Private equity take-over for Virgin Australia?
I was going to start with one word 320, deluded. However, I might as well continue.....if it was just so easy. The corporates, ie. the higher yielding mob want consistency of service, more than two flights to choose from, a lounge and points. I think virgin will come out the other end with a refocus on what’s important, but if you think the recipe you have described will bring instant success, I beg to differ.
The higher yielding punters won’t be bothered with the risk to begin with. It will take a long time to regain confidence and forward bookings.
The higher yielding punters won’t be bothered with the risk to begin with. It will take a long time to regain confidence and forward bookings.
Reborn Virgin’s international conundrum
Simply lopping off Virgin's international arm and focusing on the most profitable domestic routes isn't as easy as it seems. The optimistic spin put on Virgin Australia’s collapse by the government, the administrator and the company’s chief executive, Paul Scurrah, is understandable.
With so many jobs on the line, and the national interest to be protected, it’s in everyone’s interest that a reborn airline emerges with a relatively clean slate, restructured operations and a hell of a lot less debt.
The dominant narrative suggests Virgin could prosper with a "less is more" mindset. By ditching its loss-making international operations and carefully selecting the domestic routes it flies, the new Virgin would be a more focused, profitable entity.
Refocusing Virgin isn't as easy as many might think. But in the airline game, nothing is quite as simple as it seems. Chanticleer’s discussions with former airline executives and insiders suggest the seemingly simple, slim-down strategy isn’t so simple at all.
What makes airlines so difficult to turn a dollar from is that the sector must balance extraordinarily high fixed costs – basically 30 per cent aircraft, 30 per cent people and 30 per cent fuel – with revenue that is particularly volatile to price movements (raise your prices and people stop flying very quickly) and economic conditions.
And that’s the steady-state business model. On top of that airlines need to deal from time to time with the fallout from freak accidents, terrorist attacks, volcanic ash clouds, international incidents and, of course, the odd pandemic.
While Virgin’s poor profitability over the past decade has been well documented, its divisional results do tend to fit the narrative that the best solution is to refocus the airline on the domestic market.
While group earnings before interest and tax (EBIT) for Virgin in financial 2019 totalled $89.5 million, domestic EBIT was $133.4 million, and EBIT from the Velocity loyalty program was $122.2 million. By comparison, Virgin’s international business lost $75.6 million, and its low-cost offshoot, Tiger Airways, lost $45 million.
The surgery necessary looks pretty obvious.
But some observes suggest simply killing the international arm would make Virgin far less attractive to Australia’s corporate travellers, who offer much better margins than leisure travellers.
Virgin doesn’t necessarily have to fly international routes itself to provide corporate customers with an international offering; agreements with foreign airlines via international alliances and code-sharing deals (including access to good quality lounges in overseas airports) would do the job, with lower costs and less risk.
But insiders say these agreements can be tricky. International travel is notoriously competitive, and foreign airlines will often pressure domestic carriers to push travellers towards their home countries.
As one former executive says, if Virgin wants to keep any international exposure, it will likely need to deal with one or more of the 600-pound gorillas that dominate international aviation – which, of course, has long been one of its problems, given it has previously had as many as five foreign airlines on its share registry.
The suggestion that Virgin will be able to pick and choose what domestic routes it flies doesn’t necessarily stand up to scrutiny either.
Observers suggest the rational competitive response to that strategy is to take what the airline industry calls a matrix pricing approach. That is, Qantas would be likely to drop prices on the routes where it is competing fiercely with Virgin, and raise prices on the routes where there is no competition.
Virgin may have little choice then but to match Qantas on all significant routes, which would, of course, limit its ability to bring its fixed cost base down.
Prime Minister Scott Morrison said on Tuesday that it was important that the new Virgin is "not crushed by any anti-competitive actions that may be put in place by another player in the market" but exactly what regulatory framework the government would be prepared to put in place isn't clear. Price caps or profit caps on specific routes seem pretty unlikely.
No doubt the interested parties that have apparently flooded administrator Vaughan Strawbridge in recent days are working through the combinations and permutations that might work for a reborn Virgin.
