting of creditors, which they propose to hold in August.

The administrators are seeking permission to issue conditional credits to customers that had booked flights cancelled due to the pandemic which could be honoured by an acquirer, Mr Strawbridge said.

“Potential buyers may be motivated to extend these conditional credits as part of any restructuring or recapitalisation of the Virgin Companies’ business for the purposes of maintaining and enhancing the customer goodwill associated with the Virgin Companies,” he said.

He added the airline is seeing a rise in credit card charge-backs from customers seeking refunds. There have been around 340,000 requests for refunds after cancelling 65,000 flights between March 1 and April 30.

That is a potential drain on cash it holds in accounts.

The travel credits will be valid for the administration period, and customers who have not claimed or used the credits during the process are "unlikely to receive a 100 per cent refund on any restructuring or upon liquidation".

Mr Strawbridge said the credits would preserve goodwill in the airline and make it more attractive to potential buyers."

The idea of turning a profit anytime soon will need the work of a 'Magician'. With one of the worst economic downturns in history, there could possibly be up to 500,000 punters who will probably never want to fly the Airline again if they DO lose their Travel Credit. Credit is still Credit!
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Old 14th May 2020, 00:26
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I agree with the statement the AFR is generally pretty good but this story has been placed
Like all business it is a case of buyer beware and to do due diligence so what is this story saying? That the buyers are stupid?
And they offer up the typical unnamed source, every slack jurnos go to, to offer up the startling quote of “this is nuts” and then go onto talk about Rex so no surprise who wanted this story run. I don’t believe the numbers myself but I don’t expect a salesman to offer me the best deal or the truth at any time so again what is the point of this ‘article’?
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Old 14th May 2020, 01:14
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Interesting the AFR hasn't run the same level of skepticism over Rex's idea of creating a jet operation from zero in a few months. They have bought the whole thing hook line and sinker and all Rex have said is they are looking at a business plan with jets.
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Old 14th May 2020, 01:50
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These "comments" thrown into the public arena are probably designed to disrupt potential bidders from getting the show on the road again (as unlikely as that still is). It positions REX into a better position if Virgin goes into receivership.

Of more real action, Alliance and a deal to buy VARA could be interesting. it would still keep Alliance in a niche market, but at a much higher level. That is a real possibility. Dump the ATRs.
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Old 14th May 2020, 02:36
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From the article : "But it is worth remembering that the cumulative net profits of Rex over the past six years exceed the combined net earnings of Virgin and Qantas over that same period."

What point does this statement intend to convey? How does it make any sense to combine net profits of QF and VA and then come up with a number which probably the "cumulative net profits" of your average Uber driver over the past six years would also exceed.

This article strikes me as being sourced from a media release by Rex's spin doctors. I cannot imagine any journalist spending the time seeking out and then adding up the profits and losses of each company for the past six years. Why choose six years, why not ten, why not two?

It is possible that Servo may not be so far off the mark after all.
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Old 14th May 2020, 02:38
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Dump the ATRs.
The ATR fleet is no longer part of VARA. And with renegotiated leases could be viable.
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Old 14th May 2020, 02:54
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I expect the administrators forecast of $5B p.a revenue (Average of $96.154M per week) to be a pipe dream.
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Old 14th May 2020, 12:06
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Originally Posted by Blackout View Post
Taken from news.com.au

Virgin Australia customers owed refunds to be offered ‘conditional credits'

Quote:

"He said the administrators were considering whether Virgin Australia would need interim funding to allow the business to keep operating until a second meeting of creditors, which they propose to hold in August.

The administrators are seeking permission to issue conditional credits to customers that had booked flights cancelled due to the pandemic which could be honoured by an acquirer, Mr Strawbridge said.

“Potential buyers may be motivated to extend these conditional credits as part of any restructuring or recapitalisation of the Virgin Companies’ business for the purposes of maintaining and enhancing the customer goodwill associated with the Virgin Companies,” he said.

