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VIRGIN AUSTRALIA: Plan for Dreamliner Fleet Fuels Bidder Disquiet

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Patrick Hatch and Sarah Danckert at The Sydney Morning Herald reports that Virgin Australia’s administrators have proposed the airline buy a fleet of new long-range Boeing Dreamliner 787 aircraft, but prospective buyers are concerned its plan for the collapsed airline ignores how fundamentally COVID-19 has changed the aviation industry.

The Herald relates that nineteen parties are weighing up rescue bids for Virgin following its collapse last month, with preliminary bids due by 6:00 p.m. May 15, and they have been presented with a confidential management business plan for the relaunched carrier called “Virgin v2.0″.

According to the report, several sources close to the process, who spoke on the condition of anonymity due to strict confidentiality agreements, said the plan includes buying eight Boeing 787 Dreamliners to replace Virgin’s existing international fleet of five Boeing 777s and six Airbus A330s.

Boeing 787s have a “list price” of between US$250 million and US$338 million (AUD388 million to AUD525 million) depending on the model, although airlines normally negotiate significant discounts, the report notes.

Simplifying Virgin’s fleet to reduce costs was a core part of chief executive Paul Scurrah’s turnaround plan for the airline prior to it entering administration, the Herald states.

The Age and The Sydney Morning Herald previously revealed the business plan, detailed in a memorandum distributed to key bidders, involves maintaining an international network, which was under a cloud because it was a source of heavy financial losses.

Those details come amid growing frustration from potential bidders that Virgin’s administrator, Deloitte, is asking them to buy a business largely as it was before it collapsed and before the COVID-19 pandemic brought the global aviation industry to a standstill, says the Herald.

The Herald notes that airlines around the world have been devastated by the pandemic and major industry players expect it to take two to five years for passenger demand to recover. Deloitte hopes to secure a new owner for Virgin by mid-August.

More than half a dozen people close to potential bidders or working in senior aviation industry roles expressed concern and disbelief Deloitte was not using its administration powers to more aggressively restructure the airline by reducing its aircraft fleet and considering employee redundancies in recognition that a relaunched Virgin will operate in a significantly smaller aviation market, according to the Herald.

“There’s no recognition that the market has fundamentally changed,” said one source, adding administrators were setting up the winning bidder as the “bad guy” who would have to cut its fleet and workforce after they take ownership.

“They are setting themselves up for the most catastrophic failure – some of the consortiums are close to saying ‘ok, fine we’ll see you in the liquidation’.”

“This is the time to fix it,” another source close to one bidder said of the loss-making company. A third said the administration appeared to be controlled by Virgin management, with Deloitte adopting its long-term plan for the airline, the Herald relays.

Groups known to be considering a bid for Virgin include US private equity firm Bain Capital, local private equity group BGH Capital and Canadian asset manager Brookfield, the report discloses. The Queensland government on Wednesday announced its intention to bid for the airline, while co-founder Richard Branson is said to be waiting in the wings to join a leading consortium, the Herald adds.

About Virgin Australia

Brisbane, Queensland-based Virgin Australia is Australia’s second-largest airline. It commenced services in 2000 as Virgin Blue, wholly owned by the Virgin Group.

As reported in the Troubled Company Reporter-Asia Pacific on April 22, 2020, Bloomberg News related that Virgin Australia Holdings Ltd. became Asia’s first airline to fall to the coronavirus after the outbreak deprived the debt-burdened company of almost all income. Administrators at Deloitte, who have taken control of the Brisbane-based carrier, aim to restructure the business and find new owners within months. More than 10 parties have expressed an interest, Deloitte related on April 21.

According to Bloomberg, Virgin Australia, which has furloughed 80% of its 10,000 workers, will continue to operate some flights for essential workers, freight and the repatriation of Australians. The airline’s frequent flyer program is a separate company and is not
in administration.

Richard John Hughes, John Greig, Vaughan Strawbridge and Sal Algeri of Deloitte were appointed as administrators of Virgin Australia, et al., on April 20, 2020.

On April 29, 2020, the company and certain affiliates filed petitions pursuant to Chapter 15 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York.

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