Coronavirus forced Virgin Australia into voluntary administration. Here’s how the airline began


Updated

April 22, 2020 12:48:02

As the COVID-19 pandemic wreaks havoc around the world, Australians are hunkering down in their houses in a bid to avoid contact with the potentially deadly virus.

Many states and territories have closed their borders and Australians have been banned from travelling overseas, with very few exceptions.

As the nation stays indoors, many businesses are doing it tough, and the tourism industry has been one of the hardest hit.

On Tuesday, Virgin Australia, with a 20-year history of operating in Australia, announced it had gone into voluntary administration.

With $5 billion in debt and no hope of a government bailout, the company said it planned to “recapitalise the business” and appointed accounting firm Deloitte to act as its administrator.

But where did it all begin? And why has its billionaire founder not stumped up the cash to save Australian jobs?

Virgin’s history in Australia

In 2000, Virgin Australia first entered the Australian aviation market with just one route, two aircraft and 200 employees.

Then known as Virgin Blue, the airline’s first flight was from Brisbane to Sydney on August 31, 2000 and the following year it launched 14 new routes and welcomed its millionth guest.

2001 also saw the collapse of Ansett Australia — an airline that had been flying the Australian skies for 65 years — after it was placed into voluntary administration.

Although Virgin Blue had several aircraft ready to start flights, there weren’t enough trained pilots available at the time and it took Virgin years to fill part of the gap left behind by Ansett’s departure.

Somewhat ironically now, Virgin Group founder Richard Branson made an important decision later in 2001, which some say played a significant role in the collapse of Ansett.

Singapore Airlines, which together with Air New Zealand, controlled Ansett, made an offer believed to be worth $240 million to buy Virgin in order to increase Ansett’s market share and remove its competitor.

The offer seemed enormous at the time but Mr Branson wasn’t having any of it.

Not only did he turn the offer down, but the flamboyant businessman was intent on making a scene of it.

In early September 2001, he held a press conference at Melbourne Airport where he made out like the deal had been done, holding up a cheque for a quarter of a billion dollars.

Just as the mood turned sour in the terminal, Mr Branson revealed he was joking before ripping the cheque to pieces and throwing it away.

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A short time later, Ansett collapsed.

Ansett’s failure meant Qantas’s market share jumped to about 90 cent before Virgin was able to start making inroads.

In a bid to try to keep Virgin at bay, Qantas, which had acquired the independent Impulse Airlines in 2001, then established low-cost carrier Jetstar in 2003.

While Virgin continued to expand its routes — until last month flying to 56 destinations around the world — it also started accruing debts.

Over the past decade, Virgin Australia made a full-year profit just twice, racking up total losses of $2 billion. According to its latest accounts, at the end of 2019, Virgin had borrowings of $5.3 billion.

It’s a figure on par with Qantas, except Qantas has three times the revenue of Virgin.

Until recently, Virgin Australia held a 30 per cent share in Australia’s aviation market, but had struggled to get a hold in key corporate markets, which Qantas dominated.

What was the Virgin strategy?

Virgin Blue initially followed a low-cost formula already, being used by some airlines in Europe and the US, that included online booking systems and paid in-flight meals.

Virgin said the low-cost model was so successful that it became the fastest growing Virgin company in history.

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The company successfully floated on the Australian Stock Exchange in 2003 and over the years, began to form codeshare deals with major carriers like United Airlines, Etihad Airways and Singapore Airlines.

In May 2011, the company announced its new name — Virgin Australia — and confirmed international airlines Pacific Blue and V Australia would also adopt the same branding.

By 2012 it was a full-service airline.

In the following years, the ownership and leadership of Virgin went through several changes and in 2014, Virgin itself fully acquired low-cost carrier Tigerair.

The airline became visible in the Australian sporting landscape as a sponsor of a number of teams in national leagues.

It also launched its frequent-flyer program, Velocity, in 2005, which remains profitable and has more than 10 million members today.

What happened during the COVID-19 crisis?

Airlines all around the world are doing it tough, with International Air Transport Association figures estimating the COVID-19 crisis will see airline passenger revenues drop by $US314 billion in 2020.

Flight cancellations put Virgin Australia on the edge of insolvency, with about $5 billion of debt — a whopping bill its foreign stakeholders aren’t keen to touch.

To prevent haemorrhaging money, Virgin Australia temporarily stood down about 8,000 of 10,000 workers as it grounded most of its planes due the coronavirus pandemic.

With only one flight a day, 129 of the company’s 130 planes were sitting on the ground.

In a bid to stay afloat, Virgin Australia asked the Federal Government for a $1.4 billion loan to help through the COVID-19 crisis.

But the Morrison Government wasn’t keen on offering a bailout, with Prime Minister Scott Morrison, Treasurer Josh Frydenberg and Deputy Prime Minister Michael McCormack repeatedly insisting the market, not the Government, should step in with a solution.

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The Government announced a $715 million package to help airlines cover fees and charges associated with flying planes, but since both Qantas and Virgin had grounded most of their flights, this measure wasn’t enough to help Virgin, which desperately needed a cash injection.

Government backing was also later provided to help keep some key domestic routes open, which Virgin said would allow it to operate 64 return services from Sydney, Melbourne, Brisbane, Canberra, Adelaide and Perth.

Where does Richard Branson fit in?

The Virgin brand is synonymous with Richard Branson, who founded the Virgin Group in 1970.

The enthusiastic billionaire made his early millions though music label Virgin Records, which signed acts like the Rolling Stones, the Sex Pistols and George Michael.

Virgin Australia is 90 per cent owned by offshore airlines including Etihad Airways, Singapore Airlines, Nanshan Group, HNA Group, and Mr Branson’s Virgin Group, which are all facing their own cashflow challenges amid the coronavirus pandemic.

But Virgin Australia’s total liabilities now exceed its total assets by $1.6 billion, which means for shareholders the company is worthless.

There have been calls for Mr Branson to personally stump up cash and bail out the airline.

But rather than offer a lifeline, Mr Branson was instead focused on warning about the consequences of a monopoly of the Australian skies.

Meanwhile, he was urging the British Government to step in and support his stricken Virgin Atlantic airline.

He even pledged his luxury Caribbean island resort as collateral in a bid to get government help.

As soon as the voluntary administration announcement was made for Virgin Australia, Mr Branson issued a statement to Virgin Australia staff vowing to “never give up”.

“In most countries, federal governments have stepped in, in this unprecedented crisis for aviation, to help their airlines. Sadly that has not happened in Australia,” he wrote.

Mr Branson said he was “never one to give up” and that the Group was “determined to see Virgin Australia back up and running soon”.

“This is not the end for Virgin Australia, but I believe a new beginning,” Mr Branson said.

On Friday, Virgin’s chief operations officer, Stuart Aggs was asked directly why Mr Branson would not help with a cash injection, but Mr Aggs said he had no comment.

Mr Branson’s Virgin Group only owns about 10.42 per cent of Virgin Australia, meaning the $5 billion bailout the company needed to pull it out of debt, would not give him a return on his investment.

In a 2016 story about achieving success, Mr Branson told the Sydney Morning Herald: “You can take risks but you have to be able to work out what the worst is that can happen.”

It seems much of the airline industry was never prepared for a hit of this scale.

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Topics:

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sydney-2000,

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First posted

April 22, 2020 07:36:33





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