Borghetti fills war chest to battle Qantas
It means Virgin can continue its strategy to move the airline upmarket and snatch market share from Qantas in the lucrative corporate and government passenger sector.
The equity raising, which represents a third of Virgin's market capitalisation, will strengthen its balance sheet and improve its liquidity as it faces one of the most fierce price-war environments since 2004 when Qantas launched Jetstar.
It puts the domestic airline war at an interesting juncture, with the much bigger Qantas in the box seat to either continue the fight or back down. Either way, Virgin's key shareholders, Singapore Airlines, Etihad and Air New Zealand, have sent a strong message to Qantas that they back both Virgin and its boss John Borghetti in his quest to reinvent the airline from a low-cost carrier to a full-service airline.
All three have backed the equity issue and will take an extra 7 per cent of the stock if institutional and retail investors don't take up all their entitlements.
Richard Branson's Virgin, which holds a 10 per cent stake, has confirmed it will take up its entitlement. The four shareholders hold a combined 73 per cent stake in the airline. Post the equity issue it could be closer to 80 per cent, which moves it a step closer to being delisted from the Australian Securities Exchange.
Once the free float falls below 20 per cent, it will be a matter of months before it is removed from the stock exchange and the vagaries of daily share-price volatilities. Put simply, Singapore, Etihad and Air New Zealand will be able to continue to creep up the register, buying 3 per cent every six months, to a point where it will be dumped from the main board on the ASX.
It will make for an interesting year for Borghetti as the trade-off for the extra cash from shareholders was the offer of a board seat to Singapore Airlines, Etihad and Air New Zealand.
Seats on the board were always inevitable, but given they make strange bedfellows, it has been put off - until now.
The expectation is the CEO of each airline will sit on the Virgin board, making it a powerful board with deep pockets. But it will require some skilful diplomacy given Etihad and Singapore Airlines are arch rivals outside of Australia.
At some point, when their stakes get big enough, there will be an eventual shoot out, with Branson's 10 per cent stake up for grabs - at the right price.
But the brutal reality is each of the airlines need Virgin as much as Virgin needs them. If Air New Zealand drops out of the alliance, it can't go to Qantas as a feeder for certain routes as Qantas has a strategic alliance with Emirates.
It is a similar story for Singapore Airlines and Etihad, which also need Virgin as the feeder for the Tasman routes. Put simply, all three airlines make tens of millions of dollars a year in revenue from their alliance with Virgin.
It explains why they need Virgin to succeed. Thursday's announced equity issue at 38¢, a small discount to its 40.5¢ market price, will reduce Virgin's gearing and put cash in its pocket to fend off any further pressure Qantas might have been planning to inflict on the airline.
The battle between the two airlines has cost both bucketloads but neither has backed down. Virgin posted a $150-million pre-tax loss for the year and Qantas recently issued a profit warning and reaffirmed that its all-important yields were falling.
Virgin started the war almost 18 months ago when it began increasing capacity by putting more aircraft on routes that had previously been neglected. Qantas retaliated and warned it would continue to fight to maintain its market share at 65 per cent or higher, arguing the decision was based on the so-called "S-curve" phenomenon, which contends that aviation revenue will fall off a cliff if market share falls below a certain level.
Whatever happens, it will be an interesting 12 months for Virgin that will see Singapore and Etihad sitting at the same board table as Virgin, and slugging it out as arch rivals in India.
They will either grow closer or further apart and Qantas just might back off or, with the backing of Emirates, rev up the intensity.
Frequently Asked Questions about this Article…
Virgin Australia is raising $350 million to strengthen its financial position and continue its strategy to compete with Qantas in the corporate and government passenger sectors. This cash infusion will help Virgin maintain its upmarket shift and improve its liquidity amidst a fierce airfare battle with Qantas.
The equity raising represents a third of Virgin Australia's market capitalization. This move is expected to bolster Virgin's balance sheet, providing the financial stability needed to withstand the ongoing price war with Qantas.
Virgin Australia's key shareholders, including Singapore Airlines, Etihad, and Air New Zealand, are backing the equity raising. They have committed to taking an extra 7% of the stock if other investors do not take up their entitlements, demonstrating strong support for Virgin's strategic direction.
Yes, if the free float of Virgin Australia's shares falls below 20%, it could be delisted from the Australian Securities Exchange. This would occur as major shareholders like Singapore Airlines, Etihad, and Air New Zealand increase their stakes, potentially leading to a delisting once their combined ownership reaches a certain threshold.
As part of the equity raising, Virgin Australia has offered board seats to Singapore Airlines, Etihad, and Air New Zealand. This move will create a powerful board with significant financial backing, although it will require careful diplomacy due to the competitive relationships between these airlines outside of Australia.
The alliance with Virgin Australia is financially beneficial for Singapore Airlines, Etihad, and Air New Zealand, as they generate significant revenue from their partnership. Virgin serves as a crucial feeder for routes, particularly the Tasman routes, making the alliance strategically important for these airlines.
Virgin Australia faces significant challenges in its competition with Qantas, including a costly airfare battle that has resulted in substantial financial losses for both airlines. Virgin's strategy to increase capacity and market share has intensified the rivalry, with Qantas determined to maintain its dominant market position.
The 'S-curve' phenomenon is significant in the Qantas-Virgin rivalry as it suggests that aviation revenue can sharply decline if market share falls below a certain level. Qantas is committed to maintaining its market share at 65% or higher to avoid this potential revenue drop, which fuels its competitive stance against Virgin.
Call 1300 880 160
Start a chat
Schedule a call
