Airline industry around the world is facing extremely tough time due to travel restrictions related to COVID -19. According to updated analysis released by the International Air Transport Association (IATA), it is estimated that grounding the fleets is going to cost USD 314 billion in passenger revenue to the global airline industry in 2020.
The pandemic has emerged as a massive crisis for almost all businesses. However, for Australia's second-biggest airline Virgin Australia Holdings Limited (ASX:VAH), which already reported losses for seven consecutive years before the epidemic and had a debt of AUD 5 billion, it was too much to handle. The airline asked for the government's financial aid multiple times before entering the voluntary administration during April 2020, but it seems Virgin Australia has collapsed entirely due to its financial scarcity.
In the company's bid to survive the crisis, VAH Board of Directors appointed Deloitte Restructuring Services as voluntary administrator for the company and a number of subsidiaries excluding Velocity Frequent Flyer, which is a separate entity. The Deloitte officials appointed by the airline are - Vaughan Strawbridge, Richard Hughes, John Greig, and Sal Algeri.
The airline was utterly broke, in terms of cash when it was hit by the corona crisis that gripped the entire aviation industry and other businesses worldwide. The biggest challenge for both the administrators and the airline is to meet the costs required to keep the airline intact while it gets a buyer. As per the airline and Deloitte, VAH should remain operational to extract the maximum value from the buyers.
Virgin Australia S&P Rating Update
On 1 May 2020, Virgin Australia Holdings released an S&P rating update in the market. The company’s rating has been lowered to 'D' on payment moratorium and Chapter 15 bankruptcy petition filing.
The administrators placed a moratorium on all creditor payments. It also includes payments on the airline's debt. Given the moratorium, the company's administrators have announced that the airline will not make the next coupon payment on its USD 425 million senior unsecured notes on 15 May 2020.
Committee of Inspection Appointed during First Creditors' Meeting
Deloitte Restructuring Services held the first virtual meeting of creditors on 30 April 2020. There were ~1,300 creditors and their representatives in the virtual meeting including employees, financiers, bondholders and unions.
In the creditor's meeting, an inspection committee was appointed, representing various creditor groups to assist the administrators on matters as needed. It was decided in the conference that Deloitte will consult with members on multiple issues.
As the creditors are more in number, the administrators believe that the committee will be useful in assisting Deloitte with the conduct of its work across the main operating and employing entities.
Deloitte remains strongly focused on restructuring and getting capital for the company besides looking for interested parties for sale.
Parties Expressed Interest in VAH during Creditors' Meeting
Image source: Company’s presentation announcement
There are several prospective buyers interested in making a bid for the airline. Among them, eight parties have signed non-disclosure agreements, and with further 12 more parties, negotiations are ongoing. Those who have inked non-disclosure agreements received an information memorandum and now also have access to the data room.
Houlihan Lokey and Morgan Stanley have been appointed to lead the sales process. While the administrators are busy in getting buyers for the airline, Virgin Australia continues to operate with 64 domestic return services every week, federal government-supported international flights to Los Angeles and Hong Kong and contracted domestic charter flights.
Based on the scope and scale of the administrators' work, the administrators are also looking for an extension of the convening period of three months, as they intend to position the airline for a successful sale, a huge challenge considering the extreme financial crisis the airline is facing.
Going by this, it is expected that the second creditors’ meeting will be somewhere around 22 August 2020. Such an extension of the period is a usual process in a complex voluntary administration as is the case here.
Lead Voluntary Administrator on Airline Selling Plans
Vaughan Strawbridge, who is the lead voluntary administrator, has cited that the goal is to restructure and refinance Virgin Australia, so that the airline emerges more substantial from the COVID-19 crisis. It is an early stage in the entire sales process. However, administrators are encouraged by the interest of parties in the sale of the airline.
Timeframe for receipt of indicative offers currently stands at mid-May 2020. The administrators are working on a business scheme to guide interested buyers in terms of next steps.
The focus remains on keeping the airline operations running to appeal to the prospective buyers and take the airline out of external administration soon. It is crucial to retain the airline's contribution to Australia and its economy, as well as to protect the jobs of Virgin employees.
As per Mr Strawbridge, VAH management has already provided a transformation plan to increase the airline's profitability. He also acknowledged the support of Virgin's people during such a challenging time, stating that the administrators are aware of the impact of the sale on 16,000 direct and indirect employees. It is crucial for these employees that Virgin Australia fly again and be functional as before.
Legal Route to Protect Aircraft from Being Seized in the US
Before the creditors' first meeting, the collapsed airline launched legal action in the US as a protection from the creditors. The company owes billions of dollars to its creditors. The move was also to protect Virgin's planes from being seized that were undergoing maintenance at Nashville, Tennessee airport.
Administrators Closely Working with Government
Virgin Australia's administrators have revealed to the creditors that their team was working with the state and federal government for refinancing and restructuring the Australian airline. They stated that governments are a significant part of the company’s revival plan.
Mr Strawbridge has also stated that the government is critical for the speed with which the airline can come out of the voluntary administration and the administrators also seek government's help for the refinancing process.
The Deloitte administrators are quickly working on plans to help Virgin Australia come out of voluntary administration and get a buyer. With sophisticated parties showing interest, let us keep our eyes on how the airline survives the crisis.