‘Misconceived strategy’, 10 years of financial losses behind collapse of Virgin Australia

What caused Virgin Australia, the country’s second-largest airline, to fall into administration owing $6 billion has been uncovered in a damning report that has been released publicly after an intense, four-month investigation.

Virgin Australia creditors will receive between 13 and 9 per cent of their investment as Deloitte administrators finalise their four-month investigation and recapitalisation of Australia’s second-largest carrier.

Deloitte, in a 197-page report to creditors, has recommended they endorse Bain Capital’s deed of company arrangement which would see the American investment giant pay $3.5b to take control of the carrier.

Voluntary Administrator Vaughan Strawbridge said the report to creditors outlined the sale process which resulted in an “excellent outcome in securing a future for the Virgin Australia business”.

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Virgin Australia’s 9022 employees are owed a total of $128m in leave and redundancy entitlements. Picture: Albert Perez

“We have set out our opinion to creditors that it is in their interest to approve the deed of company arrangement proposed by Bain as it provides for the best return to creditors in what are extraordinary circumstances, and that were impossible to foresee,” he said.

“It achieves all the objectives of the voluntary administration process that we sought from the outset.

“Now we just need to bring the airline out of administration as soon as possible.”

The airline collapsed in April, owing $6.8bn to its creditors, who range from mum and dad bondholders to aircraft lessors to service providers.

Mr Strawbridge said Bain’s plan would provide “certainty” for Virgin to continue as Australia’s second airline, pay employee entitlements and cover customer credits.

Virgin is holding between $550m and $650m in customer credits, with administrators noting its value is changing constantly.

Virgin Australia CEO Paul Scurrah. His company lost $2.2 billion in 10 years. Picture: Glenn Hunt

The airline’s 9022 employees are owed $128m in leave and redundancy entitlements.

There are about 1400 individual creditors owed an estimated $237.2m for goods and services provided to the group and 53 landlords, which are predominantly airport landlords.

Liabilities of $14.7m are owed to the Australian Taxation Office in GST, fringe benefits tax and payroll tax.

The administration of Virgin Australia came after repeat net losses for the company, which between the 2009 financial year and March 2020 totalled $2.2b after tax.

“It was generally held to be underperforming from a financial performance perspective for a significant period compared to its peers, usually Qantas,” the report noted.

Administrators blamed a “misconceived business strategy to change its business model from a low-cost carrier to a full-service airline”.

The move resulted in Virgin increasing its capacity on certain routes and Qantas responding by protecting its routes and significantly reduce its cost base.

“Virgin did not have the size and financial strength to sustain this capacity increase without suffering significant losses,” the report noted.

After four months in control of Virgin Australia Deloitte administrators issued their findings about why the company collapsed.

“Our view is that the Virgin Group’s difficulties were largely due to the inability of the Virgin Group’s balance sheet to withstand the immense financial impact caused by COVID-19,” their report notes.

“The balance sheet had been weakened from cumulative losses incurred almost year on year from 2009 to 2020 of approximately $2.2b.

During this period 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.”

The arrival of new CEO Paul Scurrah in March 2019 was a turning point for the airline, administrators noted.

They said Mr Scurrah had embarked “upon a strategic review designed to simplify the business and drive cost reduction”.

“When COVID-19 impacted capacity, the Consolidated Group was only part way through its strategic review and the implementation of various initiatives,” administrators said.

On appointment of administrators Virgin Australia directors said the company “did not ‘fail’, and that the steps they took to appoint administrators were for the purpose of ensuring the continued survival of the business”.

Creditors will vote on the deed of company arrangement on September 4.

Originally published as ‘Misconceived strategy’, 10 years of financial losses behind collapse of Virgin Australia