Ever since Australia’s two airline policy of regulated competition was abandoned in 1990 ushering in an era of deregulation, Australian governments have prioritised airline competition over stability and reliability of services.
Just how much airlines were operating on a wing and a prayer after the end of the policy was powerfully illustrated by the failure of Ansett in 2001.
Ansett had been Australia’s second major airline.
Its owner, Air New Zealand had been sucking out cash to cover its own losses.
Virgin Blue was founded in 2000 by the flamboyant British entrepreneur Richard Branson, floated on the Australian Securities Exchange in 2003 and rebranded Virgin Australia in 2011 after the original owners lost control.
Chief Executive Paul Scurrah praised the board’s decision to quickly enter administration.
But his “courageous” board had long been chancing fate.
The company had always been dominated by a small number of overseas shareholders (often airlines) with little interest in building a well-capitalised profitable airline with cash buffers.
The initial share offer raised $371.7 million, of which the board promptly handed back to the airline’s previous owners $90.4 million.
Strategies to achieve this include the extensive use of outsourcing and leasing, which is tax effective and allows companies to operate without much capital outlay. But its success depends on positive, stable and predictable cash flows.
Virgin Australia’s major shareholders, Singapore Airlines and Etihad Airlines, and the two Chinese conglomerates Nanshan Group and HNA Group have historically had enormous access to capital.
Branson himself (now just a 10% shareholder through Virgin Group) is not short of money.
He is highly attuned to the politics of jobs and growth. The loss of air services and competition within aviation markets creates intense political pressure for governments to act.
So rather than contributing more capital, Virgin Australia’s major shareholders have used the the COVID-19 crisis to look for bail outs.
State governments in the past offered, and now are again offering hundreds of millions of dollars in incentives for Virgin to base its operations in their state.
Predictably Branson has joined the campaign chorus, acting more like a cheerleader than a shareholder.
Virgin’s shareholders could have supported it
He has offered to borrow against his private island located in the notorious tax haven the British Virgin Islands, although he hasn’t said how much of the money raised would go to Virgin Australia.
The inescapable reality is that if Branson and the board really cared for Virgin Australia’s employees, it would have long ago put pressure on the major shareholders to properly capitalise the business.
The administrators have said they have already received expressions of interest from 10 potential buyers.
Its future isn’t guaranteed
Paul Scurrah says without the debt Virgin Australia will come back “leaner, stronger and fitter.”
But Australia has long found it difficult to sustain two major airlines.
Former Ansett and British Airways chief CEO Rod Eddington says it is possible, but that both airlines would need to be “well run“.
Being “well run” implies being well capitalised and avoiding unsustainable price and capacity wars.
Regular airline failures not only push costs onto employees and creditors, they undermine important Australian industries such as tourism and leave regional communities isolated.
The government and regulators should ensure that any successor that takes to the skies is fit for purpose and won’t crash in 10 or 20 years time as a result of the poor governance and risky financial engineering.
Authors: Warren Staples – Senior Lecturer in Management, RMIT University | Andrew Linden – Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT University | Mariano L.M. Heyden – Associate Professor of Strategy & International Business, Monash University