The Distillery: Jet fuels

Virgin Australia has emerged on the other side of a capacity war with rival Qantas. It’s in need of an injection of funds and with three strategic shareholders on the books, the airline has been able to get it.

The commentariat contends that the funding boost – around a third of Virgin’s market cap – is a sign the war in the skies isn’t over, with one scribe suggesting major shareholders Air New Zealand, Etihad Airways and Singapore Airlines have too much riding on Virgin to back out anytime soon.

Meanwhile, the battle for Warrnambool Cheese and Butter has seen its third twist in as many days, with Bega Cheese raising its bid. For one commentator, the latest, and final Bega offer won’t win, but can still offer value to both dairy groups.

First to aviation, The Australian’s Richard Gluyas argues the capital raising will cause more pain for Qantas with Virgin chief John Borghetti freed of the shackles of a stretched balance sheet, at least in the near-term.

“In the final analysis, the shareholder bailout of Virgin – or whatever you like to call it – is unquestionably bad news for Qantas. Bank of America Merrill Lynch yesterday downgraded Qantas to neutral, saying Virgin was now well-funded with its liquidity restored. Borghetti was also free to pursue his five-year strategy, which effectively means taking on Qantas in all market segments.”

Gluyas expects Virgin’s push to claim a greater share of the business travel market will continue apace and suggests the next step will include Virgin’s majority-owned Tigerair heightening domestic pressure on Qantas’ no-frills offshoot Jetstar.

Australia’s national carrier, meanwhile, argues that Virgin is only surviving on the back of foreign owners who are using it to cripple Qantas both in Australia and overseas. It has long claimed that the foreign ownership laws work against it from a competitive standpoint and it has a case.

Still, Fairfax’s Adele Ferguson believes there’s more to the shareholdings of Air New Zealand, Etihad Airways and Singapore Airlines than just a desire to wound Qantas.

“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.”

Business Spectator’s Stephen Bartholomeusz also spotlights the strategic value of Virgin for its biggest stakeholders, but contends that the moves they have made over the past twelve months suggest a lack of trust in each other. This should make board meetings rather interesting now that all three have been offered a seat at the table.

“The three airline shareholders have similar reasons for being on the Virgin register. The tit-for-tat share purchases indicate, however, that while they might have some strategic interests in common, they aren’t working together and, indeed, are suspicious of each other.

There are some particular tensions between Etihad – Borghetti’s initial international ally – and Singapore, his most recent. Both, however, would see common cause in trying to weaken Qantas, particularly after it struck its partnership with their arch rival, Emirates.”

In the dairy sector, The Australian’s Rebecca Urban suggests the final bid from Bega, which comes at a discount to Murray Goulburn’s proposal, may be no more than a last ditch effort to make its more cashed-up rivals pay a little more.

“While Bega is hoping to quickly build momentum in its pursuit of Australia's oldest dairy processor, yesterday's aggressive move appears designed to flush out any higher offers from Saputo and Murray Goulburn. As Warrnambool's largest investor, sitting on a stake of 18 per cent, Bega stands to clear a profit of at least $60 million on its holding in the event its own bid is defeated.”

Business Spectator’s Bartholomeusz, however, isn’t convinced Bega is out of the running, although it still “needs to overcome long odds”. The smallest of the three suitors is looking to capitalise on what is likely to be a three to six-month process for Murray Goulburn to receive regulatory clearance.

“Bega’s decision to go unconditional and declare the offer final at a value pitched below (but not that far below) Murray Goulburn’s is clearly designed to exploit that delay and uncertainty. It can give WCB shareholders cash and shares within eight business days. The time-value of money alone, let alone the possibility that Murray Goulburn can’t get past the regulator, would give it the advantage over Murray Goulburn, if value were the only consideration.”

Regardless of whether Bega wins or not, it is considered the next takeover target.

In politics, the departure of Kevin Rudd has received plenty of press coverage, but it is the debt ceiling debate that has left Fairfax’s Malcolm Maiden perplexed. According to Maiden, contrary to popular opinion, the debate on the ceiling in Australia is not similar to the one in the US. Instead, our debt ceiling means nothing given the executive is part of the Parliament – unlike the White House – and is no more than an opportunity for political grandstanding.

As if we needed anymore of that.

Meanwhile, The Australian Financial Review’s Laura Tingle explains why the carbon tax debate is a lot more loaded in the business community than it seems, with many worried about what the Coalition’s Direct Action plan will entail. Are many businesses keen for an emissions trading scheme but just afraid to say it?

Finally, the AFR’s Chanticleer columnist Tony Boyd wonders whether the Freelancer.com and Dick Smith Electronics signify a frenzy in the IPO market, while Fairfax’s Michael Pascoe compares the go slow approach of the NSW government compared to the Queensland government when it comes to building new airports.