Cyrus Capital outlines vision for ‘hybrid’ Virgin Australia

New York hedge fund Cyrus Capital is planning to relaunch Virgin Australia as a ‘hybrid’ airline.

Virgin Australia aircraft parked at Brisbane International airport. Picture: AFP

New York hedge fund Cyrus Capital is planning to relaunch Virgin Australia as a “hybrid” airline, ­ranging from economy to business class, in a deal that could take in investments from Virgin founder Richard Branson and other airlines.

In an interview with The Australian from New York, Cyrus Capital adviser and former Virgin America chief executive Jonathan Peachey, who is leading the negotiations in the bid for the airline, said Cyrus would keep Virgin chief executive Paul Scurrah and the management team if it succeeded in buying the airline.

He said Virgin Australia, which went into administration on April 22 with debts of almost $7bn, had become a “a little too corporate”.

Mr Peachey said Cyrus would seek to revive its brand as being an “entrepreneurial, challenger brand”, following Sir Richard’s “employee first, customer close second” strategy. “The cultural ­element which Virgin brings to the table is really key,” he said.

“The word I use is ‘entrepreneurial’. Giving employees of an airline the ability to be entrepreneurial, giving them permission to think for themselves, allowing them to bring their personality to the table, is the key to making the customer experience really special. The Virgin brand has this sweet spot that’s sort of in the middle, that’s focused on offering a high-quality product at a value price point with a service that is differentiated.”

Cyrus and the other short-listed bidder for Virgin, Bain Capital, have to submit binding bids for the airline on June 22.

Mr Peachey’s interview with Australian media at the weekend was the first time Cyrus has publicly outlined its plans for Virgin.

Virgin’s administrator, Deloitte’s Vaughan Strawbridge, has said he wants to decide the preferred bidder for the airline by the end of the month. Mr Peachey said Cyrus had no intention of taking Virgin back to its low-cost carrier Virgin Blue roots, or trying to go head to head with Qantas’s budget carrier, Jetstar.

“We do not intend to take it back to the Virgin Blue days, the pure low-cost carrier of the past,” he said. “The brand has evolved, the business has evolved and the market has evolved as well.”

The British-born Mr Peachey, who worked for Sir Richard for 15 years before becoming an adviser with Stephen Freidheim’s Cyrus Capital three years ago, made it clear the airline would retain the Virgin brand, with a possibility of Sir Richard returning as a minority shareholder.

Sir Richard’s group had a 10 per cent stake in Virgin Australia ­before Virgin went into administration on April 21.

 

“The Australian market is very receptive to the Virgin brand,” Mr Peachey said.

“There is a love for the Virgin brand that has existed for a long time. Sir Richard is very well known in Australia and his spirit lives on in the brand and therefore in the airline.”

Mr Peachey said Cyrus was prepared to finance the bid itself, but was also in discussions with other potential investors including other airlines.

“We have the funds available to do that (finance the deal on its own),” he said.

“That said, there is a lot of interest in participating. We are in discussions with several potential sources of capital about playing a part in the business.”

Mr Peachey said potential shareholders would have to be “like-minded (investors who) share out vision for the business, which is very much aligned with management’s vision for the ­business”.

He said Sir Richard’s Virgin Group was “a good example of such a party”, adding: “They clearly bring value to the table with their experience of this business over many years.”

But he said there were other airlines around the world that could be “strategic partners”.

Virgin Australia’s shareholders include Singapore Airlines, Etihad, the Virgin group and two separate Chinese investors, Nanshan and the financially troubled HNA.

Mr Peachey said a Cyrus-owned Virgin Australia, which includes the Velocity Frequent Flyer business and budget carrier Tiger Airways Australia, would be a more “simplified” organisation, allowing management to focus on its core domestic and short-haul international businesses.

Mr Peachey revealed that Cyrus was talking with state governments in Queensland, NSW and Victoria about Virgin’s potential operations on their states.

