Bain sets tone for ‘partnership’ with grounded airline

Bain Capital has high hopes it can be the chosen bidder to resurrect Virgin Australia.

Virgin Australia was struck down by the coronavirus

When the Bain Capital team took to Zoom at 3.30pm on Wednesday afternoon for its most detailed briefing yet with Virgin Australia chief executive Paul Scurrah in the American private equity giant’s multi-billion-dollar campaign to buy the embattled airline, its opening message was ­simple.

It was just a tick over 24 hours after Bain had beaten off its more fancied rivals, AustralianSuper-backed BGH Capital and Canadian infrastructure investor Brookfield, to be one of the two shortlisted bidders for Virgin alongside US hedge fund Cyrus Capital, one of the original backers in Virgin America when Sir Richard Branson established the airline.

Bain’s local boss, Mike Murphy, was clear on the call — which lasted more than 3½ hours — that in contrast to the more preliminary discussions Bain had held with Scurrah and his team to that point, they were now in a “partnership” to set a strategy for the airline’s long-term future.

They were the same sentiments expressed by Murphy a week earlier in a wide-ranging media interview where he looked forward to Bain making it through to the final round of the process being overseen by Deloitte’s Vaughan Strawbridge.

“We will form our own independent view on what we can support in terms of the scope of the business, the size of the fleet, the route network and what ultimately the financial projections would look like. That is obviously a business case under development. But what we would then do is we obviously have a certain level of access to Paul and his team but not the type of access you have when you are on the other side and you are sitting around together,’’ Murphy said in an earlier interview with The Weekend Australian.

“We would typically out of the gates work very closely with the management team in setting a strategy for the next five to eight years, including revisiting the question of earnings forecasts and how does it break down by brand, geography, etc. It illustrates one of our styles here, back to this partnership thematic. We are not the type of firm that says, ‘boom, here is our plan, go deliver’. We say, ‘we have done our best to put together what we think is viable but now we need to actually sit down with you and your team to co-create a plan that we can all sign off on and we all believe is deliverable’.”

Bain certainly has its critics, most notably among the union movement which is worried the American private equity giant will slash and burn the airline for what is known in private equity parlance as a “quick flip”.

Some in the union movement are also deeply worried about the presence of former Jetstar chief executive and long-time Bain adviser Jayne Hrdlicka on the private equity group’s bid team. One union member even started a hashtag on Twitter this week that read #IfBainNoJayne.

Sources close to Bain said on Friday they expected Hrdlicka could emerge with the chairmanship of the airline or a directorship rather than a management role, although Murphy himself said in the interview of her future: “She will have her own — which we have not discussed — thoughts and aspirations as to what is the next chapter for her. For the moment it is really just head down and focused on getting through the work.”

Virgin’s 9000 employees form a decisive bloc of creditors that need to be won over by Bain and Cyrus if their rescue plans for the airline are to ever take flight.

Just to emphasise their importance in the process, Strawbridge sent a note to all Virgin staff on Friday highlighting that both Bain and Cyrus were prepared to cover the full entitlements of those made redundant after the sale.

But separately Paul Scurrah, in his regular live workplace chat on Friday afternoon, emphasised the reality that Virgin would emerge as a smaller airline at the end of the administration process and jobs would be lost.

He stressed the staff that would lose their jobs would be notified as soon as possible after the June 30 deadline for final bids.

Transport Workers Union national secretary Michael Kaine on Friday reiterated that Virgin workers were in no doubt about the harsh realities facing the airline and “they know that the impact when it comes will cause turmoil for workers and their families”.

“This is why they are fighting so hard for their jobs and their future. But Virgin workers are bitter about the federal government’s failure to act which has brought us to this point,’’ he said, reiterating the TWU’s concern about the job losses that would result without urgent and significant government intervention in the Virgin administration process.

Whatever the bidders may say during the sale process, the unions are worried that once Strawbridge has chosen a preferred bidder and the contract is signed, the new buyer of Virgin is free to do whatever it wants with the airline.

In his earlier interview with The Weekend Australian Mike Murphy acknowledged the “quick flip” perception but tackled it head-on.

