Virgin Australia sales detail speculation on the radar

Virgin Australia sign being flown over Queenscliff. Picture: Glenn Ferguson

The market is buzzing with rumours about what is included in the Virgin sale information memorandum which is normal for a high profile sale, but in this case the document is still being worked through.

It is due to be sent to prospective bidders later this week with indicative bids due in on May 15.

Reports about what is in the document are speculative unless they are sourced to one of the advisers, which would be an unusual way of doing business.

The key question being considered right now is what exactly you are buying when you acquire Virgin.

We know its got $6.8bn in debt, its aircraft are mortgaged to the hilt in some time poor contracts and there is an operating certificate needed to fly, the slots at Sydney and other airports providing landing rights are of value but also a liability and of course, 9000 staff.

The latter is actually the prized asset because the Virgin corporate culture is a major selling point and this is provided by the staff.

This culture brings with it a loyal customer base.

The VA process will hopefully simplify the airline to convert it from five different aircraft flying around Australia to one or two

The domestic triangle covering the east coast of Australia will bounce back quicker than most markets in the world and in good times, it is one of the most profitable routes in aviation.

Inevitably, the bidders will also have to consider whether to keep management, and on what terms.

Highly regarded boss Paul Scurrah is one. He gets $1.3m to turn up for work, compared with $2.2m taken home by Qantas boss Alan Joyce.

Both have access to short- and long-term incentives at the standard rates of 1.5 or two times base pay as a maximum bonus.

On Tuesday, when Qantas confided staff stood down would stay off the books until the end of June – an extension from the end of May when the timetable was first indicated – no mention was made about senior executives, but it is understood their no-pay period, which has run since April, will continue until the end of June.

Scurrah’s extension under new owners will come with a deal on incentives on what he will earn for the turnaround.

Separately, Citi analysts have warned Qantas’s weekly cash burn would need to be halved to reach its goal of $40m expenditure per week.

The airline on Tuesday said it was targeting cash burn of $40m a week by the end of June as it navigates the coronavirus crisis, and had boosted liquidity with a loan of $550m against three of its Boeing 787-9s.

Citi’s Jakon Cakarnis calculated the group’s current burn rate at closer to $90m to $100m after a number of one-off items – indicating a required reduction of around 50 per cent.

“While Qantas’ market update provided a number of positives around the company’s liquidity position, the earnings outlook remains considerably uncertain,” Mr Cakarnis said in a client note.

Citi has a “buy” rating on the stock with a price target of $3.70.

Qantas shares closed down 3.3 per cent on Wednesday, at $3.50.