Virgin Australia happy to return aircraft engines, but at no cost

Virgin Australia’s administrators have returned to court to appeal a ruling on the return of four aircraft engines.

Four aircraft engines leased by Virgin Australia are at the centre of an ongoing court tussle that threatens to reduce the financial return to bondholders even more. Picture: Brendon Thorne/Bloomberg

Days after confirming the sale of Virgin Australia to US private equity firm Bain Capital, administrators have returned to court to appeal a ruling ordering them to return four aircraft engines to the US.

In a judgment made last week, Federal Court Judge John Middleton ruled in favour of engine owner Wells Fargo who had sought to repossess the Boeing 737 engines being leased to Virgin Australia.

Documents filed in court on Tuesday by administrators said they did not object to handing the engines back, but rather the requirement they bear the cost and responsibility of redelivering the items to the US, in accordance with the original lease.

According to submissions by solicitors for the administrators Deloitte, the delivery process set out in the original lease would cost in the vicinity of $1m, and probably more given the current COVID crisis.

That was due to the fact Virgin Australia would be required to store and maintain the engines until they could be delivered to Atlanta and Florida.

“The additional costs … will ultimately be borne by the unsecured creditors of the Virgin companies,” said the submission.

“In circumstances where the administrators are presently forecasting a return of 9c to 13c in the dollar for ordinary unsecured creditors (including bondholders) … I am concerned as to the appropriateness of incurring such substantial costs.”

As a result of the court ruling, other lessors were also now “asserting a positive right to redelivery of their property” despite entering into new aircraft protocol agreements with Virgin, the submission said.

Fleet restructure

This was seen as problematic given there were 62 aircraft and up to 15 engines to be returned to lessors, as part of the airline’s fleet restructure.

“I believe that the disposition of this appeal is of urgent importance to aircraft lessors and lessees throughout the world,” said the submission.

An expedited hearing of the appeal was requested to avoid additional demands on Virgin Australia’s maintenance, storage and technical staff and facilities.

The administrators also sought orders the engine owners pay the costs of the appeal and any costs related to the storage of the engines.

Virgin Australia went into administration on April 21 with debts of $6.8bn, including $1.65bn owed to aircraft lessors.

At the September 4 creditors meeting, Bain Capital was overwhelmingly endorsed as the new owner with its deed of company arrangement (DOCA) supported by 99 per cent of those who voted.

Under the DOCA which represented a $3.5bn commitment by Bain, secured creditors were promised to be repaid in full but unsecured creditors such as bondholders faced a much smaller return on their investment.

Deloitte will now take steps to transfer all of the shares in Virgin Australia to Bain Capital which was expected to run the airline as a private company.

The deal should be finalised by the end of October.