Reborn: Bain Wins Battle For Virgin Australia


US private equity firm Bain Capital is the new owner of Australia’s second-biggest airline, Virgin Australia, after a rival bidder’s shock exit.

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US private equity firm Bain Capital has been confirmed as the new owner of Virgin Australia, just an hour after a major rival pulled its offer for the cash-strapped airline.

Virgin Australia’s administrator Deloitte signed a deal with Bain believed to be worth more than A$1 billion, just an hour after New York hedge fund Cyrus Capital Partners quit the race, claiming it had been frozen out of negotiations.

Boston-based Bain plans to relaunch Virgin Australia as a low-cost carrier that sits between the full service offering of Qantas and its low-cost offshoot Jetstar.

Bain still needs the airline’s 12,000 creditors to rubber stamp the deal at a meeting planned for late August.

Mike Murphy, Bain Capital Australia

Mike Murphy, Bain’s managing director in Australia (pictured), said the plan was to celebrate Virgin Australia’s unique culture and “protect as many jobs as possible for the short and medium term”.

That means Virgin 2.0 will continue to be based in Brisbane with chief executive Paul Scurrah (pictured below) at the helm, along with most of the former management team.

While the deal is no doubt a win for the airline’s 10,000 employees (Bain has promised to honour the $450 million in outstanding entitlements owed to them), the reality is that up to 30 per cent could be let go in coming weeks as flights remain grounded and cost-cutting kicks in.

Its much bigger rival Qantas has already said it would axe around 6,000 jobs and undertake a $1.9 billion capital raising to try to safeguard its future.


Paul Scurrah
Paul Scurrah will stay on as chief executive of Virgin Australia 2.0

What Virgin 2.0 Will Look Like

With Qantas dominating corporate travel in Australia and Jetstar entrenched as the low-cost carrier, Virgin’s new owners aim to carve out a niche value market somewhere in the middle.

The reborn Virgin Australia would primarily be focused on the busy Melbourne-Sydney-Brisbane routes, using existing narrow-bodied Boeing 737s, as well as regional destinations. Domestic flights previously made up 80 per cent of Virgin’s revenues.

Some short range international flights are likely to destinations like Fiji, Bali and New Zealand, but anything further afield could be years away given the state of global travel.

Velocity Frequent Flyer, with more than nine million members, is the jewel in the crown .

Virgin previously flew to Los Angeles and Hong Kong and was set to fly Brisbane-Tokyo before the coronavirus pandemic shut down travel.

Virgin’s airport lounges around the country are likely to survive, but the VIP lounge known as The Club is likely to be shuttered as it moves away from the high-end business market.

The profitable Velocity Frequent Flyer business, with more than nine million members, is the jewel in the crown for Bain because it actually makes money. Velocity is expected to be aligned more closely with the core flying business through the same website.

Tigerair Australia – considered a distraction that adds costs and complexity with little or no return – is expected to be culled. Even before COVID-19, Virgin warned drastic steps  were needed to make the offshoot profitable.

Deloitte lead administrator Vaughan Strawbridge said Bain’s intention was to operate a “single-branded” airline, which would spell the end of Tigerair.


Tigerair


The Sale Process 

Virgin Australia (and Tigerair) ran at a loss for seven consecutive years before collapsing in April with debts of around $6.8 billion, setting off a competitive sale process.

A list of about 20 contenders for the airline was reduced to a shortlist of just four parties, and that was narrowed down earlier this month to just Bain and Cyrus Capital.

Deloitte had been planning to name a preferred bidder for the airline next week, but brought the announcement forward after Cyrus Capital’s stunning exit (June 26).

Cyrus –  a founding investor alongside Sir Richard Branson in the old Virgin America – claimed it tabled an offer to buy Virgin Australia, its regional business and the Frequent Flyer business on June 22.

“Since then, the administrators have not returned calls, emails, or meaningfully engaged with Cyrus to progress its offer,” Cyrus said in a statement.

An improved bid submitted on June 25 “received no response other than an acknowledgment of receipt.”

Virgin Australia’s original shareholders – including Singapore Airlines, Etihad Airways, HNA, China’s Nanshan group and Branson’s Virgin Group – saw their equity all but wiped out in the administration process.

Branson is reportedly willing to inject up to $100 million for a new stake in the rebooted airline, and could reduce the annual $15 million it receives from licensing the Virgin brand until it is profitable.


#UNTILWETRAVELAGAIN

© 2020 Bernard O’Riordan (Travel Instinct). All Rights Reserved.

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2 comments

  1. Private equity and airlines. There’s only one possible attraction and that’s the frequent flyer business. Watch this space. It will all be rebundled for a stock market float before you know it.

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