Source : THE AGE NEWS
Virgin Australia has completed one of the largest corporate makeovers in Australian history. From bankruptcy five years ago, in a few weeks, investors large and small will get an opportunity to punt on its shares – to decide whether this is a quality reno or one with just a lick of paint and floorboard polishing.
The vendors, private equity outfit Bain, will be handsomely rewarded, as will a handful of its senior management who could pocket tens of millions of dollars if the airline’s hockey stick earnings forecasts are met.
Flying high: Virgin gets ready for stock market take off.Credit: Alamy Stock Photo
But what about the new band of shareholders who have been offered shares in the new public listing, or those who are thinking of buying into Virgin after it lists at the end of the month?
Investing in aviation has a long history of being at the riskier end of the spectrum. Airlines are especially sensitive to black swan events such as COVID-19 or 9/11, but they are also susceptible to changing industry dynamics such as new entrants, disruption in market share, or the health of the economy.
In the 25 years since its launch as the cheeky disruptor airline funded by Richard Branson, Virgin Blue has had many corporate faces – not all of them attractive in an earnings sense.
In a financial sense, the period in which it sought to clone Qantas was a speculator failure.
But the common theme has been its position as a challenger to Australia’s aviation queen – Qantas.
Virgin Blue was born in 2000 as a low-cost airline that carved out a new market, tapping into price-sensitive leisure customers who could not afford to fly Qantas or its then-rival Ansett, which collapsed the following year.
It shed the irreverent, slightly scrubber clothes it wore as Virgin Blue more than a decade ago as it sought to become a full-service, multi-brand airline group under former chief executive John Borghetti. That was its Qantas mini-me period.
In a financial sense, the period in which it sought to clone Qantas was a speculator failure.
For its shareholders, which were mainly large offshore airlines, Virgin was a financial black hole that suffered a string of losses. In the early months of the COVID-19 pandemic, it lost the support of financiers and shareholders and collapsed under a mountain of debt and a pandemic-induced revenue stasis.
But Borghetti’s reign also marked the heyday period for Australia’s flying public.
He invested millions into Virgin’s product – its aircraft, its food, loyalty scheme and its lounges. At one stage, travellers were fed feasts devised by celebrity chef Luke Mangan and could fly some domestic business class routes on a full lie-down seat.
It was smiles all round on December 8, 2003, when Richard Branson and his staff celebrated the listing of predecessor Virgin Blue on the Australian Securities Exchange.Credit: AP
It also forced Qantas to lift its service game in what became a service race to the top. This market-share war also led to a price war – a dream for customers who received peak service levels with discount airfare prices.
But it was unsustainable.
Under Bain’s ownership, yet another version of Virgin was crafted, which could or should be its Goldilocks market position.
Arguably, it does retain some of the disruptor/challenger original DNA and some of the premium features it grew under Borghetti.
It will compete with Qantas and with low-cost carrier Jetstar, but its strategy is to commandeer the middle – the more cost-conscious small- and medium-sized business market and the higher-end leisure traveller. It will do so by pitching its pricing a bit below Qantas mainline, but above Jetstar.
The recovery in its earnings over the past two years suggests this strategy should be a winner.
Australia has demonstrated it can support two airlines (and three differently pitched airline brands) as long as none of them does anything to disrupt the status quo.
But there is a large aviation graveyard full of those that attempted to introduce a third national airline.
The Virgin prospectus (which is the float sales document) says that Australia is a structurally attractive market because of large distances between capital cities and the lack of a fast and efficient train network. You can add to that a wealthy population that has prioritised travel even in the face of a cost-of-living crisis and high interest rates.
Virgin will compete with Qantas, but its strategy is to commandeer “the middle”.Credit: Bloomberg
The secret to Virgin’s success going forward will be to know its place in the market and not lose sight of it.
Beyond that, Virgin, like any airline needs a good smattering of luck – given the fact that black swan events can blow up the best-laid plans.
For private equity owner Bain, the revival and (now) sale of Virgin has been well executed. The pricing is pitched at a discount to Qantas which provides new shareholders with some upside.
Not too greedy, not too generous – just greedy enough.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
