Joe Aston
With elaborate pageantry, this newspaper
declared on Friday that Virgin Australia chief executive
Jayne Hrdlicka’s “moment of truth” has arrived.
“I’m not afraid to be myself,” she said in one of three interviews (to say nothing of the elaborate fashion shoot) designed to present a painstakingly curated version of herself.
Project Runway: It’d bring a tear to your eye if you hadn’t seen this tragicomedy three dozen times. Paul Harris
Hrdlicka has been in public life, in the leadership of Australia’s highest-profile organisations, for nearly 15 years. She’s a known quantity. So why is any of this necessary? Why the reset? We’ve all heard her 30-minute speeches at the Australian Open...
Only two years ago, Hrdlicka tried another of these heroic profiles – that one for
Good Weekend– and blew her own reputation to smithereens. She claimed she quit as CEO of a2 Milk in 2019 “because her husband had cancer” and that “I don’t think a2 handled that particularly well”. She also accused the media of sexism and of falsely reporting her awarding of $19 million in fees to her former firm Bain & Company.
The a2 Milk Company
responded that Hrdlicka had been allowed to say she was leaving for family reasons when she was really terminated, and confirmed that she’d spent $NZ26 million with Bain. The brouhaha
ran for nearly a week.
“Project Runway” was the headline on this, Hrdlicka’s latest softly-lit once-over. A better one would’ve been “Here Private Equity Goes Again”.
Virgin’s owner, Bain Capital, has demonstrated “a patient, strategic, long-term orientation,” Hrdlicka insisted, inanely. Actually, Bain has gone from acquisition to IPO beauty parade in 2½ years flat.
“From the day we came out of administration we started buying new aircraft, hiring more people, investing in systems… investing in talent,” she said. “We were spending money from day one to build for the future.”
It’d bring a tear to your eye if you hadn’t seen this tragicomedy three dozen times.
Most of Bain’s supposed investment is totally unverifiable. They were buying aircraft because they took fewer than 60 737s from the administrator, which was never enough. They were in a hiring phase because they’d just sacked everyone. Meanwhile, they were serving 2 Minute Noodles in Business class.
“I think that’s exceptional private equity,” Hrdlicka contends. “That’s the very best of private equity.” We’re not like the others, see? Literally every PE firm says this.
Bain is different but also Jayne is different. This is not robotic,
bait-and-switch Jayne, this is honest Jayne. Investors won’t be ripped off because Jayne is there and you can trust her. She wears divine clothes and plays tennis. Her son plays tennis, too, and she’s a terrific mother. She will never fall into the clutches of those short-term, tax-dodging private equiteers who previously sold you buckets of **** at the top of the cycle. Oh no, Jayne is there for you.
Observe who provides verification of this narrative: Jayne’s father. Jayne’s direct reports at Virgin.
Diane Grady, who joined Jayne on the Tennis Australia board in 2016 after Jayne had joined Diane on the Woolworths board in 2010. Tennis Australia CEO
Craig Tiley, who also relies upon Jayne’s patronage. Tiley helped install Hrdlicka on the TA board after she reached out to ask him how he talks to people. How do you do it, Craig? Please explain to me what it’s like to be human.
Jayne is merely the vehicle for this PE sell. This is her last big kill. This is $50 million plus, and if that means playing dress-ups and saying foolish things and getting Dad to email the
Financial Review, then she’ll do it. For that kind of money, who wouldn’t? Just don’t ask us to believe any of it.
Friday’s profile confirmed that Hrdlicka has colonised Virgin’s executive team with her former colleagues from Bain, Jetstar and a2. Wherever she goes, she transplants her entourage.
Does anyone think that Jayne or her entourage will be around in five years? No, they will make f--- off money and then do what people who make f--- off money all do: they f--- off. Virgin will be left with only their watermark, a cheap aftertaste of their greatness. The traumatised rump of management will be left to pick up the pieces, yet again.
Private equity isn’t complicated. It has one trick, which is to dress up a company’s accounts and sell us cups of warm sick posing as revolutionary new wellness smoothies. Nothing illustrates this more perfectly than the ridicule Hrdlicka reserves for the $35,000 Poltrona Frau leather chairs former Virgin Australia CEO
John Borghetti put in Virgin’s The Club (now Beyond) lounges. “Those three lounges were costing the airline $600 every time a passenger walked through the doors”. Today, however, “it is not bleeding cash every time someone sinks into a leather chair.”
The point of these chairs is to make Virgin’s most valuable customers feel like they’re in Milan, or in a Ferrari, to make them feel like
Alan Joyce can keep his Chairman’s Lounge. Did Hrdlicka get rid of them? Hell, no.
In Virgin’s financial accounts, thanks to their write-down at acquisition, the cost of providing the customer benefit of luxury furniture is zero. This is why those lounges no longer cost $600 per passenger – not just because they took seafood off the menu.
The replacement cost of those chairs in five years’ time is astronomical. Of course by then, Bain is gone and so is Jayne. The point is that it’s impossible for an IPO investor to determine the true cost, five years from now, of providing Virgin’s current service.
On a far greater scale than lounge furniture, the aircraft industry provides abundant opportunity for creative lease accounting, where today’s cost may be nothing like tomorrow’s cost. Back-ended leases were the key to the greatest private equity shakedown in Australian history: Myer. The annual lease liabilities in the prospectus bore no resemblance to the liabilities in later years. Accounting standards were updated to deal with this issue but you could still drive a 737 MAX through the loopholes. Where there’s a will, there’s a way – and there is a lot of will.
Hrdlicka is, as ever, incredibly ungracious. She claims Virgin went broke because of bad management, not because aviation is a fiendish industry. If only she could drill some sense into amateur capital allocator
Warren Buffett who knowingly says: “Investors have poured their money into airlines and [aircraft] manufacturers for 100 years with terrible results.” They were all badly managed, Jayne would tell him. They didn’t have me.
How much money has Qantas made in the past 15 years?
None. Zero. Even in the pre-COVID decade, Qantas barely made money. And Alan Joyce is supposed to be the gold standard.
If Virgin was such a good business, Bain and Jayne wouldn’t be selling it to us now. If Virgin’s growth prospects were still so promising, Bain would be reinvesting profits to capture that growth for itself rather than paying itself a monster dividend, selling you their equity at five times what they paid for it and funnelling those proceeds through the Virgin Islands.
This is a carnival trick as old as civilisation itself. Don’t watch the thimble and don’t watch the pea, don’t watch the cups or the ball, watch the sleight of hand before your very eyes.