Fight or flight: Inside Deloitte’s Virgin Australia rescue
Deloitte’s turnaround team put Virgin Australia back in the air, concluding a sale and recapitalisation deal in just 10 weeks.
- Virgin Australia went into voluntary administration in April 2020 owing A$6.9 billion to creditors.
- Deloitte was appointed administrator and ultimately sold Virgin to Bain Capital, saving more than 6000 jobs.
- The trio of CAs steering the rescue credit their success to decades of experience and the skills learned through their chartered accountant qualification.
By Cameron Cooper
The enormity of trying to save Virgin Australia hit home for Deloitte’s team of administrators back in April 2020. After the airline was grounded due to COVID-19 border closures, and following weeks of publicly seeking financial assistance from state and federal governments, on 21 April Virgin announced it had entered voluntary administration. It had A$6.9 billion in debts owed to creditors including banks, bondholders and aircraft lessors.
Working closely with Virgin management, Deloitte took over the airline’s operations. Within about 10 weeks, it had concluded a competitive sale and recapitalisation deal. History will record that the banks came good and Deloitte would go on to sell Virgin to US private equity firm Bain Capital via a deed of company arrangement in arguably the most complex administration yet undertaken in Australia.
But it was a long 10 weeks. Steering the deal from the cockpit, so to speak, was Sal Algeri FCA, Deloitte turnaround and restructuring partner, and the firm’s national turnaround and restructuring leader, along with turnaround and restructuring partners John Greig FCA, Richard Hughes FCA and Vaughan Strawbridge CA. (Strawbridge has since left Deloitte and joined FTI Consulting.) An extended team of up to 80 professionals at Deloitte also worked on the Virgin project and played a key role.
Picture: Deloitte’s John Greig FCA (at left), Richard Hughes FCA and Sal Algeri FCA at Brisbane Airport. Image credit: Lyndon Mechielsen / Newspix.
Winning the tender
While Deloitte is keeping details of the ins and outs confidential, getting Virgin Australia was a big win for the firm. KPMG, as Virgin’s auditor, had been excluded from the tender and PwC was reportedly out of the game due to its former CEO Luke Sayers advising a then potential Virgin suitor BGH Capital. (BGH dropped out of the running in June.)
Greig speculates that Deloitte’s strong corporate restructuring practice in Brisbane could have been a factor for the board of Virgin, which has its headquarters in the Queensland capital. Strong professional ties with some of the airline’s executives through other business engagements over many years had forged a “non-independence impairing” connection with Virgin’s leaders that may also have made a difference.
“For whatever reason, and we don’t know why, they chose to run with us and we can only assume it’s because of the longstanding relationships we had with them,” Greig says.
Even then, the initial appointment was not guaranteed to last, amid media speculation that rival firm KordaMentha could challenge Deloitte’s role as administrator at the first meeting of creditors. Such a move that would have mirrored its action 20 years earlier to take over the administration of Ansett from PwC. (KordaMentha ending up advising Bain Capital on the Virgin purchase.)
“In fact, they didn’t nominate themselves at that first meeting and largely I think that was because we quickly established a very strong relationship with the Virgin employees and the unions representing a large number of the employees,” Greig says.
No matter the reasons, Hughes believes the deal highlights the exciting opportunities that exist for chartered accountants.
“When I first started, did I think for a second I’d end up in a position where I was essentially running an airline? No. But the things you can do as a CA are almost limitless and what we’ve done shows that,” he says.
Picture: Richard Hughes FCA. Image credit: Lyndon Mechielsen / Newspix.
“The things you can do as a CA are almost limitless and what we’ve done shows that.”
And while administrators are often portrayed as corporate undertakers, Algeri says the overarching aim for the Deloitte team in any administration is to help society and preserve businesses.
“And Virgin is a really good example of that. Our business is really focused on saving things,” he says.
Ready for take-off
Deloitte’s goal from day one was to keep creditors, employees, unions, airports, suppliers and other stakeholders calm and focused – and to avoid another Ansett.
“We all made a personal pact that we didn’t want this airline to fail,” Algeri says. “So failure was not an option.”
“We all made a personal pact that we didn’t want this airline to fail. So failure was not an option.
For the best part of five months in the transition to Bain Capital taking over, Algeri, Greig, Hughes and Strawbridge met in their virtual “war room” early every morning and again at night to inform each other on their progress, determine strategies and instruct the extended team.
Just one week into the restructuring, and facing market uncertainty during the global pandemic, the turnaround experts had to find A$15 million for the first payroll after banks had closed the debt-ridden airline’s accounts, effectively locking up a previous JobKeeper receipt that would help.
“We didn’t have any money and had to go cap in hand to one of the banks and ask them to trust us and give us some money,” Algeri explains.
