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Happy landings unlikely in Virgin’s flight path

by Australian Strategies sraff

The Queensland government has been mulling  over buying or taking a stake in the wreckage of Virgin Australia – this according to Nikkei, Japan’s news agency, one of the world’s more reliable sources of news.

Not much of a surprise there. The state government is desperate to keep the corporate and technical base of what it hopes will remain Australia’s second airline, based in Brisbane.

One should never underestimate the ability of the Palaszczuk government to spend money like a drunken sailor – witness $4.2 billion of Queensland taxpayers’ money to the Carmichael mine.  

It beggars belief that elected ministers could consider taking such a big risk as putting public money down a rathole like Virgin Australia which has over $6 billion in debt. Or that the government could run an airline, when there already is a successful one – the Queensland and Northern Territory Air Services, or QANTAS for short.

To be fair, the state-owned Queensland Investment Corporation appeared to have realised it was digging a hole for itself not long after Cameron Dick, state treasurer,  was reported as saying it was thinking of taking an equity stake.

In practice there are now only four shortlisted potential bidders for VA, all of them overseas based; two of them have already been involved in failed airline rescues. The Queensland government is now likely to hitch its wagon to whichever one, if any, gets the final nod from Deloitte,  Virgin Atlantic’s administrators, to put a detailed package to the creditors next month.

Several bidders are consortia or private equity groups, but those named on May 18 do not show existing shareholders – Singapore Airlines, Etihad, two airlines from China or Richard Branson’s Virgin Group — as lead bidders, nor any other airline of note.

The two potential bidders involved in airlines that collapsed or needed government support are New York-based investment fund Cyrus Capital and Indigo Partners.  Indigo is owner of an American budget carrier, Frontier Airlines, and the Hungary-based Wizz Air. Both airlines have had government bailouts. Cyrus Capital has been active in the airline sector, partnering with Richard Branson in the launch of Virgin America before it was sold to Alaska Air. It was also involved in talks to bailout UK airline FlyBe before it fell into administration last year.

So, the question now being asked is could any of these potential owners keep the airline going, or even gather together enough money to satisfy the creditors?

It’s doubtful. First, Virgin Australia is running out of cash. The $100 million it has may not be enough to keep even the very limited operations going until one of the four shortlisted bidders – or another white knight – has done its due diligence.  Its fleet needs reshaping for whatever future a new owner has in mind and, inevitably, some of its planes will be surplus to requirements. (Right across the world there are newer and better aircraft for sale or lease at knockdown prices).

The airline will need a new management. Virgin Australia was already in financial trouble during the years when it was run by the affable John Borghetti, a man of smooth talking and excessive optimism who bid to challenge Alan Joyce’s Qantas for the profitable business market, and seduced much of the Australian mainstream media. Aviation and travel journalists extended the same indulgence to Borghetti’s successor, Paul Scurrah in fairness, Scurrah  probably arrived too late to staunch the losses, while also having to deal with five major shareholders, and grasp the complexities of fighting a formidable foe in both domestic and international markets. Scurrah made mistakes, like selling off 65 per cent of VA’s frequent flyer program, Velocity. As Joyce was turning Qantas round from huge losses to profits, Scurrah piled up debt of over $6 billion.

Virgin’s new owners will not be short of outside advice. One of those with significant airline experience is Melbourne celebrity businessman Sir Rod Edington, chairman of JP Morgan Australia and Infrastructure Australia. Edington ran British Airways when the UK flag carrier was the self-styled ‘world’s favourite airline’, competing with Richard Branson’s Virgin Atlantic on the lucrative routes between London and the United States.

Edington, who inherited BA’s hugely successful Executive Club program – which was the model for the Qantas Club – made extensive use of the data about the airline’s customers. ( I was to write about it in a book I co-authored at the time The Intelligence Edge).

As Sir Rod was recently to tell the Sydney Morning Herald: “It was a crazy idea. They (Virgin Australia) bought it back at what turned out to be an expensive time, but by selling it they put themselves in harm’s way. Your frequent flier program has all your customer IP, it’s  the heart of your business, it tells you what customers like and what they don’t like”.

Sir Rod, who also once chaired Ansett and was on Rupert Murdoch’s boards, told the paper if he was in charge he would dump Virgin Australia’s international business, and then make a decision whether to return to the Virgin Blue model of a low-cost, no-frills airline with a single aircraft type or become a full service domestic carrier focused on profitable routes.

The problem with either of these strategies is their implementation. The first would pit a re-emerged VA directly against the Qantas-owned highly successful Jetstar, built by Alan Joyce before he took over the helm at Qantas.  The second option confronts the same problem: despite some weaknesses in the standard of QF’s ground services, it is tough competition. Moreover, Joyce has shown himself to be a better airline manager than Edington ever was.

Edington himself was personally responsible for one of BA’s biggest strategic mistakes. Before he took over, BA’s Go, a cut-price airline operating from London’s newly emerging third airport at Stansted, was run by the American Barbara Cassani.  Go was a classier version of what we know as Jetstar, not unlike America’s Jet Blue. It quickly established itself with a network of routes across Europe, competing with Michael O’Leary’s Ryan Air.

Instead of seeing Go as a valuable addition to BA, which dominated at London Heathrow, Edington saw it as an unwelcome competitor, possibly eating into BA’s profits. (There was no doubt Ms Cassani was a skilful operator and a brilliant marketeer.)  Edington sold Go for £100 million to a private equity management buyout involving Cassani.

Ryan Air went on to dominate Stansted and is now Europe’s largest airline. Cassani was later instrumental is selling on Go to Easy Jet, which is also one of Europe’s largest carriers, and dominates London’s second airport at Gatwick. Between them they operate 3150 routes in Europe. Last year EasyJet carried more than 28 million passengers, outstripping both Ryan Air and BA.

Of course, leaders cannot always get strategy right, and Rod Edington’s time at BA was not the success some claim. Had he kept Go and Cassani, it may have been different. But the real loser was Branson. He could have picked a female to run all three of his airline brands, and Qantas would likely have a competitor worthy of the name.

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