Listen to the unions and the future of Virgin Mark II looks clear. But what do the bondholders want?

There are at least two obvious wild cards at play before any deal is done: the role of the bond holders and the quickly shifting domestic aviation environment. That’s assuming a deal is done at all, and there are plenty of parties who say they are unsure about the prospect of a sale.
What looked ambitious just a few weeks ago getting more than 40 planes in the air by the end of July is now possible. In fact, Qantas said this week it expected to be back to 40 per cent of its pre-COVID-19 domestic capacity by July.
Qantas’ full plan includes ramping up domestic capacity from 5 per cent to 15 per cent by the end of June the equivalent of putting on about 300 more weekly return flights. It’s a way of helping the airline meet demand and defray the costs of owning a fleet and paying staff.
Industry rule of thumb though these vary wildly is the lease cost on a mid-life narrowbody aircraft would be about $250,000 a month.
“Scope of operations”, it was said, was key in selecting the final two bidders, with 80 planes the rough level that Virgin is expected to be able to effectively compete with Qantas. Where that leaves the final dollar number something the bond holders will watch closely isn’t clear.
Deloitte picked the two final bidders apparently based on their commitments to keeping about 80 or so of Virgin’s 130 domestic planes in the fleet and plans to quickly get them flying again, subject to demand.
“It’s really just guesswork at this stage,” says aviation expert Peter Harbison, executive chairman of CAPA Centre for Aviation, when asked about the environment in which a resurrected Virgin will operate.
Recreating Virgin’s international network will be challenging, he says: “You’d want to keep away from that for at least a year.”
So what about the domestic corporate market? That’s looking tough as well, he says, noting that traditionally the business segment has been both profitable and strategically important for Virgin.
A commitment to keeping the planes assuming the bidders stick to it is interesting, because many saw the administration as an opportunity to reset the cost base, of which leases were one part.
What looked ambitious just a few weeks ago getting more than 40 planes in the air by the end of July is now possible. Darren England
“It [the airline] has got to have lower costs, that doesn’t mean having fewer flights … and if you can come out of administration and only lose 15 per cent of jobs, you are looking pretty good as well,” Mr Harbison said.
While the unions are getting plenty of attention, and the employee vote is important in getting a deal approved, the bond holders seem oddly quiet.
For weeks, the bond holders have been banding together, appointing Farraday and Corrs Chambers Westgarth as their advisers.
Representing as much as $1.8 billion of the total $6.8 billion owed, the bond holders are significant in numbers. One estimate is about 5000 owners, made up mainly of people holding the ASX-listed notes. Of those retail notes, most are Australian.
The creditors will be asked to approve any sale based on both a majority of numbers and value, and if there’s a split, the administrator has the casting vote. On numbers and value, the bond holders represent an important creditor group.
There’s been talk of needing a pay-out as others say they are unlikely to get anything, and even whispers of debt to equity swaps and alternative offers. How an improved domestic operating environment feeds into that remains to be seen.
So far, there has been no real action despite the endless discussions. Time is running out and any move, if one is to be made, must come soon.
Crystal-ball gazing for the new Virgin (which will only have that name if the bidder strikes a deal with Richard Branson’s Virgin Group) is complicated.
Mr Harbison says it will be interesting to see how prime-time slots at Sydney Airport are awarded, if the new Virgin gives some up, and whether that will be overseen by the competition regulator.
But he’s clear on one part of Virgin’s future. “Two months ago this airline was owned by four international airlines. The primary goal was to deliver traffic to international airlines,” he says.
“Making a profit wasn’t top of the list. That will change.”