Qantas Won’t Benefit If Virgin Australia Goes Out Of Business, Through Insolvency Or Administration

Qantas needs Virgin Australia to survive and continue the status quo. Qantas has long had Virgin in the perfect position.

Virgin was in business but weak, fulfilling the need for competition but not growing, and was a seemingly worthy challenger yet Qantas soared with domestic performance, international rejuvenation, and a lucrative loyalty program.

Australia will not tolerate Qantas having a monopoly on aviation if Virgin Australia goes out of business. “We want to see two airlines in the domestic market,” Treasurer Josh Frydenberg told Channel 9.

Relaxed ownership laws in Australia make it easy for a new entrant to establish. A replacement airline with fresh practices, modern labor contracts and perhaps the benefits of an Asian shareholder’s low overhead costs will pose more threat to Qantas than Virgin Australia ever will.

Qantas may publicly argue against government support to Virgin. Qantas’ remarks have been so prevalent and strong that Australia’s competition regulator is investing if Qantas breached competition law, sought to lessen competition and spread misinformation.

“Implications publicly made to allow Virgin to go under, I just think that’s unhelpful,” Australian Competition and Consumer Commission chairman Rod Sims told the Australian Financial Review, after which Qantas simmered down. Sims also wants to see Australia have two major airlines.

Qantas’ actual objective is likely two-fold. First Qantas wants to limit the amount of government support, ensuring Virgin remains but does not flourish.

Virgin asked the government for a A$1.4 billion (US$879 million) loan. Like airlines globally, Virgin is turning to its government and not reluctant shareholders. Virgin’s loan could be converted to equity, prompting Treasurer Frydenberg to say, “We’re not in the business of owning an airline.”

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Second, Qantas would want the government to offer it comparable support. The mere availability of low-interest government loans helps airlines establish a benchmark with commercial lenders.

As for the consideration Virgin could exit the market, passengers will benefit since a new airline will be more efficient, have cheaper fares and prompt Qantas to restructure. Alan Joyce deserves every credit for taking fat out of Qantas during his tenure as CEO, but there are more trimmings to do.

Australians have been paying too much for air travel. They lack a true low-cost airline. Virgin Australia long ago moved up-market, saddling it with more costs than additional revenue. New Virgin CEO Paul Scurrah faces a long cost-cutting restructuring.

Jetstar hybridized and may be cheaper but is not low-cost. The last hope, Tigerair Australia, was bought by Virgin and lost momentum.

Any new airline takes time to spool up, but a replacement carrier can accelerate due to the availability of skilled staff, airport slots, infrastructure and demand.

The short-term brings job losses and pressures ticket costs, although the government could push for temporary fare caps on Qantas and Jetstar. But this is only for a transition period – not the 10 years Geoffrey Thomas says Qantas will have a monopoly for. To the contrary, the long-term result will be a healthier aviation industry with greater growth prospects and lower fares.

A gap in Australian aviation would be lucrative any day. It will be especially enticing now as the coronavirus crisis prompts over-supply in most other aviation markets. Growth will be scouted by investors with cheap capital: aircraft over-ordered, retired, and seized from defaulting airlines.

Australia could be the next base for Asian airlines with plug-and-play franchises. Virgin Australia suffers from a high cost base, a large part driven by expensive staff contracts.

Virgin may be younger than Qantas, but it is approaching legacy status since launching as Virgin Blue in 2000. Starting afresh lowers costs, all the more so if the owner is an existing LCC that is already cost disciplined.

There has long been the threat of an efficient Asian airline establishing in Australia. It started in the late 2000s with Lion Air, but Lion and others were put off by limited opportunities and high hurdles while Australia already had two major airlines.

Australia, unlike other countries, allows domestic airlines to be 100% foreign owned. Tiger Airways launched in Australia as a wholly-owned subsidiary of Singapore’s Tiger Group (now Scoot).

The calculation for a new entrant entirely changes if there is a market void. Qantas knows this and can play out the scenarios below that could theoretically unfold if Virgin exits and a replacement airline is needed.

Malaysia’s AirAsia has units as far as Japan and India while Singapore Airlines’ Scoot formed a unit in Thailand. Qantas would face not just financial competition but strategic overlap if the shareholder of a new domestic airline already has international flights to Australia and a large intra-Asia network. Such presence would reinforce the new airline’s domestic Australia proposition.

There are smaller franchises like VietJet and Spring, as well as highly-successful stand-alone LCCs like Cebu Pacific that have yet to identify the right franchise location. There are existing airline investors like Indigo Partners, which has stakes in Wizz Air, Frontier Airlines and carriers in Latin America. Other potential investors wait for an opportunity.

The greatest theoretical threat to Qantas is arguably Singapore Airlines establishing in Australia a hybrid or full-service airline as it did in India with Tata, creating Vistara Airlines.

Even on a hybrid or full-service base it would be cheaper than Qantas by virtue of being new. Australia does not have India’s population or growth potential, but yields are high and competition low. Thankfully for Qantas, SIA is more measured than agile.

But conceptually the SIA Group would then compete with Qantas in every key market: domestic, Asia, Europe and – what SIA has still yet to access after all these years – the trans-pacific between Australia and the U.S. That is greater than what SIA achieves with its minority stake in Virgin and limited partnership.

Another thorn for Qantas that has shown general subsidiary interest is fellow Oneworld member Qatar Airways. Qatar planned to start Al Maha Airways in Saudi Arabia, even outfitting and painting aircraft for the start-up. It never received final approve due to Saudi-Qatar political tension (later extended to the still on-going blockade against Qatar).

Qatar, unlike Etihad Airways, is not shrinking. It had a brief foray with Meridiana, rebranded Air Italy. But that was more of a sovereign investment, not strategic or financial, due to interests between Meridiana and the State of Qatar.

Qantas has not been playing nice with Qatar, lobbying against Qatar receiving traffic rights and not even allowing Qatar to codeshare on domestic Qantas flights.

Some scenarios are far more likely than others. But there is no shortage. Qantas knows this. The government is unlikely to want shock from Virgin’s exit. That would benefit consumers in the long-term, but their priorities are often taken last.