But the central conundrum investors will need to get to grips with is around the question of an international arm. Would a domestic-only airline have the scale to be sustainably profitable if it doesn’t have an international offering, and so can’t attract as many high-margin corporate passengers?
Finding the middle road – something between the unprofitable Virgin Australia and its far more profitable forerunner, Virgin Blue – looks the best bet.
But it’s won’t be an easy task, and its why potential owners will want government support.
With so many jobs on the line, and the national interest to be protected, it’s in everyone’s interest that a reborn airline emerges with a relatively clean slate, restructured operations and a hell of a lot less debt.
The dominant narrative suggests Virgin could prosper with a "less is more" mindset. By ditching its loss-making international operations and carefully selecting the domestic routes it flies, the new Virgin would be a more focused, profitable entity.
Refocusing Virgin isn't as easy as many might think. But in the airline game, nothing is quite as simple as it seems. Chanticleer’s discussions with former airline executives and insiders suggest the seemingly simple, slim-down strategy isn’t so simple at all.
What makes airlines so difficult to turn a dollar from is that the sector must balance extraordinarily high fixed costs – basically 30 per cent aircraft, 30 per cent people and 30 per cent fuel – with revenue that is particularly volatile to price movements (raise your prices and people stop flying very quickly) and economic conditions.
And that’s the steady-state business model. On top of that airlines need to deal from time to time with the fallout from freak accidents, terrorist attacks, volcanic ash clouds, international incidents and, of course, the odd pandemic.
While Virgin’s poor profitability over the past decade has been well documented, its divisional results do tend to fit the narrative that the best solution is to refocus the airline on the domestic market.
While group earnings before interest and tax (EBIT) for Virgin in financial 2019 totalled $89.5 million, domestic EBIT was $133.4 million, and EBIT from the Velocity loyalty program was $122.2 million. By comparison, Virgin’s international business lost $75.6 million, and its low-cost offshoot, Tiger Airways, lost $45 million.
The surgery necessary looks pretty obvious.
But some observes suggest simply killing the international arm would make Virgin far less attractive to Australia’s corporate travellers, who offer much better margins than leisure travellers.
Virgin doesn’t necessarily have to fly international routes itself to provide corporate customers with an international offering; agreements with foreign airlines via international alliances and code-sharing deals (including access to good quality lounges in overseas airports) would do the job, with lower costs and less risk.
But insiders say these agreements can be tricky. International travel is notoriously competitive, and foreign airlines will often pressure domestic carriers to push travellers towards their home countries.
As one former executive says, if Virgin wants to keep any international exposure, it will likely need to deal with one or more of the 600-pound gorillas that dominate international aviation – which, of course, has long been one of its problems, given it has previously had as many as five foreign airlines on its share registry.
The suggestion that Virgin will be able to pick and choose what domestic routes it flies doesn’t necessarily stand up to scrutiny either.
Observers suggest the rational competitive response to that strategy is to take what the airline industry calls a matrix pricing approach. That is, Qantas would be likely to drop prices on the routes where it is competing fiercely with Virgin, and raise prices on the routes where there is no competition.
Virgin may have little choice then but to match Qantas on all significant routes, which would, of course, limit its ability to bring its fixed cost base down.
Prime Minister Scott Morrison said on Tuesday that it was important that the new Virgin is "not crushed by any anti-competitive actions that may be put in place by another player in the market" but exactly what regulatory framework the government would be prepared to put in place isn't clear. Price caps or profit caps on specific routes seem pretty unlikely.
No doubt the interested parties that have apparently flooded administrator Vaughan Strawbridge in recent days are working through the combinations and permutations that might work for a reborn Virgin.
But the central conundrum investors will need to get to grips with is around the question of an international arm. Would a domestic-only airline have the scale to be sustainably profitable if it doesn’t have an international offering, and so can’t attract as many high-margin corporate passengers?
Finding the middle road – something between the unprofitable Virgin Australia and its far more profitable forerunner, Virgin Blue – looks the best bet.
But it’s won’t be an easy task, and its why potential owners will want government support.
