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A financial analyst has predicted Australia’s domestic airline duopoly may not last indefinitely ahead of Virgin’s IPO next week.
As reported by The Australian Financial Review, Angus Hewitt of financial services firm Morningstar wrote in a note to clients that the company “does not think Australia will only have two airlines forever” and said the planned IPO is “too expensive”.
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Hewitt has valued Virgin Australia’s stock at $2.60 per share, below majority owner Bain Capital’s $2.90 price point.
According to his client note, rival Qantas is overearning at a time of high demand and low competition following the collapse of Rex’s domestic jet operations last year, but these earnings will eventually attract more players to the Australian market.
“Bain is selling down its Virgin stake at an opportune time. Industry conditions are favourable, pricing power is elevated, and Virgin has reemerged from bankruptcy a better business.”
“Virgin, like other airlines, lacks pricing power. Burdened by high fixed costs, low barriers to entry, and low switching costs, airlines globally struggle to durably earn economic profits. Virgin is no exception.
“These conditions plagued the airline industry before the pandemic, and we think they will again as industry tailwinds abate. We think conditions are cyclically, rather than structurally, favourable.”
Bain Capital is looking to raise $685 million in Virgin’s IPO, which will reduce its holding in the airline to 40 per cent. Brokers are selling 30 per cent of stock to new investors, with Qatar Airways to retain 23 per cent and management 7.8 per cent.
“The IPO is comprised of an offer of 236.2 million fully paid ordinary shares at an offer price of A$2.90 per share, raising A$685 million to allow certain existing equity holders the opportunity to realise part of their investment in the company,” Virgin said in a press statement earlier this month.
The planned IPO has won the approval of pilots’ union, the Australian Federation of Air Pilots, with vice-president Michael McGinnis saying it supports Virgin’s plan to expand its fleet and route network.
“The AFAP looks forward to continuing to work productively with Virgin as it embarks on this new phase of the company’s growth following the ASX listing,” McGinnis said.
“The AFAP also welcomes the employee share scheme that will see Virgin pilots receive $3000 worth of share rights. This recognises that Virgin pilots were key in helping to rebuild the airline into the success that it is today.”
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