Virgin Australia says it is new and improved but the risks of investing in airlines remain

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7 hours ago

Dave Emerson was woken at 3.30 am with the worst possible news.
In a little over eight hours, he was scheduled to ring the bell at the Australian Securities Exchange for the long-awaited resurrection of Virgin Australia.
But Iran had chosen that very moment to eke out revenge against America with a missile attack upon a US air base in Qatar, the home of Virgin's partner airline, Qatar Airlines.
"I got a phone call this morning at 3.30, 'ah, we're diverting some planes', but two of ours, we had two," he recounted.
For an airline chief executive, it's the kind of news that sends shivers down the spine. You can adapt to an economic downturn, take remedial action against the worst of health scares, and hedge against violent moves in the oil price.
But war? That's an entirely different scenario. It's one that places passenger and employee lives in jeopardy. And it's hardly the way to celebrate the return of a business that had been to the brink.
By dawn, the crisis had passed. US President Donald Trump had declared that both Israel and Iran had agreed to an indefinite ceasefire. Oil prices slumped, Wall Street cheered, and Virgin's planes were back in the air after stopovers in Oman and India.
By the time midday rolled around, the champagne was flowing at the ASX, Virgin debuted at a solid 7 per cent premium to the $2.90 a share sale, and a beaming Emerson was enthusiastically ringing the bell.
Was he relieved?
"Honestly, I didn't have any expectations on how it was going to trade," he said.
That's easy to say after the event. Had Virgin shares sunk on the debut, it could have been a scarring experience for all involved, as anyone who remembers the Myer flop will readily recall.
It also would have damaged the credibility of the ASX, an institution already under intense fire. The exchange has been shrinking, with a dearth of new listings in recent years that have failed to keep pace with the constant takeovers that have seen an exodus of major corporations.
And it would have made life more difficult for private equity funds that would have seen the door shut on a potential exit for their investments.
"It's always good to start on a nice positive note," Emerson eventually admitted, after some prompting.
"I'm happy to see that."
By day's end, Virgin shares had piled on an extra 11 per cent, ending the day at $3.23.
Virgin has undergone some radical surgery in the five years since it collapsed.
It is now focused almost entirely on domestic routes, centred around the Golden Triangle of Melbourne, Sydney, and Brisbane, has a singular fleet of smaller Boeing 737s, and has outsourced its international operations to Qatar.
Debt has been slashed, with a lower metric than Qantas, and last financial year, it delivered its first profit in more than a decade, although that was boosted by a one-off credit recovery.
It has also hit the ASX at a time when competition has evaporated following the collapse of REX and Bonza in the past 18 months.
And despite the favourable landing on the ASX, it is significantly cheaper than Qantas when the share price is compared to earnings.
Qantas, meanwhile, is facing some significant hurdles. After a decade and a half of underinvestment in aircraft under Alan Joyce, Qantas boss Vanessa Hudson is facing a mammoth task upgrading one of the world's oldest fleets.
But it would be highly unlikely for Qantas to simply allow Virgin a free kick when it comes to market share and earnings growth.
The Flying Kangaroo recently announced the closure of its Singapore-based Jetstar Asia offshoot, a decision that will allow around a dozen extra aircraft to ply the Australian domestic and Tasman routes.
More aircraft means extra seats, which translates into competitive air fares.
That competition doesn't end with consumers. Qantas will want to ensure that Virgin also has to compete when it comes to capital.
Constraining Virgin's margins and earnings will force the comeback airline to be more judicious when it comes to eating Qantas's lunch.
Emerson seems content to ensure Virgin's growth doesn't come at the expense of earnings. So, while there may be a lift in competition, don't expect a re-run of Qantas and Virgin's battle to the death that we witnessed a decade ago.
"Our growth will come as Australia's GDP grows," he said.
Of the $685 million raised through the float, none of the proceeds will find their way into the airline's hands.
All will be repatriated to Bain. The US private equity firm will retain a 39 per cent stake, Qatar will keep 23 per cent, private investors will hold 30 per cent, and employees will keep the rest.
"We didn't need any additional capital," Emerson said.
"We have a very strong balance sheet. We're generating strong returns."
The Virgin boss is adamant that Virgin will be able to fund its fleet expansion without raising equity, something Qantas may struggle with.