Virgin Australia: what does voluntary administration mean and how will it affect you?

On Tuesday Virgin Australia went into external administration after being crushed by a $4.8bn debt mountain and failing to secure a federal government bailout.

The decision affects about 10,000 staff and 6,000 contractors who work for the airline, along with 4,000 suppliers and customers who have bought tickets worth more than $1bn but haven’t yet flown, as well as holders of Velocity frequent flyer points.

Here’s what it means and how it affects you.

What is voluntary administration?

It’s against the law for company directors to continue to trade when they know the company can’t meet its debts as and when they fall due. When directors realise their enterprise is in danger of going broke, they can appoint insolvency practitioners to act as administrators.

Virgin Australia plans bare bones flight service as administrators look for buyers

The administrators step into the shoes of the directors and have additional powers, including the ability to disclaim contracts or property that are costing money.

They can also negotiate an exit from administration, handing the company back to directors, through what’s called a “deed of company arrangement”, or Doca.

This is what Virgin Australia’s administrators, Deloitte, are aiming for.

Under a Doca, debts can be settled for cents in the dollar and different classes of creditors can be treated differently.

This requires the approval of more than half of the creditors, both by number and amount of money owed.

Why wasn’t this avoided?

It could have been, if the federal government had been willing to put aside its dislike of nationalisation and take a stake in Virgin Australia.

Virgin Australia originally asked for a $1.4bn loan from the government, which could be converted into shares, but on Tuesday the chief executive, Paul Scurrah, revealed that by Monday this had dwindled to a request for $200m.

This was rejected.

When the Virgin board met on Monday, members were confronted with a $4.8bn pile of debt that needed to be repaid, cash spending of millions of dollars a day and no government lifeline.

Rather than carry on and risk trading while the company was insolvent, they appointed Deloitte as administrators.

Will all the employees get laid off?

During the period of administration, Scurrah said there would be no redundancies and all Virgin employees would keep their jobs.

Most are stood down at the moment and Virgin is accessing the federal government’s jobkeeper scheme (available when companies lose 50% of their revenue). This will ensure each employee receives $1,500 a fortnight.

But there are no guarantees about what will happen to jobs after the company is recapitalised and has new owners.

If it survives through the administration, it is likely to emerge as a very different airline. Scurrah predicted: “We’ll come back leaner, stronger and fitter.” That sounds like job losses.

Are employees’ entitlements safe?

Scurrah said all Virgin employees’ entitlements, such as holiday pay, long service leave and redundancy provisions, were preserved and the company had cash reserves.

Employees rated at the top of the pile for “circulating assets” like cash, he said. This puts them just behind lenders who hold mortgages over Virgin Australia’s fleet of planes.

But during the collapse of the airline Ansett Australia in 2001-02, entitlements became a major issue as many long-term employees were owed large sums.

It’s too early to say what will happen to working conditions in a recapitalised airline. That will depend on the new owners.

Will this leave Australia with just one major airline?

Not if Deloitte’s Vaughan Strawbridge and his fellow administrators can successfully sell the whole airline to a new owner.

But even they succeed, the size and shape of Virgin Australia would depend on what the new owner wanted to do with it.

For example, it could cut unprofitable routes that service regional Australia, or international flights.

All this could make Virgin Australia a lot less competitive against Qantas.

Will this mean higher prices for flights?

It could, but it’s too early to tell. Again, it depends on how deep the pockets of a new buyer are – and how much the new Virgin Australia wants to take on Qantas.

Experts say that without two airlines slugging it out, prices will inevitably go up.

What about the frequent flyer miles with Velocity?

Velocity isn’t in administration but, after a run on points on Tuesday, it froze redemptions for four weeks.

Strawbridge says the Velocity business is a valuable part of Virgin Australia and he’d prefer to sell it along with the airline.

Velocity is also the source of some of the company’s debt woes, as in November Virgin Australia raised about $700m in junk bonds to take full control of the points business, which it had partly sold off.

What the points will be worth under a new owner isn’t clear.

What happens to flights you have already booked or credits for flights cancelled?

Scurrah said people with bookings on Virgin should “expect to fly” once the restrictions on travel are lifted.

The plan was to keep flying during administration, he said.

Scurrah said there was no intention to cancel flight credits and that the goodwill associated with those credits would be worked through with interested parties. In other words, flight credits are safe for the time being.

Who might buy the airline?

The administrator has said there are more than 10 interested parties. Names that have been mentioned include Ben Gray’s private equity firm, BGH Capital, which has been combing through Virgin’s books. A current shareholder, the Abu Dhabi-backed airline Etihad, is also said to be interested, although with international air traffic all but shut down by the crisis Etihad has financial strife of its own.

An industry in crisis: can Australia afford to have just one airline?

The Queensland government has also offered support, provided the airline retains its headquarters in Queensland, while New South Wales is yet to reveal its hand.

The NSW treasurer has confirmed it is in discussions with Virgin and the administrator, and would likely insist the airline be based in western Sydney.

Richard Branson’s Virgin Group, which owns 10.42% of Virgin Australia, was willing to put up between $200m and $250m during pre-administration talks and the tycoon has expressed sadness about what has happened.

But, as Scurrah noted, his investments in cruising, airlines and hotels overseas mean he will have many pressures on his wealth.

Over the coming weeks the bidders are likely to coalesce into two or three consortiums that have a real chance of buying the airline.

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