Last edited by T28B; 22nd Apr 2020 at 14:38. Reason: Attributation added; please remember to properly attribute what you cut and past in the future. Thanks.
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I was going to start with one word 320, deluded. However, I might as well continue.....if it was just so easy. The corporates, ie. the higher yielding mob want consistency of service, more than two flights to choose from, a lounge and points. I think virgin will come out the other end with a refocus on what’s important, but if you think the recipe you have described will bring instant success, I beg to differ.
The higher yielding punters won’t be bothered with the risk to begin with. It will take a long time to regain confidence and forward bookings.
The higher yielding punters won’t be bothered with the risk to begin with. It will take a long time to regain confidence and forward bookings.
RECESSION
If new airline has as many flights say BNE/SYD, SYD/MEL & MEL/BNE as QF & work out cheaper, many corporate travel managers will be getting staff to fly the cheapest full service option, ie. new airline, but not junkstar, as not enough frequency for disrupts.
New airline could have exactly the same everything as QF, as least for BNE, SYD & MEL but much lower cost base.
SO higher yielding punters, will bother with QF who nearly went belly up 7 years ago ?
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Reborn Virgin’s international conundrum
Simply lopping off Virgin's international arm and focusing on the most profitable domestic routes isn't as easy as it seems. The optimistic spin put on Virgin Australia’s collapse by the government, the administrator and the company’s chief executive, Paul Scurrah, is understandable.With so many jobs on the line, and the national interest to be protected, it’s in everyone’s interest that a reborn airline emerges with a relatively clean slate, restructured operations and a hell of a lot less debt.
The dominant narrative suggests Virgin could prosper with a "less is more" mindset. By ditching its loss-making international operations and carefully selecting the domestic routes it flies, the new Virgin would be a more focused, profitable entity.
Refocusing Virgin isn't as easy as many might think. But in the airline game, nothing is quite as simple as it seems. Chanticleer’s discussions with former airline executives and insiders suggest the seemingly simple, slim-down strategy isn’t so simple at all.
What makes airlines so difficult to turn a dollar from is that the sector must balance extraordinarily high fixed costs – basically 30 per cent aircraft, 30 per cent people and 30 per cent fuel – with revenue that is particularly volatile to price movements (raise your prices and people stop flying very quickly) and economic conditions.
And that’s the steady-state business model. On top of that airlines need to deal from time to time with the fallout from freak accidents, terrorist attacks, volcanic ash clouds, international incidents and, of course, the odd pandemic.
While Virgin’s poor profitability over the past decade has been well documented, its divisional results do tend to fit the narrative that the best solution is to refocus the airline on the domestic market.
While group earnings before interest and tax (EBIT) for Virgin in financial 2019 totalled $89.5 million, domestic EBIT was $133.4 million, and EBIT from the Velocity loyalty program was $122.2 million. By comparison, Virgin’s international business lost $75.6 million, and its low-cost offshoot, Tiger Airways, lost $45 million.
The surgery necessary looks pretty obvious.
But some observes suggest simply killing the international arm would make Virgin far less attractive to Australia’s corporate travellers, who offer much better margins than leisure travellers.
Virgin doesn’t necessarily have to fly international routes itself to provide corporate customers with an international offering; agreements with foreign airlines via international alliances and code-sharing deals (including access to good quality lounges in overseas airports) would do the job, with lower costs and less risk.
But insiders say these agreements can be tricky. International travel is notoriously competitive, and foreign airlines will often pressure domestic carriers to push travellers towards their home countries.
As one former executive says, if Virgin wants to keep any international exposure, it will likely need to deal with one or more of the 600-pound gorillas that dominate international aviation – which, of course, has long been one of its problems, given it has previously had as many as five foreign airlines on its share registry.
The suggestion that Virgin will be able to pick and choose what domestic routes it flies doesn’t necessarily stand up to scrutiny either.
Observers suggest the rational competitive response to that strategy is to take what the airline industry calls a matrix pricing approach. That is, Qantas would be likely to drop prices on the routes where it is competing fiercely with Virgin, and raise prices on the routes where there is no competition.