The Queensland government has announced its plans to contribute as much as $200m in a winning bid, provided the airline retained its headquarters in Brisbane.

But NSW Premier Gladys ­Berejiklian has said NSW could be interested in having Virgin move its headquarters to the “aero­tropolis” being built at the new international airport in western Sydney.

Cyrus’s strategy contrasts with the one outlined by its rival Bain Capital, which would return the airline to a lower-cost model, which it claimed would “make flying fun again”.

Former Jetstar chief executive Jayne Hrdlicka is an adviser to the Bain consortium, and is expected to play a leadership role, possibly as chair of the airline if it were to take over Virgin.

Mr Peachey said Cyrus had not made a decision on where Virgin’s head office would be located if it were to buy the airline.

“We haven’t made a decision yet on the head office, but we obviously will do so very shortly,” he said. “We’re in discussions with management on that as well as with the states.

“It’s not a decision we take lightly. I think we will ultimately make the right decision, but that doesn’t mean one state or another necessarily loses out. The airline will continue to be an important contributor in all three states.”

Mr Peachey would not say how much Cyrus planned to bid for Virgin Australia or what its bid could mean for bondholders, which include some $2bn in unsecured creditors including retail investors and retirees who subscribed to Virgin’s $325m note issue in November last year.

“I can’t talk about the specifics of the deal, partly because we’re still formulating the shape of the final bid,” he said.

“Needless to say, we intend to put out best foot forward. We are working very closely with the administrator, who is doing a fantastic job in a short ­period of time.”

Mr Peachey said he supported moves by the administrator to ask the federal government for assurances around future financial and other support for Virgin.

A leaked letter last week showed Mr Strawbridge had asked the government to extend the JobKeeper allowance to Virgin staff for another six months and provide other guarantees, including an extension of assistance for airlines to fly regionally until the end of the year, protection of Virgin’s airport slots, and an assurance that the Australian Competition & Consumer Commission would keep a close eye on Qantas’s market tactics once Virgin emerged from administration.

“We’re supportive of the administrator and his efforts to achieve a positive outcome,” Mr Peachey said.

He said there had recently been further announcements of federal government support for airlines that he said was “obviously helpful in terms of getting a running start when the business is able to emerge from administration”. He added: “But is our bid conditional on the involvement of the federal government? I would just say, again, we have the funds to make the bid.”

Mr Peachey said Cyrus had been talking to Virgin management behind the scenes for the past two years.

“We said back then and we made it clear to the Virgin group if they needed any help in doing that we would be willing to have a conversation,” he said.

He suggested Virgin Australia had “become a little too corporate” and “maybe lost a level of that challenger mentality and ethos”.

“We want to bring that back to the forefront, empowering the employees to take the lead,” he said.

“When Paul (Scurrah) came in with a mandate to return the airline to profitability, we were very supportive of that. We believe this management team is best placed to do that.

Mr Peachey said Australia represented a “unique market in global aviation”.

“It has two large carriers and I think I speak for most passengers when they say they don’t want Australia to go back to a place where it only has one large carrier,” he said.

“We believe in creating an environment and an airline which is a viable competitor to Qantas. We think that’s the best thing for the consumer.

“We want to ensure that this airline is well capitalised and well positioned to come out of administration to be able to provide a second airline which has competitive tension.”

He said plans for Virgin would be modelled on Virgin America, which he ran for several years to 2013.

He said Cyrus did not want to “dramatically shrink” Virgin.

“We think it needs to retain a good amount of scale in order to be a viable carrier,” he said. “Our thinking on size and focus is ­driven by the need to simplify the airline. It has become too complex over many years with lots of pieces added and multiple different businesses operating inside of Virgin Australia.

“We believe the simpler the business is, the more focused management can be in returning the core engine of the business, which is the domestic and short-haul international business to profitability against the uncertainty of the COVID backdrop.

“No one knows how long it will take for the airline to recover, or even if the market will fully ­recover. We are all optimistic that it will.”