Business guide to Coronavirus

4 things your business can learn from Virgin Australia

Virgin Australia has entered into voluntary administration amidst the fallout from the coronavirus pandemic. The move comes after the Australian government denied the debt-saddled company a bailout. Now, it’s being run by Deloitte administrators, who will work to pay off its debts and find a new buyer for the brand.

At least 15,000 jobs hang in the balance, although Deloitte has said it has no plans to make any redundancies. So, how has Virgin Australia handled the situation? And what can businesses learn from its collapse?

What led to Virgin Australia’s downfall?

First, let’s examine the key factors that contributed to Virgin Australia’s collapse. Undoubtedly, the coronavirus pandemic has had a detrimental effect on many industries, and perhaps none more so than the aviation and tourism sectors.

However, the company was struggling long before the outbreak, constricted by debt and flat revenue. On February 26, the airline's half-yearly results revealed a loss of $88.6 million for the second half of 2019. It also recorded just over $1 billion in cash versus more than $5 billion in debt. Virgin Australia focused on cost efficiency – rather than revenue – as a strategy for long-term viability.

But this wasn’t enough for Virgin to be a dominant player in the market. And with little cash flow or revenue to fall back on, its business model was swiftly toppled by the coronavirus crisis.

Lessons for businesses

There are several important lessons businesses can take away from Virgin Australia’s collapse.

1. An effective communication strategy is paramount

Although the future of Virgin Australia remains uncertain, the company has handled the situation well, thanks to its open and honest communication strategy.

CEO Richard Branson posted a heartfelt video on LinkedIn and an open letter on Twitter confronting the uncertainty of the moment and thanking the Virgin Australia team for making the brand what it is. He also shared key points about the company’s charitable activities and what Virgin is doing to help protect jobs.

The company’s focus on its people is a great example of how a brand can demonstrate empathy and humanity in tough circumstances. It also illustrates how important it is to have a clear and transparent communication strategy, especially in times of crisis.

2. Drastic measures are sometimes the best course of action

Voluntary administration is when an insolvent company hands control over to independent administrators. The administrator then works to save the company by restructuring or selling it. In the case of Virgin Australia, professional services network Deloitte has taken over the company and hopes to recapitalise it quickly by selling it off over the next couple of months.

Although drastic measures like voluntary administration are a clear sign of a business in danger, they’re sometimes necessary to save a business in difficult circumstances. There are several examples of this in the airline industry alone. US Delta filed for Chapter 11 bankruptcy in 2005, United in 2002 and American Airlines in 2011. All three airlines emerged on top after years of restructuring, and are today some of the world’s biggest airlines.

Of course, no business owner wants to see their livelihood in jeopardy. But it’s important to note that in times of distress, restructuring or pivoting could be the right strategy to remain operational and to weather the storm.

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3. Continuity planning is critical

If Virgin Australia’s fate teaches us anything, it’s that a crisis can happen at any time and threaten the viability of even well-established businesses.

Having a clear continuity plan in place is crucial to minimising disruption and bouncing back quickly. When continuity planning for your business, ask yourself:

  • What can you do to scale back while continuing to operate leanly?
  • How will you communicate with your employees, customers and other stakeholders?
  • Which costs are necessary? Which can be reduced or removed?
  • What government support or other resources are available?
  • What can you do now to enable your business to adapt quickly in future?

4. Cash flow is always king

While the coronavirus outbreak is unprecedented, economic downturns are cyclical and peaks and troughs in revenue are a natural part of any business’s lifecycle.

With scant cash reserves leaving little room for error, Virgin Australia wasn’t able to withstand the blow to its revenue.

The key takeaway here is that maintaining positive cash flow and having a flexible balance sheet can enable you to act quickly in the face of a downturn. Regularly monitoring your revenue, cost structure, business plan and capital structure can help ensure you have enough cash on hand to meet expenses, even if sales take a hit.

It’s also important to understand the consequences (and costs) of growth and to have a clear understanding of your cash flow status at any time. Forecasting your cash flow helps provide a picture of your future incomings and outgoings. It also allows you to identify and fix issues early before they become critical events.

Answering these questions can help provide certainty on where to focus your attention, whether it’s in response to COVID-19 or other unforeseen circumstances in the future.

For more help on navigating your business through the COVID-19 crisis, visit our free resource hub.