Transformation plans

Comments by Qantas Group CEO Alan Joyce highlight the point.

“The group has reached its optimum capital structure,” Joyce told journalists on June 2, saying his airline would look to further capital returns, including a potential dividend, for the next financial year.

“We’ve got our investment-grade credit rating back. We are generating a lot of free cash. ” Although not a dividend, the share buyback and capital return this past year represented the first time since 2009 Qantas shareholders have received a return from the company from their investment.

Joyce’s counterpart at Virgin Australia – and former colleague – John Borghetti, privately must be looking on at least a little jealously. The two airline groups’ fortunes have differed markedly since late 2013 when Virgin first raised capital from its major airline investors.

That move saw Qantas lobbying the federal government for changes to the Qantas Sale Act and debt guarantees, and saw it launch the ill-conceived #fairgoforqantas campaign and petition.

“Virgin has raised over $300 million in capital from Etihad, Singapore and Air New Zealand. This will result in Virgin being over 80 per cent foreign owned. We can’t let them wreck this industry by running up huge losses to try and put Qantas out of business,” the petition read.

Some ruined industry – at least as far as Qantas is concerned. Effectively told by the federal government to nick off and go and get its own house in order, Qantas did. Not without the pain of 5,000 job cuts and a massive “transformation plan”, but a leaner Qantas emerged just in time to take full benefit of record low fuel prices and a low Aussie dollar helping fuel inbound international travel.

Virgin on the other hand finds itself struggling with profitability and burdened under debts in the order of $3 billion, with the already-stressed balance sheet of the old Virgin Blue further burdened by Borghetti’s transformation of a low-cost carrier into an airline ‘group’ comprising the flagship, full service Virgin Australia, plus Virgin Australia Regional Airlines and LCC Tigerair Australia.

In many ways today’s Virgin Australia mirrors the Qantas Group, with its full service, regional and low-cost airline units. And VA’s new cost-cutting program has a Qantas feel about it too – rationalising the fleet (axing the E190 and cutting ATRs) and an unspecified number of job losses.

And the Virgin Australia shareholders will be hoping for a Qantas-like bounce back to profitability as well.

A return to strong profitability will be one thing Virgin’s growing list of major shareholders will agree upon. What is less clear is if Etihad, Singapore Airlines and China’s HNA Group can all realise from their Virgin investments the Australian domestic traffic feeds they’re looking for.

Not that long ago Virgin was content to serve mainland China and Asia over Singapore via its alliance with Singapore Airlines.

“We’ve got a terrific, probably the best partner you could have in terms of Asian network, with Singapore Airlines,” Borghetti said in a December 2014 interview with CAPA – Centre for Aviation.

“We can feed the China traffic over Singapore with Singapore Airlines and that’s as good as it gets. ” But now Virgin is to fly to Hong Kong and Beijing in its own right from mid-2017 as part of its alliance with new shareholder HNA Group.

“We carry very little, almost no traffic on our domestic network from China in terms of percentage of the total. All of a sudden this will give us access to the 1. 2 million people that come to Australia,” Borghetti said of the HNA alliance.

“It is obviously going to be positive in terms of its impact on profitability and it is a very, very good outcome. ” But Borghetti’s own comments from that CAPA interview highlight that China and Asia is not a cure-all.

“Everybody is looking towards Asia, and that’s terrific because it is a very big market and it is growing and all the rest of it but let’s not forget the bread and butter of inbound travel really comes from America and for that matter New Zealand to a certain extent. ” Borghetti’s transformation of Virgin Blue into Virgin Australia has been nothing short of stunning. His major shareholders, old and new, will be hoping for a similarly stunning transformation of VA’s profitability, now that its balance sheet is in order. And if the transformation fails to deliver the expected returns, those shareholders may not be so generous, or willing to indulge Borghetti if he comes knocking a third time for more cash.

Bob Bell

Many long-time readers of Australian Aviation will remember fondly the On the Airbands column, written by Bob Bell, which featured in the magazine for over 20 years. It’s very sad to report that Bob passed away in early June, aged 66. All of us at Australian Aviation extend our condolences to Bob’s family and friends.

Australian Aviation founding editor Jim Thorn penned this tribute to Bob: I was particularly saddened by the news of the passing of long time AA writer Bob Bell. Bob first approached me at AA way back in the early eighties about running a column on airband monitoring. He told me that plenty of people were interested in it, that it was funny and informative. Barely having the capability to tune anything more complex than a transistor radio I took him at his word and the result was perhaps the single most read column in AA’s history.

For more than two decades, On The Airbands topped reader surveys and I was always quietly amazed that on meeting senior airline execs and pilots that it was the first thing they always turned to. It was so popular that we compiled a book on the best from the series which was also a popular seller.

Bob was a friend who I truly admired as his day job for so many years was also as an undercover anti crime operative with the various covert operations units within the NSW Police Force as well as the National Crime Authority.