“We see this opportunity as a long-term commitment and there are great prospects for Virgin in the long term. This will take some work, it will take multiple years, we expect, to get the business back up to the strength that it was. That is related to the coronavirus curve and our domestic and international borders,’’ he said.

“We can speak to plenty of examples where we have had investments for eight to 10-plus years. Partnership is a core theme of what we do. In this circumstance partnerships with management, employees, the unions that are all key stakeholders in what actually happens here. That is very important.”

He said the ACTU was acting as a co-ordinator with Bain among the unions involved with Virgin.

“We wholeheartedly agree that the employees are the critical ingredient in this overall situation.

“We have been appealing to the unions that we need to work in partnership through this process to talk about the best solution for employees and the company having long-term prospects,’’ Murphy said.

Cyrus by contrast, described universally this week as the unexpected bolter from the blue in the bidding process, is remaining secretive about its plans for Virgin. Its American office replied with a firm “no comment” this week when contacted by this newspaper. While Bain has launched a public relations offensive to explain its plans to “make flying fun again”, Cyrus has kept its plans for Australia’s second-largest airline close to its chest as both sides now hunker down with Strawbridge and in discussions with unions, aircraft lessors and a range of other stakeholders.

This week it did appoint Sefiani Communications Group as a public relations adviser, the preferred PR firm of another of its advisers, McGrathNichol.

But it appears to be hoping it can get through the bidding process with as few public comments as possible about its plans, which will give it the most latitude if it is named the preferred bidder at the end of the month.

Both bidders are ostensibly supporting plans advanced by Virgin management for a restructuring of the airline aimed to return it to profitability, a plan Scurrah began after taking over as managing director last year from former Qantas executive John Borghetti.

Strawbridge has made it clear that he sees this as a good plan which should be accelerated where possible while the airline is in administration and then by its new owner.

Virgin has 132 aircraft and there are suggestions that Bain is looking at an operation of 75 aircraft. Cyrus has reportedly told people that it intends to keep most of Virgin’s Boeing 737s for domestic flying while selling its other domestic aircraft.

Cyrus plans to relaunch Virgin as a full-service airline, encouraging expectations that it is considering an airline which will involve more staff than one run by Bain.

Cyrus is focused on replicating in Australia the Virgin America model that it flew for 11 years domestically in the US before that airline was merged with Alaska Airlines in 2018.

It offered dual class service on all the flights it operated, as well as in-flight entertainment, on-board Wi-Fi, a frequent flyer scheme and airport lounges.

It also has historic connections with Virgin’s management team, which it plans to retain if it emerges as the winning bidder.

Virgin chief commercial officer John Macleod is known to Cyrus after he worked in San Francisco for the Cyrus-backed Virgin America between 2012 and 2017.

Jonathan Peachey, who is a senior adviser to Cyrus Capital focusing on the airlines sector, was also formerly CEO of Virgin Group North America.

Cyrus’s low key approach will give it the maximum latitude to do what it wants with Virgin if it gets to own the airline, but any study of the track record of Stephen Freidheim confirms that he too will be a hard-nosed investor.

While Freidheim is known for his ties with Richard Branson, he is an experienced buyer and investor in distressed organisations who could bring his own forensic approach to turning around Virgin, if he succeeds.

In an interview with Yale University Department of Economics in 2018, Freidheim outlined his approach to distressed assets. “In my job looking at distressed companies, (we) break them down into their individual components and reconstruct them.

“We literally break down the companies into individual building blocks, access each block, keep, discard or replace each block, then rebuild this company into a stronger and more sustainable enterprise.”

Cyrus, which has big investments in US airlines Delta and American Airlines, has a mixed track record, investing in British airline Flybe which collapsed in March with the loss of more than 2000 jobs. The airline went into administration on March 4.

In a scathing commentary, Alistair Osborne, business commentator for The Times of London, attacked Cyrus and its partners for the way they handled the already struggling Flybe, calling the consortium of Cyrus, Branson and UK-listed Stobart “greedy owners” who bought the airline but when things got tough did not want to put any money into it.

“It’ll be no consolation to the airline’s 2400 staff that its minted shareholders had the financial fuel to keep it flying,” Osborne wrote in March. He attacked the three for buying the struggling airline in 2018-19 and then letting it “keel over just over a year after they bought it”.