Wednesday marked a turning point for Virgin Australia. The airline collapsed in April and has since maintained a slender schedule of flights as it navigated a turbulent post-collapse environment. But Virgin Australia has found a buyer and its future now seems assured. That buyer, Bain Capital, took control of the airline on Wednesday.
Bain Capital was due to give a media conference on Wednesday, but that fell through. When news broke last week of their successful bid, Bain Capital issued a statement saying they had made the following commitments;
• Fully fund employee entitlements
• Support program for any team members who may leave the airline
• Ongoing commitment to investing in regional services
• Invest in and see closer integration of Virgin Australia and the Velocity program
• Carry forward all existing travel credits, both direct purchased and through travel
• Invest in world-class digital and data technologies
• See Virgin Australia emerge from voluntary administration with a strong balance sheet
delivering resilience and future growth
So let’s break down these points a bit to try to plot what’s next for Virgin Australia.
Downsizing the workforce
No-one likes losing their job, but it looks like up to 5,000 jobs will go. That is around half of Virgin Australia’s workforce. Incumbent CEO Paul Scurrah (who will keep his job) acknowledged the anxiety in a group email to Virgin Australia employees yesterday.
The new Virgin Australia will be a smaller airline with fewer planes, requiring fewer employees.
The new owners have also acknowledged the stress Virgin Australia’s are under. They have committed to keeping as many jobs as possible. They’ve also committed to carrying all accrued entitlements forward. These accrued entitlements are estimated to exceed $310 million. Those employees who lose their jobs will be fully paid out and given help with finding new roles.
Staying in the regions
Virgin Australia evolving into a strictly domestic trunk route operation was a possibility. It was potentially bad news for those people who lived outside capital cities. But Bain Capital has committed to flying regional routes.
But with the inevitable fleet downsize and aircraft type consolidation to an all Boeing 737-800 fleet of around 60 planes, many regional airports previously served by Virgin Australia may find themselves losing that service. While the 737s will continue to zoom around to key regional airports like the Gold Coast, Darwin, Cairns, and Townsville, other routes do not have the numbers to support a 737-800 service.
That raises questions about the continuation of services to airports like Mildura, Port Macquarie, Albury, Wagga, and various regional centers in Queensland and Western Australia.
Virgin Australia has just stepped up the tempo of its flying, adding more flights and reinstating flights to 17 airports. They will also resume flying into the Northern Territory shortly. There is no word when the airline will head back to Tasmania.
Velocity program retained
Virgin Australia’s Velocity frequent flyer program had ten million-plus members. It was a reasonably user-friendly program with plenty of opportunities to earn points. But with the airline in administration, redemptions and transfers were temporarily frozen.
However, Velocity was still promoting opportunities to earn points. This strategy was widely criticized, including by Australian Frequent Flyer’s Matt Graham.
Redemptions have now resumed. But with fewer flights (including no international flights) operating, opportunities to redeem are limited. Virgin Australia is also now refunding taxes and charges paid on canceled redemption flights.
Bain Capital has said the airline’s lounges would stay, but the exclusive Club lounges look likely to go. The imminent demise of Virgin Australia’s widebody fleet signals the end of their top-notch “The Business” suites. They were a popular points redemption opportunity and a favorite of mine. Also uncertain is the future of Velocity’s relationship with Krisflyer. Previously, you could transfer points across, thereby tapping into the more extensive Star Alliance network.
What is sure is that Bain will need to retain the loyalty and goodwill of the existing Velocity members for a future Virgin Australia to succeed.
Travel credits and forward booking honored
To keep that goodwill, Bain Capital has decided to honor all travel credits and forward bookings, whether purchased directly from the airline or via a travel agent. The value of these credits and forward bookings exceeds $400 million.
For a time, Virgin Australia froze refunds. While in administration, Virgin Australia was issuing “conditional travel credits,” saying there was no guarantee the future owners would honor them
The new owners could have lawfully elected not to honor the travel credits and previous bookings. But customers, including high-value frequent flyers, would have deserted to Qantas in droves. Bain Capital might be on the hook for hundreds of millions of dollars, but it is money well spent.
Virgin Australia to get a long-awaited IT upgrade
Frankly, both Virgin Australia and Velocity’s websites have been a bit of a nightmare. They were clunky, unintuitive, and slow. Virgin Australia often long criticized for this. Many believed the expense of upgrading their IT system was deterring the then cash-strapped airline from doing so.
I would show you a screenshot of their website landing page, but I’m getting a bad gateway error. Says it all.
But an upgrade is on the cards. It’s part of the commitment Bain Capital gave when submitting its final bid. They also plan to integrate Velocity deeper into Virgin Australia’s website. That may seem a no brainer, but integration was seriously lacking.
A more user-friendly website and app that makes bookings easier can only be a good thing.
A commitment to resilience and future growth
Most Australians agree on the need for Qantas to have a competitor. Even the combative Qantas CEO acknowledges competition drives the airline industry forward and lifts the overall airline product.
Bain Capital taking over Virgin Australia helps provide that. They’ve got a jump start. Much of the pre-existing US$4.71billion is debt is gone. Shareholders have done their dough. While secured creditors will see some return, unsecured creditors and bondholders very little.
Paul Scurrah is staying on as CEO. He is a canny operator. Virgin Australia’s problems long pre-dated his arrival at the airline last year.
A smaller airline operating without the debt and overhead that Virgin Australia had previously borne is the outcome of the airline’s voluntary administration and sale. As they power forward, the new owners plan to fortify the balance sheet and even perhaps, being some of Qantas’ financial discipline into their operations.
That might be one of the few things they take from Qantas. The days of Virgin Australia trying to emulate and conquer Qantas are over.
To succeed, Virgin Australia doesn’t need to be a Qantas clone. It needs to find a place for itself in the market and offer a product that is both competitive and distinctive.
Now Bain Capital has moved in at Virgin Australia, decisions will get made, and announcements should follow. Simple Flying will keep you posted as Australia’s second airline gets some uplift again.