Virgin’s creditors ‘owed $6.8bn’

Virgin Australia’s books have revealed the depth of the airline’s financial woes, with $6.8bn owed to more than 10,000 creditors.

Virgin Australia CEO Paul Scurrah and administrator Vaughan Strawbridge of Deloitte who will try to restructure the airline’s finances. Picture: John Feder

Virgin Australia’s books have revealed the depth of the airline’s financial woes, with an enormous $6.8bn owed to more than 10,000 creditors, and thousands of outstanding property and aircraft leases.

Financial services firm Deloitte outlined its initial findings in documents lodged in the Federal Court after being appointed administrator to Virgin Australia on Tuesday.

Meanwhile, Perth Airport on Friday took possession of a number of Virgin Australia’s aircraft over its failure to pay its bills, becoming the first airport to do so.

A Perth Airport spokeswoman said it had taken liens over a number of Virgin aircraft, which she described as a “standard practice in these situations”.

Deloitte was appointed after the federal government rejected nine proposals from Virgin chief executive Paul Scurrah for assistance, ranging from a $1.4bn loan facility to a $200m grant.

In its half-year results to December 31, 2019, the airline was reported to owe $5.3bn.

Employees accounted for the majority of creditors, with 9020 workers owed $450m, or close to $50,000 each.

As more information becomes available Deloitte believes the number of creditors could pass 12,000.

Corporate lenders and aircraft financing facilities were owed $2.2bn, unsecured bond holders $1.98bn, and 50 aircraft lessors $1.88bn. Landlords were out of pocket $71m and trade creditors owed $166m.

The extent and complexity of the financial woes prompted the administrator to seek a four-week extension from the court to decide how to deal with 94 aircraft leases before Deloitte became liable for the cost.

An affidavit of administrator Vaughan Strawbridge filed with the Federal Court said the large number of leases, and significant liabilities associated with them, made reaching a decision about their future status “a significant task”.

He said the administrators had sought to continue to trade Virgin on a “business as usual” basis despite the travel restrictions brought on by the COVID-19 crisis. This means the airline is not operating any international passenger routes and only limited domestic passenger routes.

“Furthermore, as a result of the travel restrictions ... the administrators and our staff are unable to operate (Virgin) at full capacity, and it is likely that the businesses will continue to generate losses throughout the administration period whilst these restrictions are in place,” he said in the affidavit.

Aviation data provider Cirium suggested lessors such as Goshawk, Aviation PLC, ORIX Aviation and SMBC Aviation Capital were receiving an estimated $1m a month from Virgin.

In addition to the aircraft leases, the administrator identified 3463 registrations for property leased, used or occupied by Virgin Australia companies.

It was possible landlords could be asked to grant a three-month rent waiver, the administrator said. Federal Court judge John Middleton granted the request for a four-week extension to the lease arrangements, and also gave orders for next Thursday’s creditors meeting to be conducted electronically due to the virus crisis.

Despite the dire situation of Virgin Australia’s finances, Mr Strawbridge reiterated the “extraordinary” interest in a positive restructure of the airline since the appointment of administrators.

“So far more than 10 separate sophisticated parties, including international parties, have expressed an interest in buying the companies,” his affidavit said.

“An expression of interest campaign is in the process of being run over the next three weeks.”

One possible contender, private equity firm BGH Capital, is believed to have hired advisory firm Moelis to assist with a potential recapitalisation of Virgin Australia.

The cashed-up firm is one of several equity firms thought to be in the running, along with Wesfarmers, Macquarie Group and US-based airline investor Indigo Partners.

Monash University business and economics professor Greg Bamber said it would be unfortunate to see Virgin Australia in the hands of a private equity firm.

“They like to buy up when times are tough or when prices are cheap, and then engage in asset stripping, stripping down the size of the company they buy and then selling it off again,” Professor Bamber said.

“Their aim is to make money in both directions and in my view that would be an unfortunate way to go — unfortunate for the travelling public and for the workers and other stakeholders.”

He said the service Virgin Australia had provided over the past 20 years should not be forgotten as public attention focused on its financial state.

“It’s the COVID-19 crisis which has pushed it over the edge,” said Professor Bamber.

“In a lot of ways, Virgin Australia has been a big success story in terms of building itself up over only 20 years to be a significant competitor to Qantas in the Australian market.” His views were shared by Qantas chief executive Alan Joyce who told his staff in an electronic town hall meeting on Thursday that Virgin Australia’s move into voluntary administration was “very sad for the people who’d worked hard over many years to build the airline”.

“I think it’s fair to say that over the years they have pushed Qantas to be better,” Mr Joyce said.

“The good news is that Virgin management and administrators Deloitte are very positive about the company’s prospects.”

Separately it emerged in a notice to creditors that voluntary administration will generate bet­ween $20m and $30m in fees, much of which will go to Deloitte.

“This estimate is subject to the timeframe and progress of the recapitalisation or sale, and any variation to the timeframe will have a significant effect on our estimate,” Deloitte said.

The administrators were also facing challenges, with staff at Deloitte working remotely. This has meant dealings with Virgin’s management team are largely by phone or email.