Branson hope for ailing Virgin Blue

An article by Derek Sadubin of the Centre for Asia Pacific Aviation in The Australian says that Virgin Blue is in the headlines, and not for all the right reasons.

Certainly its move to international service with V Australia should one day generate profits, but  meanwhile, profits are falling, fuel prices are soaring and its market share is being eaten away by leaner rivals.

Even majority shareholder Toll Holdings is looking for the exits, but can’t get through the door. But Richard Branson with his relationship with AirAsia X, could come to the rescue.

However, beyond the slump in its share price – in the process inflicting collateral damage on Toll – is a potentially very exciting story for the so-called New World carrier.

Most recent media attention has focused on Virgin Blue’s selloff on the stock market. Virgin Blue shares have lost 65 per cent of their value in the past year – a similar result to many of the US and European low-cost carriers – as fuel prices surge and competition intensifies.

Virgin Blue is in some ways caught in no-man’s land, stranded in vicious headwinds engulfing the entire airline industry, at the same time as it transforms into a business carrier.

The ramp-up in capacity in the Australian domestic market this year has served to intensify the pressures on Virgin Blue. It no longer has the cost base to compete sustainably with Jetstar or Tiger Airways on price on some routes.

The other carriers know this, and will be relentless in their attack on Virgin Blue in the coming weeks. And, sooner or later, Tiger will enter the Sydney market, to maximise the pressure on Virgin Blue.

Despite the apparently bleak outlook, Virgin Blue is still the second carrier in one of the world’s most profitable airline markets. It has an experienced management team. It retains a strong position in the profitable Sydney-Melbourne-Brisbane triangle.

It will shortly, via V Australia, launch an assault on Qantas’s most profitable international route – Sydney-Los Angeles.

It is attacking the previously cosy domestic New Zealand market with a New Zealand subsidiary. It is opening up new regional markets and tackling key premium traveller markets, including Canberra, with added frequencies.

Its Corporate Plus travel fares are significantly cheaper than Qantas, and combined with other business-friendly service improvements, gives Virgin Blue the best chance to grab a share of lucrative government and corporate travel contracts.

Unit costs have been growing, and will rise further this year, but unit revenues are expanding more quickly and are back to levels in the immediate post-Ansett collapse period in 2002, thanks to Virgin Blue’s increasing focus on the corporate travel market.

Subject to some creative ownership changes, Virgin Blue is also potentially extremely well positioned to expand further internationally, and deliver a painful blow to Jetstar in the process.

The Qantas subsidiary’s aspirations for international expansion have suffered a major setback with the still-unspecified time delays on the B787, upon which it pinned its future.

This is particularly important now, with AirAsia X’s expansion into Australia from Kuala Lumpur going ahead using 25 392-seat A330-300s, the first of which will deliver in October this year.

AirAsia X plans to link Australia to a range of other destinations, including London.

Finding the additional six A330s to meet Jetstar’s short-term expansion needs will not be easy in today’s very tight widebody leasing market.

But parent Qantas has some flexibility in how it can allocate its aircraft and Jetstar must certainly look for support in that direction.

As well as Virgin Group’s 25 per cent holding in Virgin Blue, Sir Richard Branson owns a 16 per cent stake in AirAsia X, which could be brought into a much closer relationship with Virgin Blue, along with AirAsia – possibly as an alternative ownership group to Toll.

There are plenty of potential synergies.

Virgin Blue could feed AirAsia X’s long-haul low-cost network from various points in Australia to Asia and Europe.

AirAsia X could help Virgin Blue establish its “ultra-low-cost carrier” to fend off Tiger and Jetstar on domestic leisure routes.

Such a combination would carry considerable market clout.

Branson and AirAsia would have noted a lack of other offers for Toll’s interest in Virgin Blue and they could conceivably acquire Toll’s 62.3 per cent interest at a discount to Virgin Blue’s IPO price of $2.25 – especially as it is now trading at around 90c a share.

Virgin Group could ideally buy Toll out completely with its Malaysian friends, retain a majority and float the rest.

Renewed investor interest, and the potential synergies from an AirAsia/AirAsia X linkage, could put a rocket under Virgin Blue’s shares and help pay for the acquisition.

Branson is not likely to be excessively generous, but as Toll watches Virgin Blue’s share price (and its own) sink further and other buyers remain scarce, the Branson attraction increases.

Branson is apparently in a mood to consider fresh investments in airlines, with reports he is seeking a possible deal to take over UK carrier bmi, while putting more capital into his US start-up, Virgin America.

Maybe he’ll take a fresh look at his troubled Australian venture too. There is considerable potential to be mined.

More low-cost carrier updates are available at www.peanuts.aero

Derek Sadubin is the chief operating officer of the Centre for Asia Pacific Aviation.

A Report by The Mole from The Australian