He added the airline is seeing a rise in credit card charge-backs from customers seeking refunds. There have been around 340,000 requests for refunds after cancelling 65,000 flights between March 1 and April 30.

That is a potential drain on cash it holds in accounts.

The travel credits will be valid for the administration period, and customers who have not claimed or used the credits during the process are "unlikely to receive a 100 per cent refund on any restructuring or upon liquidation".

Mr Strawbridge said the credits would preserve goodwill in the airline and make it more attractive to potential buyers."
Frankly I'm surprised that that story isn't generating more widespread interest/concern, particularly the

The travel credits will be valid for the administration period, and customers who have not claimed or used the credits during the process are "unlikely to receive a 100 per cent refund on any restructuring or upon liquidation.
bit.

If I were one of the thousands of Virgin customers, sorry, guests, holding a travel credit I'd be extraordinarily pi55ed off. I've been done out of a refund at a federal court hearing that I had no representation at such that I'm now effectively being treated as an unsecured creditor but with no representation on the Committee of Inspection.

As to the 'travel credits will be valid for the administration period', how much flying and on what routes is likely to occur during 'the administration period'? The Administrator is effectively rissoling the customers here and it's all gone under the radar.

And it's made all the more galling knowing that PS is still trousering twenty large a week ... to do what exactly?
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Old 14th May 2020, 12:29
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Originally Posted by MickG0105 View Post
Frankly I'm surprised that that story isn't generating more widespread interest/concern, particularly the



bit.

If I were one of the thousands of Virgin customers, sorry, guests, holding a travel credit I'd be extraordinarily pi55ed off. I've been done out of a refund at a federal court hearing that I had no representation at such that I'm now effectively being treated as an unsecured creditor but with no representation on the Committee of Inspection.

As to the 'travel credits will be valid for the administration period', how much flying and on what routes is likely to occur during 'the administration period'? The Administrator is effectively rissoling the customers here and it's all gone under the radar.

And it's made all the more galling knowing that PS is still trousering twenty large a week ... to do what exactly?

Well it seems that the 'liabilities' doesn't just stop there:

https://www.fedcourt.gov.au/__data/a...on-1252020.pdf
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Old 14th May 2020, 21:48
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Originally Posted by Blackout View Post
Well it seems that the 'liabilities' doesn't just stop there:

https://www.fedcourt.gov.au/__data/a...on-1252020.pdf
That is somewhat astounding, isn't it?!

6. The conditional credit will only be able to be redeemed for a limited period and will have to be redeemed before the earlier of:

(a) a restructuring or recapitalisation of the Virgin Australia Group Ent ity that issues the credit (unless the right to redeem such credits, or their equivalent, is expressly preserved and extended as part of that restructuring or recapitalisation); or

(b) a liquidation of the Virgin Australia Group Entity that issues the credit.

It may not be possible or practical for Regional Airlines Pty Ltd Virgin Australia Airlines Pty Limited or Virgin Australia to resume commercial flights during this period and nothing in this Proposal should be understood as a promise or warranty that eith er company will do so.

7. A customer's use of the conditional credit will be subject to the availability of flights and, if applicable, payment of any fare differences and applicable fees, taxes and airline surcharges if the credit is not sufficient to cover them or the credit is not redeemable for them. Upon booking a flight with a conditional credit, the terms and conditions applicable to that flight and fare type will apply.

8. A conditional credit cannot be exchanged for a refund or unconditional credit. ...
How is this shafting not getting some airplay?
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Old 14th May 2020, 21:53
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https://www.fedcourt.gov.au/__data/a...on-1252020.pdf

Can anyone who understands legal documents explain in laymans language what this really means ??
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Old 14th May 2020, 21:56
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And it's made all the more galling knowing that PS is still trousering twenty large a week ... to do what exactly?
I really hope you don't mean he's earning $ 20,000 per week ???
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Old 14th May 2020, 22:13
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Originally Posted by MickG0105 View Post
That is somewhat astounding, isn't it?!



How is this shafting not getting some airplay?
The Jobkeeper and Virgin Loan liabilities also make for an interesting read!!
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