Question

The subject of the report is the collapse Virgin airlines. Students should focus on two questions: • What were the main causes of the crisis? • What was the resolution of the crisis?

Answer 1

Let us first understand the reason behind the Collapse of Virgin Airlines.

Virgin Australia, was running on a balance sheet with excessive levels of debt, which made the business a "High risk" one.

A huge debt positioned coupled with the loss in business due to the Covid-19 pandemic, created a slump in the company's cash flows to the tune of $1.4 Billion.

It was now upto the major shareholders like Etihad, Singapore Airlines and Richard branson, to infuse large amounts of Equity capital to rescue the airline from an impeding collapse.

Let us now understand why Virgin landed up with so much debt.

Virgin started off as a low cost airline, but then later pivoted to become a full-service airline (similar to Qantas), for which it took a debt of $6bn.

Due to this massive debt burden, the airlines had only made a profit once, in the last 10 years of operations, as it paid most of its cash flows to service their msasive $6bn debt obligation

Virgin failed to capture market share despite the massive upgrades they took out, which made their business model unsustainable, and eventually when the Covid -19 crisis hit, the airline went out of business.

The shareholders then looked to the government for a bailout, which did not happen and it resulted in the airlines operations being halted.

What was the resolution of the crisis ??

Evenutally, the creditors of Virgin airline got together, and crafted a deal to sell the airlines to US- based firm Bain capital.

The deal is worth $3.5 Billion, which would see the unsecured creditors being paid ~15 cents on the dollar for their claims on the airline. (Total creditors are owed approximately $7 bn)

The terms of the deal were structured such that, the workforce will be reduced to 6,000 and all "long haul" routes from Australia will be shut down

So all in all, there was some respite for the creditors, but they suffered huge losses on the capital they had lent to the airlines