https://www.smh.com.au/business/comp...i2cpDnzPdYi6ps
For years Virgin Australia has been recognised as a very good airline but a very bad business. So this begs the question: What is Qantas’ worst nightmare? Virgin remains a good airline but becomes a good business.
Sure businesses that go through the ignominy of administration suffer brand damage but if they come out the other side they get their phoenix moment - and with a pretty clean sheet of paper from which to build a better business.
Having said that Qantas will almost certainly pick up some market share when flying begins again.
Virgin chief executive Paul Scurrah and Qantas CEO Alan Joyce. It is unclear whether Qantas will be a winner from a revamped Virgin.
But the medium-term prospects are unclear. When companies enter administration, existing contracts, legacy agreements and historical structures can be toasted.
As a business that will work in Virgin’s favour.
It is not only the Virgin 2.0 balance sheet that will look much healthier having cut a swathe through the $5 billion debt pile, the resurrected airline will be able to establish a new cost base - one that will be significantly lower than that of Qantas.
Administration triggers the opportunity to renegotiate everything from the current enterprise bargaining agreements to fuel hedging contracts, lease rentals from the airport owners and catering. It is a lot like starting a business from scratch.
Students of history will remember Virgin Australia’s predecessor, Virgin Blue, started life in 2000 as a budget airline that operated with a very small cost base and rapidly expanded over the next couple of years after Ansett collapsed.
And even after it was reinvented by former chief executive John Borghetti into a premium airline and massively increased costs, it still beat Qantas on the cost metric. There is no doubt the ability to reset costs will be a huge factor that weighs into the amount would-be Virgin buyers would need to recapitalise the business and place it on a profitable footing.
The extent to which the emergence of Virgin 2.0 becomes a problem for Qantas depends on the plans of the party which gets control of Virgin.
A buyer may choose to pitch Virgin 2.0 as a hybrid - with a scaled-down business offering with a more upmarket leisure product. That would suit Qantas and allow it to grow its share of the business market but could eat into Qantas mainline's share of the leisure market.The third option would be to retain Virgin as a premium carrier and take advantage of the lower cost base to improve margins or reduce fares.
This would be the worst-case scenario for Qantas. Even as a premium carrier Virgin could reduce less profitable routes and ditch or pare back its international operations which have in the past been mostly loss-making. It could focus on increasing the frequency of the main capital city routes.
Which strategy is employed is in the hands of the new owners - the identity of which won’t be known for a couple of months.
But there is no guarantee that Virgin’s administration will be positive for Qantas. There are too many unknowns at this point for Qantas investors. Its shares fell 6.7 per cent on Wednesday. But in the current information vacuum and amid a virtual aviation shutdown punting on airlines is a hazardous pastime.