Virgin Australia: Creditors vote YES to Bain Capital deal

At the second meeting of creditors held on 4 September the vote overwhelmingly supported the AU$3.5 billion deed of company arrangement (DOCA) for Bain Capital to acquire Virgin Australia.

The new owners Bain Capital have vowed to pay out all worker entitlements and honour all travel credits and Velocity frequent flyer bookeed points redemption flights.

Creditors

Virgin Australia has over 10,000 of them, with about 9,000 being employees. The rest of them include bondholders and aircraft lessors. Reports suggest over 99% of creditors voted for the DOCA, translating to 97% by value.

The Unions

Previously thought a possible thorn in the side of this deal, all of the major airline associated unions supported the sale, including the sometimes difficult Transport Workers Union (TWU). The TWU had previously indicated their displeasure with the possibility that ex-Jetstar chief, Jayne Hrdlicka might become CEO (she won’t) or take up a board position with the airline (she most likely will, maybe even chair).

The TWU was successful in getting some assurances:

“These include resuming as a fuller capacity airline, maximising jobs, retaining regional operation VARA, tiered cabin classes, airport lounges and the airline’s international arm.”

Michael Kaine, TWU national secretary

The two pilots unions, the Australian Federation of Air Pilots (representing most commercial pilots except those who work for Qantas mainline) and Virgin Independent Pilots Association also supported the DOCA. Unions representing flight attendants, the Australian Services Union (ASU) and the Flight Attendants Association of Australia (FAAA), which represents Virgin’s international FA’s voted for the deal.

The Bondholders

This is where it might have all fallen apart if the bondholders had been able to recruit more supporters amongst creditors. Fortunately, I think, both a bid to have an their alternative proposal voted on, and any potential opposition to the Bain Capital deal were thwarted through lack of additional support.

The bondholders had billions to lose, but bonds are about high risk, and high reward, and this one didn’t pay off.

Virgin Branding

It looks like the licensing agreement with the Virgin group has not quite been tied down, although there is no sign from either side that it won’t proceed, so presumably its a bit of too and fro about price and other details.

The future of Virgin Australia

The Airline will no longer strive to be a full-service competitor to Qantas. What that means, I’m not sure, but statements from Bain Capital and Paul Scurrah, the Virgin Australia CEO indicate that returning to profitability is the keystone.

Initial indications that the airline might return to the low cost DNA of the original Virgin Blue, have been denied in favour of targeting the perceived demand gap between Qantas and Jetstar.

How this will roll out in practical terms is difficult to say. It is looking like a premium cabin will remain, but that economy fare tiers might start with an absolute discount no-frills ticket. Some form of lounges in at least capital city airports will remain, and ‘The Club’ as a separate entity for the airlines VIP passengers may disappear, be repurposed into the general lounges, or as a premium lounge for high tier frequent flyers but without the table service and a la carte dining. Think Qantas Business lounges as opposed to Qantas Club.

What we do know is that Tiger Air is gone, and there will be no active international division until COVID-19 resolves itself with better treatments or a vaccine and Australian borders with the rest of the world are opened. There may be some ‘bubble’ flying to New Zealand and other destinations in the range of a Boeing 737-800 aircraft.

The Fleet

Depending on demand, Virgin Australia will slim down to a fleet of between 30 and 60 Boeing 737s flying by mid 2021. Say goodbye to all those leased A330’s with their very desirable business class lie flat seats (sorry flights to Perth), and those international flying 777’s are likely to stay parked, returned to lessors, or be sold in the short term.

737MAX

As part of a response by one of the Deloitte administrators, Vaughan Strawbridge (as reported in Executive Traveller), Virgin is likely to forfeit the deposit it has paid for 48 Boeing 737-800 Max’s, ordered back in 2012. On the one hand, Virgin and Bain might have a couple of cards to play against Boeing given the delays and grounding of the aircraft. On the other hand, you don’t want to piss off a future aircraft supplier. With all world airlines in turmoil due to COVID-19, I suspect Virgin Australia will need to ‘get back in the queue’ for negotiations with Boeing.

What happens now?

The deal will be signed in the next 15 business days and will require Federal Court approval of the share transfer to Bain Capital. Expect that to be wrapped up by the end of October. To service the creditors, a trust will be formed to deal with claims.

At least 3,000 Virgin employees ( a third of its pre-COVID-19 workforce) will lose their jobs as part of the deal and that might not be the last of the redundancies. There are a handful of very big variables management is going to have to balance. Think government funding for JobKeeper, subsidies for essential flights, repatriation flights, border closures/openings, just to start. Add to that at least one new airline competitor on capital city routes (REX), and maybe another on regional routes (Alliance Airlines) although it currently partners with Virgin on various Queensland routes.

2PAXfly Takeout

Although it seemed a bit touch and go for a while there when the bondholders were challenging everything the administrators seemed to do in court. As August this year was drawing to a close, the certainty of a Bain Capital’s purchase of Virgin Australia began to firm.

Friday’s result at the creditors meeting earns a sigh of relief, but not the arched eyebrow of disbelief.

Given the state border closures here in Australia, and my changed pattern of flying for other reasons, I’m not sure how soon, or often I will be able to sample Virgin’s changes to service.

Although many Virgin pilots, flight attendants and other staff will lose their jobs over the next few months, at least some will be retained in the reborn airline. Lets hope the new version of Virgin Australia continues to survive and outlives this damned pandemic!

I am so glad that a viable competitor to Qantas remains and will monitor with interest the changes, and, I hope improvements to Virgin’s competitive offering.