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Why would anyone bother buying Virgin Australia?

June 11, 2020 Headline News 2 Comments Email Email

With plenty of time to think about these things in this new COVOD-19 world, something has been bothering me for some time.  Why would anyone would bother buying Virgin Australia and all the baggage that goes with it?

We all know Virgin Australia went into administration on April 21, with a massive $AUD7 billion of debt, an amazing 12,000 creditors and sadly over 10,000 staff all factors which need to be take into account by the new buyer…and of course Deloitte’s sure to be very significant fees.

 So, with the original shortlist of 20 potential buyers now down to 2, I have to question what they are really thinking about?  Have they had a sniff of aviation fuel and that boyhood dream of flying planes that seems to affect everyone that gets involved in aviation? Or is it the attraction of the cash they think they can access out of the airline at some point in the future, which Virgin Australia’s shareholders never saw!

 Cast your mind back to when similar companies wanted to take over Qantas with subsequently it becoming very clear that what attracted them was Qantas’ significant cash reserves, with it equally clear if that takeover had happened, Qantas would not have survived the global financial crisis in 2008.

 The question of why buy Virgin Australia still haunts me, because starting a new domestic Australian airline without all of Virgin Australia’s baggage, liabilities, debt, staff and administration stigma, although recognising it was a popular airline but made no money, would be a much better strategy.

 If any of us was an investor in either the Boston-based private investor Bain Capital or what is described as global investor Cyrus Capital Partners, with reportedly links to Virgin founder Richard Branson, wouldn’t we be asking them the question, “Why are you even thinking about investing our money in an airline that has incurred debts of $AUD7billion has 12,000 creditors and over 10,000 staff?” 

 I would also remind them of what Rod Eddington said about Ansett, “great airline, lousy business!”

 Over and above future cash, another reason could be to secure Virgin Australia’s AOC, but that is also resolvable as the regulatory team at Virgin could be “bought” and transferred across to new airline and the government has already said they are committed to two domestic airlines, so without breaking or bending any rules, it is pretty certain that the government would fast track the AOC.

By the way about Branson!  Let’s face it, he is a small investor with only around 10% of the shares of Virgin Australia and quite honestly is he or the name Virgin worth the reportedly $10m fee paid to Virgin Australia ever year, with Branson making more money in royalties from Virgin Australia than the airline has ever earned!

Former Virgin Australia CEO John Borghetti said  a few years ago in the AFR, “the airline has benefited from the “halo effect of Virgin globally, which just – money can’t buy,” adding, “the Virgin brand, which a 20-year-old Branson founded in 1970 as a mail-order discount records business, has ‘been absolutely tremendously helpful, tremendously cost-effective.”

So, does Branson still have a role and is he worth it?  Do we also really need his silly publicity stunts in Australia?  My view! No, let’s move on, he isn’t worth it!

OK, moving on to this new domestic airline!  It will need some aircraft, which is not too difficult a task either, with airfields and airparks around the work awash with aircraft and owners and leasing companies desperate to get rid of them and at bargain basement prices!

Of course, right here in Australia Virgin Australia’s very own fleet of 130 aircraft would be up for grabs with most available for lease, with a domestic carrier needing a single aircraft fleet of either Airbus A320 or Boeing 737 aircraft.  The rest of Virgin Australia’s aircraft, which have either been used on longer haul domestic, international or regional flights would probably have to go.

By the way my view about regional flight is that to keep them flying and they are important for regional communities, they either need to make money or be subsidised by state, regional and/or local government.

So, quite honestly and tough though it may seem, especially for the 10,000 staff still waiting to hear about their future, why buy all the legacy stuff that Virgin has and why not simply start again with a new airline?

With one bidder saying they want to keep the current Virgin Australia model operating as a full service carrier in competition with Qantas, quite frankly they should head back to the drawing board and think again as they clearly have not learnt from John Borghetti’s mistakes in his vision for Virgin Australia, which is why it crashed, with the full service business model competing with Qantas simply not sustainable.

There is no question in my mind that the only survivable business model for a second airline in Australia is a new low-cost model airline, which will primarily compete with Jetstar and also because price is now much more important than frills, steal market share from Qantas.

Also , remember that corporate travel is going down the gurgler to a significant extent, to be large replaced by tele conference calls, zoom, working from home and other new post COVID-19 business and communication practices and for those that travel if necessary, lower costs!

Even this week it appears Virgin’s administrator has written to the Federal Government, saying that it thinks that bidders for Virgin might pull out in the absence of government handouts, with that saying it all that they can’t make Virgin Australia work without handouts.

With final bids due this Friday, let’s see if that whiff of aviation fuel and boyhood dreams or even future profit, which Virgin Australia’s shareholders never saw, will overtake comment sense or will common sense rule and another sustainable non-Virgin domestic carrier emerge – I hope so!

John Alwyn-Jones

Currently there are "2 comments" on this Article:

  1. Andrew North says:

    An excellent article, well said.

  2. David W says:

    Good honest article John. Having worked at both Virgin Blue and Virgin Australia it is blindingly obvious that the original LCC model is the way to go or maybe the New World Carrier format that Brett was working towards. In regard to the Virgin connection – no one but Branson would miss it, its about price and service but mainly price. In regard to staff, it got way too bloated especially as much of the ancillary services that used to be done in-house are now contracted out.

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