Virgin Australia chief executive Paul Scurrah might sound confident when he says he has a plan to bring the airline back to life after the coronavirus crisis.
But the route he has chosen, or had forced upon him – voluntary administration – is by definition an uncertain one.
If he pulls it off, it will be one of the most famous victories in Australian corporate history, achieved in the face of astonishing hostility from the chief executive of Virgin Australia’s bigger rival Qantas, Alan Joyce, and overwhelming indifference to the airline’s fate from Scott Morrison and his government.
To figure out how Virgin Australia can get out of the financial swamp in which it is currently mired, we need to look at how it got here.
Bankrolled by a group of – until now – extremely wealthy foreign owners, the airline has been losing money for years. Over the past five years alone, losses total more than $1.6bn.
To keep the airline running, and pay for its planes, it has built a vast mountain of debt.
It owes more than $4.8bn to banks, aircraft financiers and investors in junk bonds issued by the company. On top of that, it owes about $1.2bn to people who have booked tickets but haven’t flown, and there’s also about $180m or so outstanding in unpaid employee entitlements.
Frequent flyer points in the airline’s Velocity scheme are held by a separate company, which isn’t in administration.
But it’s the interest-bearing debt that presents the biggest challenge. If Virgin is to continue, it cannot repay all this debt.
Scurrah had hoped to do a deal with the airline’s creditors without putting the company into administration, but that plan depended on getting some money from the federal government.
With that shot down on Monday – even though the amount wanted had been reduced from $1.4bn to just $200m – the board chose to put Virgin Australia into the hands of Vaughan Strawbridge and his Deloitte partners rather than risk trading the company while it was insolvent.
So who can Strawbridge afford not to pay? Of the close to $5bn it owes, some $1.2bn is owed to a group of companies, including US bank Wells Fargo, the Commonwealth Bank and specialist airline financiers, that have bankrolled its planes.
Virgin will still need planes when it starts to fly again, so Strawbridge can’t treat them too roughly. It is believed that at least the CBA has agreed to give Virgin a three-month deferral on its payments.
A syndicate of banks is owed about $220m – a relatively small amount in the scheme of things.
The biggest slice of debt is owed to the most attractive target: bondholders who have poured $1.8bn into the company. Some $700m of these were issued only a few months ago, in November, in a deal organised by Swiss bank UBS and sold to rich Australians through advisory groups Escala Partners and Crestone (the latter of which was spun out of UBS).
In return for their investment, bond investors have been earning what are these days sky-high interest rates of up to 8%.
But with great rewards come great risks. Unlike the aircraft financiers, bondholders have no security over the assets of the company and rank second-last when it comes to getting paid – just before shareholders, who don’t really count because they are almost certain to be completely wiped out no matter what happens.
With the bonds issued in November at $100 last changing hands at just $39, it is plain that the market doesn’t expect them to be paid out at anywhere near their face value.
On Tuesday Guardian Australia asked Strawbridge if he was going to stiff the bondholders because they were ideally placed to wear a loss. “That’s an interesting observation,” he said.
Strawbridge said it was his role to “get the best outcome for all creditors” – but in the same breath pointed out that bondholders rank last when it comes to getting paid.
He could do this using a deed of company arrangement, or Doca, where all creditors can be forced to accept a deal if more than 50% of creditors, by number and amount owed, agree.
Cooperation from all or some of the aircraft financiers, trade creditors, ticket-holders, banks and unions, representing workers, might therefore enable Strawbridge to cram a deal down the throats of bondholders.
Some bondholders are already preparing for a fight and have reportedly hired top law firm Corrs to represent them in the coming battle.
Strawbridge and Scurrah will also be looking for some kind of contribution from government, although Strawbridge wasn’t clear about what he wanted when pressed on the issue on Tuesday.
State governments could help bridge the gap – there’s something of an auction underway to host Virgin’s headquarters, with the opening bid of $200m set by the incumbent, Queensland.
Virgin Australia can also save money by not going ahead with the purchase of 40 737-MAX jets from Boeing, which is probably a good move anyway as the poorly-designed planes have so far killed 346 people and may or may not ever be cleared to fly again.
Strawbridge seems open to canning the order. “We have indicated to Boeing that we want to talk to them about that,” he said.
If Strawbridge and Scurrah pull all this off and sell the company, it is also not clear what it will look like and whether it will be competitive with Qantas. Market speculation has focused on the poorly performing budget offshoot Tiger as a prime candidate for the chop.
While its loss wouldn’t dramatically reduce Virgin Australia’s competitiveness with Qantas, cutting international routes or regional domestic ones would.
Scurrah was talking tough on Tuesday. “We go into administration in a healthy position, so we can come out even healthier,” he said.
Obviously, if Virgin Australia was actually financially healthy it would not have gone into administration in the first place.
But even so, Scurrah’s words fall a long way short of guaranteeing Virgin Australia will be a full-service airline that can keep airfare prices low once the crisis is over.