From Queensland, Greig and Hughes took over day-to-day operations, including managing Virgin’s flight schedules and cash flow. Algeri dealt with aircraft financiers from his Melbourne office. Strawbridge handled media duties and other stakeholder negotiations.
A trusted working relationship between the four partners stretching back decades proved instrumental. Greig, Algeri and Strawbridge had collaborated on numerous administrations in the past, while Greig and a young Hughes first teaming up in 2001 on an administration involving listed accounting company Harts Australasia. “And we’ve been working together ever since,” Greig says.
Using a rugby league analogy, Greig says knowing the “games” of their colleagues so well meant each partner could foresee their next move as problems and challenges emerged.
“In these big matters it really does count whether the teams have worked with each other for a long period of time because you can anticipate what each other is going to do and how they’ll think about a particular issue,” he says.
Turbulence never far away
Not that the Virgin deal didn’t unfold without drama. Although he considers the appointment “as some of the more fun times I’ve had as an administrator”, Hughes raises the spectre that sends a chill down the spine of any administrator – being personally liable for a company’s debts. “It’s in your face every day,” he says.
Then there was that payroll crisis, which Greig says left him and his partners temporarily “staring into a cash-based abyss” and ruining the mood of one of their daily calls. “There was probably five minutes of silence when we realised how dire the situation was, and five minutes of silence is a very long time.”
The team also had to appease aircraft lessors early in the piece when images emerged from Perth Airport of bulldozers blocking Virgin planes because of unpaid invoices. In addition, some disgruntled bidders had voiced their displeasure at being cut from the airline’s sale.
“Their grumpiness is a reflection of the quality of the asset,” Hughes says. “As much as it’s gone into administration and had a very large debt stack, there’s always been an acceptance that Virgin’s a great brand name and that it has significant market share.”
The other heart-in-mouth moment came courtesy of tense negotiations with the International Air Transport Association (IATA), which acts as a clearing house that settles ticket sales for travel agents and airlines. “If you lose IATA as a supporter, you lose the agents, which in Virgin’s case is half the business,” Hughes explains.
With IATA being exposed to significant ticket refund liabilities if Virgin collapsed, it initially sought security from Deloitte of about US$150 million to cover any financial risks – money the administrators didn’t have.
After two to three weeks of backand- forth between Hughes and IATA, in which he managed to reduce the amount of security to a figure “significantly south” of the original request, the association agreed to keep the settlements system open for agents.
“That was tense initially, but ultimately the best answer was for us to actually find a buyer for the airline and sell it, and for those tickets to be flown. IATA saw that and that’s why they agreed to the deal,” Hughes says.
Prepare for landing
From 20-odd global bidders, Deloitte ultimately went with Bain Capital. Throughout, the Deloitte team drew on the expertise of advisers from investment banks Morgan Stanley and Houlihan Lokey, as well as lawyers from Clayton Utz, while facing constant scrutiny from regulators, creditors and the media. “So it needed to be absolutely watertight from a process point of view,” Greig says.
The upshot is that Deloitte saved Virgin, including about 6000 jobs at the airline, in addition to associated roles in areas such as aircraft maintenance, cargo handling and catering.
For its work, the firm has won the award for the International Company Turnaround/Transaction of the Year from the global Turnaround Management Association, based in Chicago. It has received acclaim for the speed with which it concluded the administration, with most airline restructures taking years.
“That four-letter word, cash, really drove the velocity of the transaction because at one point, and it was publicly known, there was concern on our part that we’d have sufficient cash to get to the end of the sale process,” explains Greig. “So it required an accelerated but very robust process.”
“That four-letter word, cash, really drove the velocity of the transaction.”
Reflecting on the complexity of the deal, Algeri believes the strength of the chartered accountant qualification and decades of experience in turnaround was critical.
“We’ve served a lifelong apprenticeship to work on an assignment like this. It’s like we were ready for it,” he says.
Above all, Algeri believes the deal highlights the importance of accounting professionals developing and using their professional judgment. In the Virgin case, the administrators exercised their power of sale under the Corporations Act to sell the assets without creditor approval.
“That’s not typically done in administrations,” he says. The move stood the test of the Federal Court of Australia, the Australian Securities and Investments Commission and creditors. “That professional judgment which we work so hard to develop in our careers held us up strong.”
Hughes adds that he and his colleagues did not vacillate, despite some external critics. “We knew what the right thing was to do,” he says. “We trusted each other and we had very clear work streams and we went ahead and executed.”
Algeri says being a CA opens doors. “And having done this is a great testament to that,” he says. “When I chose to become a chartered accountant I knew it would take my career to new heights, but being privileged to play an instrumental hand in saving an airline exceeded my wildest dreams.”