VA recently spent $700 million to take full ownership of their Velocity Rewards customer loyalty program. In essence they reduced their liquidity, when they had low equity and an inability to raise new debt.
The $700 million outlay essentially changed the risk and debt profile of the business.
There are some management rules 101 that weren’t followed here.
Sorry but no business plans for a scenario where 100% of their revenue gets wiped out in one go.
So to claim that "management rules 101" weren't followed is curious unless you were in those board meetings when those decisions were made...
Note it is widely suggested in the media that the acquisition was 100% debt funded. Assuming a 3% interest rate, that equates to a $21m interest bill per year. So that in itself hasn't really impacted VA's short term liquidity position.
You can't look at this transaction in isolation.
Prior to the purchase of the remaining share of the Velocity business VA had significant structural issues with high debt and low equity (PE ratio) being high on the list of the items needing "fixing".
Using debt (100%) to purchase the remaining share of the Velocity business only compounded these significant problems.
From a risk perspective, VA's purchase of the business should have included "what if" scenarios, with one of the "what if's" being a significant event that reduced cash flows.
If we use QANTAS as a baseline, prior to the seriousness of the Coronavirus became fully evident they were actively in the market raising cash (by financing eleven if their 787's). VA wasn't. In doing so QANTAS almost immediately mitigated the full risk (low/high scenarios) of the pandemic event.
From where I sit, I can only suggest VA weren't in the market because 1) they had limited financing options to raise cash; or 2) they had incompetent business managers. Realistically, I'd suggest VA's books were such that they simply had no financing options available to them. The only option they had was to sit this crisis out.
A functioning board with proper oversight of the business would not have allowed this type of situation to occur. That it did occur suggests the board was not functioning or the major shareholders had simply had enough.
For me the Velocity transaction and the "multiples" (purchase price divided by expected profits) paid for it suggests a degree of desperation. VA obviously had a willing seller!
To put this into perspective, an aircraft (737) will typically generate gross profits in the region of 15-20% pa. As such, an aircraft will typically generate enough incomes to pay for itself over a seven year period.
Again, using QANTAS as a baseline, they were buying out aircraft leases, paying cash for new aircraft, negotiating revised lease terms for existing aircraft so that they ended up with 60% unincumbered ownership of their aircraft assets. In part, they achieved this during times when they were incurring losses and/or restructuring the business. It was a priority for them. Interestingly, there were times when they mooted the idea of selling part of their rewards program to fund these structural changes.
We have never seen this type of commitment from VA. Considering both of these businesses were equally loss makers in the 2012-2014 period, you would have thought that both of these airlines would have put measures in place to ensure they were sustainable.
Ultimately, one has and one hasn't and the one that hasn't is the one now asking for a government loan.
As such, the management and shareholders ultimately have to take responsibility for VA's woes. They should have always known better!