Virgin may have little choice then but to match Qantas on all significant routes, which would, of course, limit its ability to bring its fixed cost base down.
Prime Minister Scott Morrison said on Tuesday that it was important that the new Virgin is "not crushed by any anti-competitive actions that may be put in place by another player in the market" but exactly what regulatory framework the government would be prepared to put in place isn't clear. Price caps or profit caps on specific routes seem pretty unlikely.
No doubt the interested parties that have apparently flooded administrator Vaughan Strawbridge in recent days are working through the combinations and permutations that might work for a reborn Virgin.
But the central conundrum investors will need to get to grips with is around the question of an international arm. Would a domestic-only airline have the scale to be sustainably profitable if it doesn’t have an international offering, and so can’t attract as many high-margin corporate passengers?
Finding the middle road – something between the unprofitable Virgin Australia and its far more profitable forerunner, Virgin Blue – looks the best bet.
But it’s won’t be an easy task, and its why potential owners will want government support.
But enough of that, virgin can and will survive. It’s a good business but leveraged beyond its current life form. Both qantas and virgin will be different. There is no short term fix. It will be a marathon, it will be painful in the extreme.
A rebalance of sorts but the status quo of rideshare will remain.
BNEA320 your talents and visions are wasted on PPRUNE.
However, can you point to any of your visions that have eventuated over the last decade. A lot has gone on and you’ve had ‘opinions of fact’ on most of them. My motive in this case is that often your posts generate negative emotions in others and I’m not convinced you have the runs on the board. We are all entitled to our opinion, but when you say ‘QF can’t afford to discount its cash cow’, it’s rather matter of fact when the reality is you know as much sh#t as I, and all I know is VA needs a restructure and I hope we see all the crews out there flying again soon. This thread is about Virgins restructure. It has nothing to do with QF or what their competitive response may or not be.
However, can you point to any of your visions that have eventuated over the last decade. A lot has gone on and you’ve had ‘opinions of fact’ on most of them. My motive in this case is that often your posts generate negative emotions in others and I’m not convinced you have the runs on the board. We are all entitled to our opinion, but when you say ‘QF can’t afford to discount its cash cow’, it’s rather matter of fact when the reality is you know as much sh#t as I, and all I know is VA needs a restructure and I hope we see all the crews out there flying again soon. This thread is about Virgins restructure. It has nothing to do with QF or what their competitive response may or not be.
According to BNEA320 it's actually QF who should be panicking over VA going into administration. Once that happens all problems are miraculously solved and VA will be the only carrier left in 12 months time. I wonder why more companies just don't go into administration if it's such a magic pill??
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BNEA320 your talents and visions are wasted on PPRUNE.
However, can you point to any of your visions that have eventuated over the last decade. A lot has gone on and you’ve had ‘opinions of fact’ on most of them. My motive in this case is that often your posts generate negative emotions in others and I’m not convinced you have the runs on the board. We are all entitled to our opinion, but when you say ‘QF can’t afford to discount its cash cow’, it’s rather matter of fact when the reality is you know as much sh#t as I, and all I know is VA needs a restructure and I hope we see all the crews out there flying again soon. This thread is about Virgins restructure. It has nothing to do with QF or what their competitive response may or not be.
However, can you point to any of your visions that have eventuated over the last decade. A lot has gone on and you’ve had ‘opinions of fact’ on most of them. My motive in this case is that often your posts generate negative emotions in others and I’m not convinced you have the runs on the board. We are all entitled to our opinion, but when you say ‘QF can’t afford to discount its cash cow’, it’s rather matter of fact when the reality is you know as much sh#t as I, and all I know is VA needs a restructure and I hope we see all the crews out there flying again soon. This thread is about Virgins restructure. It has nothing to do with QF or what their competitive response may or not be.
ALmost everything here is opinion or guess work. That's it. Think Qantas shares will take a hiding, as soon as new nimble player is ID'd or even sooner.
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https://www.afr.com/chanticleer/form...0200422-p54m3i
BNEA320 might need to let this guy know how wrong he is, it’s qantas who may not survive apparently!
