By Jamie Freed
SYDNEY (Reuters) - Virgin Australia 's (AX:VAH) entry into administration could give any successful bidder for the country's second-biggest airline the chance to free it from a complex ownership structure that has slowed decision making and been blamed for years of losses.
Hit hard by the fallout from the coronavirus pandemic, Virgin appointed an administrator on Tuesday to try to sell the airline and more than 10 parties have expressed an interested in recapitalising it.
Its losses are largely down to its international and budget divisions and efforts to turn the airline around have been often stymied by a board that includes representatives from the five foreign investors who control more than 90% of the company.
They are Richard Branson's Virgin Group, which founded the airline in 2000, Singapore Airlines (SI:SIAL), Etihad Airways, China's Nanshan Group and HNA Group. Branson owns about 10% with the other four each holding 20%.
All have suffered a sharp deterioration in revenue because of the pandemic and were reluctant to inject capital into Virgin, which caused talks with the Australian government for A$1.4 billion ($883 million) in state aid to falter this month.
"Having five different owners of very, very different shades obviously wasn't ideal. Getting them off the register would be great," said Peter Harbison, chairman emeritus for global aviation consultancy CAPA Centre for Aviation.
For example, when Air New Zealand (NZ:AIR), once the largest shareholder in Virgin, sought to simplify its operations in 2016, the Virgin board rejected its proposal and the airline sold its stake in frustration, according to people with knowledge of the matter.
Air New Zealand did not immediately respond to a request for comment.
SOLID PROSPECTS
Virgin, which has about a third of a domestic aviation market dominated by bigger rival Qantas Airways (AX:QAN), had reported seven annual losses in a row even before the pandemic decimated travel globally.
Several analysts said the best option for Virgin under a new owner would involve getting rid of its wide-bodied jets and turboprops and just keep its Boeing (N:BA) 737s, the backbone of its domestic fleet.
The Australian market generated two-thirds of Virgin's revenue in the last six months of 2019 and domestic travel is expected to rebound faster than international flights after the coronavirus crisis.
Moving to a single type of jet would help simplify operations and keep costs down while maintaining an appeal to business travellers in Australia as an alternative to Qantas, they said.
Australia's domestic market, long a duopoly of Qantas and Virgin, has historically produced a profit pool of A$1 billion a year, according to Qantas data.
Citi analysts estimate Qantas could gain anywhere from 9% to 28% of the domestic market because of Virgin's problems - on top of its current 60% control - which could give it the freedom to push up airfares.
The Australian government's policy is for the country to emerge from the coronavirus crisis with two strong domestic airlines to help support competition and the local tourism industry, Treasurer Josh Frydenberg said on Tuesday.
"Australia still represents a great opportunity for aviation investors," said Brendan Sobie, an independent aviation analyst. "Long-term prospects are solid, particularly if the new airline focuses mainly on domestic."
Under a new owner, Virgin could maintain strong commercial links with partners such as Singapore Airlines, the biggest foreign airline in the Australian market and a major Qantas rival, even if there were no equity ties.
Singapore Airlines feeds traffic into Virgin's domestic network while Virgin puts travellers on Singapore's extensive international network. Singapore Airlines has a similar arrangement with Air New Zealand that does not involve equity.
Singapore Airlines said it would honour upcoming bookings ticketed by Virgin but declined further comment about commercial arrangements.
SKELETON SCHEDULE
Virgin last paid a dividend in 2008 and its shares had fallen to record lows before it entered administration, with its A$5 billion of debt too much to handle as demand collapsed.
"I would think that this is a good opportunity for them to cut it to a more profitable core," said an industry analyst who declined to be named due to compliance issues.
For now, Virgin is continuing to fly a skeleton schedule under its current management team as the administrators try to find a buyer for the operation as a whole.
Interested investors include local private equity group BGH Capital, two people familiar with the matter told Reuters, on condition of anonymity. BGH declined to comment.
Airlines normally try to avoid administration because passengers may be reluctant to book and suppliers wary of getting paid but the coronavirus shock is so abnormal those concerns are less pressing, according to one industry source.
With Virgin's equity investors likely to see their investments wiped out because they rank behind unsecured creditors such as Australian bondholders, winning support from creditors will be crucial for any restructuring, analysts said.
Creditors are likely to have to swallow a reduction in the value of their assets, known as a haircut, under a restructuring deal, ratings agencies said.
If an agreement cannot be reached, an alternative would be for a startup airline to replace Virgin as the second major airline in the Australian market, analysts said.
"Having Qantas do it alone for a few months or even a year would not be disastrous as everything is uncertain re COVID-19 anyway," said Rico Merkert, a professor of transport at the University of Sydney Business School.