Neil Chatfield must be a masochist. The Virgin Australia chairman has just negotiated himself into arguably the most complex and delicate role in corporate Australia.
Virgin today announced the appointment of three new directors: Air New Zealand chief executive Christopher Luxton; Etihad Airways CEO James Hogan and Singapore Airlines CEO Goh Choon Phong. They join Virgin Group’s former co-CEO David Baxby and Virgin Australia’s own John Borghetti on the board.
Having the CEOs of three major airlines with competing aspirations and interests elsewhere on the board, as well as a representative of another airline group with its own interests to protect, could make for a combustible mix.
It certainly creates some interesting and unusual challenges for a chairman. Chatfield, in announcing the appointments, also released the protocols under which the now-crowded boardroom will operate.
The key elements of those protocols are that they restrict the flow of some information between Virgin Australia and the representatives of its airline shareholders.
Most notably, the new directors won’t be given information about Virgin’s alliance agreements, any matter that Chatfield thinks could create a conflict of interest, information about the 60 per cent owned Tiger Airways Australia (joint-ventured with Singapore Airlines) and information about Virgin’s international business.
There will be 'limited' exceptions to allow the directors to fulfill their fiduciary duties and they will be able to receive aggregated financial data. However, they won’t be able to pass on confidential information without Chatfield’s consent or where it is required to comply with their own organisation’s reporting obligations.
In the event of non-compliance with the protocols, Chatfield (or any future chairman) can direct the representative director to retire immediately, among other measures.
The effect of the protocols might be to make for unusually high traffic in and out of the boardroom as the potential conflicts and the 'no go' zones force directors to exit from and return to the boardroom.
The need for the unusual set of boardroom protocols flows from Virgin’s unusual shareholding structure, where three major airlines and founder Richard Branson’s Virgin Group own more than 79 per cent of its capital between them. Air New Zealand owns 25.99 per cent, Singapore Airlines 22.2 per cent, Etihad 21.2 per cent and Virgin Group about 10 per cent.
Virgin has alliances with Air NZ, Singapore and Etihad but also flies internationally under its own brand. Air NZ and Etihad recently signed their own maintenance and engineering alliance. Air NZ and Singapore have historically had relationships: Singapore once owned 25 per cent of Air NZ and once funded an unsuccessful Air NZ attempt to acquire Virgin.
Singapore and Etihad operate out of competing hubs -- Singapore is threatened by the growth of the Middle Eastern hubs -- compete on similar routes and have similar reasons for wanting to use Virgin to gain an exposure to the Australian domestic market, as does Air NZ.
Etihad’s Hogan, who signed the first of Virgin’s international alliances, wasn’t happy when Singapore emerged as an ally and subsequently, as part of the deal under which it sold control of its loss-making Tiger Australia business to Virgin, a very substantial shareholder. He would also have been concerned about the potential for Singapore and Air NZ to join forces and take control of Virgin, freezing him out.
In other words, there’s massive potential for conflicts of interest -- and real conflict -- around the new Virgin board table.
Having gained their positions within the boardroom and therefore, within the limitations imposed by the protocols, some influence over Virgin’s affairs, it will be interesting to see whether that has an impact on Virgin’s strategies.
Between them, Qantas and Virgin are expected to incur underlying losses of close to $1 billion this year, with Qantas also reporting massive restructuring costs and, perhaps, asset write-downs. A large part of the losses relates to the capacity war that raged, until quite recently, in the domestic market.
The intensity of that war has been dialled down somewhat in recent months. Virgin has been reducing capacity in its main domestic brand but ramping up capacity in the discount Tiger brand, which could have an impact on the losses within that joint venture.
Hogan made it clear earlier this year that he didn’t think that a capacity war within a domestic duopoly that pushed both players heavily into the red was rational behaviour. One suspects that both Singapore and Air NZ (which plans to equity account its Virgin stake) would agree with him.
The strategic shareholders tipped in most of the $350m of new equity Virgin raised last year and presumably would prefer not to be called on again in the near term.
Chatfield and Borghetti’s diplomatic skills are about to be tested. They will need to use all of them to avoid introducing potentially destructive tensions into the boardroom and making it unworkable.
For the moment, given the size of the three big airline shareholders’ stakes, there’s something of a stand-off that preserves some stability. It also helps that all the players would see Virgin as weakening Qantas, its ability to compete with them internationally and the effectiveness of its alliance with Emirates.
There is the potential for an uneasy truce to be observed, as long as two of the big shareholders don’t join forces or the interests and convictions of the shareholders and Virgin’s management don’t diverge. If they do, it could get interesting, and messy.