BNEA320 might need to let this guy know how wrong he is, it’s qantas who may not survive apparently!
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Maybe Godfrey and Sherrard will return to the new ‘lean and mean’ Virgin Mk2 and bring with them Chris Corrigan, Paul Little and Scott Swift? Remember Scott, the Executive that had a meltdown and cried in the workplace after Il Douche gave him his marching orders! After all they brought back Keith Neate so hell, bring back Diederek Penn and Manny Gill also!!! It will be a real hoot.
The higher yielding punters won’t be bothered with the risk to begin with.
That article was full of contradictions...
By comparison, Virgin’s international business lost $75.6 million,
Would a domestic-only airline have the scale to be sustainably profitable if it doesn’t have an international offering, and so can’t attract as many high-margin corporate passengers?
You don't need to fly a route, to offer frequent flyer seats over a route.
The code share "offering" always makes me laugh. If I am buying a ticket through a Virgin website that will see me on another carrier, then why would I not just book direct with the other carrier. Just like the QF - Emirates mess.
If this new "lean and mean" VA is going to be such a threat why didn't it materialise any time after 2014 when it became obvious VA were never going to be QF's equal?
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The article Etrust posted is interesting. It states that:
"A government source said whoever bought Virgin would have to abide by Australian pay and conditions for workers but it was envisaged that the airline's enterprise bargaining agreement would be renegotiated because the current EBA was "excessively expensive''.
f%^k the government source. I am sure they get paid extremely well off the tit that is the tax payer. They cant help themselves wanting to keep real wages growth from occurring. Pricks.
"A government source said whoever bought Virgin would have to abide by Australian pay and conditions for workers but it was envisaged that the airline's enterprise bargaining agreement would be renegotiated because the current EBA was "excessively expensive''.
f%^k the government source. I am sure they get paid extremely well off the tit that is the tax payer. They cant help themselves wanting to keep real wages growth from occurring. Pricks.
This is no different to when Borgetti first took control, these pages were filled with similar stuff telling everyone who would listen how Virgin were going to crush Qantas and how Qantas should never have let him go as he was the best aviation CEO In the world. We are now seeing the same hysteria about Voluntary Administration, yes Virgin will probably survive in some form, but it will be small and lean, to be big enough to challenge Qantas is going to take a significant amount of time with very very careful management.
This is no different to when Borgetti first took control, these pages were filled with similar stuff telling everyone who would listen how Virgin were going to crush Qantas and how Qantas should never have let him go as he was the best aviation CEO In the world. We are now seeing the same hysteria about Voluntary Administration, yes Virgin will probably survive in some form, but it will be small and lean, to be big enough to challenge Qantas is going to take a significant amount of time with very very careful management.
I admit that I fell for JB's used car salesman smile and charm, but soon realised that he was not in it for the company or the staff.
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[QUOTE=On eyre;10758988]It is very rare in any market to have equal shares between competitors- usually due to CEO egos and dick comparing contests one becomes dominant and draws a line in the sand in terms of their acceptable market share (as AJ has done). It is sometimes (perhaps always) wise for minor market share competitors to accept their allocated market share, concentrate on their efficiency and maximise their profitability. I cite a small competitive RPT market of last century in which Kendell Airlines held 2/3 of the Adelaide to Port Lincoln market and Lincoln Airlines 1/3. A few others came and went. There was no collusion but Don Kendell revealed that he would always prefer a competitor he could trust. In this case competition was always there but the customers benefited by the services provided.
Perhaps if the new no longer virginal airline would accept a QF drawn line in the sand without letting CEO egos get in the way it might be a win win for all parties - customers, staff, tourism businesses, shareholders and the government. Pipe dream ? Maybe but it might work also with a better use of all resource.[/QUOTE
Some airlines only trust a competitor they own !
Perhaps if the new no longer virginal airline would accept a QF drawn line in the sand without letting CEO egos get in the way it might be a win win for all parties - customers, staff, tourism businesses, shareholders and the government. Pipe dream ? Maybe but it might work also with a better use of all resource.[/QUOTE
Some airlines only trust a competitor they own !