The Virgin Australia IPO: It may go ahead, but here’s 4 reasons Blue Horseshoe doesn’t like it

Nick Sundich Nick Sundich, June 28, 2024

The long awaited Virgin Australia IPO has been on and off ever since it was bought by Bain Capital. An IPO has been viewed as an inevitability given the model of private equity firms to buy assets on the cheap, the only thing stopping Bain being the weak IPO market and an uncertainty of what is happening at board level.

With the successful listing of Guzman y Gomez (ASX:GYG), any fears of the stock floundering just because of a dour market have eased somewhat. The uncertainty of who will succeed Jayne Hrdlicka as CEO is almost over with Chief Customer and Digital Officer Paul Jones tipped to succeed her. It was always a question of not if but when, and the when could be before the end of CY24.

What’s not to like?

 

4 Reasons why a Virgin Australia IPO may not see Guzman y Gomez’s success (after Day 1)

 

1. Leadership uncertainty

Pre-pandemic CEO Paul Scurrah was replaced by former Jetstar boss Jayne Hrdlicka, who was hired by Bain in 2020. She did do a good job in bringing Virgin out of its darkest days and adopting its current strategies. She led Virgin’s first round of IPO meetings, although these were halted after she had to go on leave for personal reasons.

Media reports suggested that key money managers just couldn’t see themselves investing in it given the cyclical nature of airlines and what happened to Virgin last time it listed. Ultimately, she announced her departure back in February and a replacement has not been named yet, although it is now tipped to be Paul Jones.

But what is also uncertain will be the extent of power the new CEO will have, with Qatar Airways all but certain to try and buy a 20% stake. Whether or not it will be approved will be at the discretion of the FIRB. This could be a saga that could drag on for a while. And even if Qatar does successfully take a stake, who knows how much control it will have.

 

2. The past record of private equity IPOs

There are too many ASX companies spun out of Private Equity that have underperformed for several years post-listing, including Adore Beauty (ASX:ABY), Myer (ASX:MYR) and Collins Foods (ASX:CKF). Granted, some have recovered, but others have not, and those that have have taken a while.

There’s no denying that the main reason Bain sought a listing of Virgin Australia was to cash out of its ownership. Maybe not straight away, but we think it would be inevitable that this would occur at some point in the not too distant future post-listing. Just ask yourself, if there was any further growth, why would private equity be selling?

 

3. And the past record of Virgin Australia

Virgin Australia was founded in 2000 and has actually been listed on the ASX, joining the Australian bourse in 2003. It has been part of the Richard Branson-founded Virgin Group and pays royalties for the use of the word, although it has otherwise not been related to either Virgin Atlantic or Virgin America (may the latter Rest in Peace). Virgin Group has a 5% stake with Bain Capital owning the balance.

The company spent the first decade or so as a low-cost carrier until former Qantas executive John Borghetti became CEO and sought to make it a competitor to Qantas. The airline captured some market share, but it made losses for several years.

Even post-pandemic, while its issues have been under the radar to some extent, it has suffered from staff shortages and operational challenges. In November 2023, almost half of all Virgin flights were delayed or cancelled. And how could Virgin compete with Qantas now on transcontinental routes (i.e. from the East Coast to Perth) with just 737 while Qantas has A330s? How could it cope with having Rex on the Golden Triangle Routes (between the East Coast cities)? And can it feed international passengers onto its domestic network to the extent that Qantas can with the Red Roo’s own routes and alliances with Emirates and Oneworld?

Seemingly, the company either couldn’t answer those questions at all, or its answers were unconvincing to fundies.

 

4. Fleet issues

12 months ago, this was viewed as a reason to buy a potential Virgin IPO. It has a more efficient fleet, with just Boeing 737s, and serves only domestic and short-haul international destinations. The airline has  returned to medium-haul international travel by launching Cairns-Tokyo flights. Although it uses narrow-body 737s for the route, it is using the latest generation 737 MAX 8s.

Four of these have been received as of March 2024 with another 10 to come. It also had an order of 25 MAX 10s, expected to start from late 2025.

Obviously, the crisis with the Max 10 has put it on ice. It took so long to get regulatory approval to even start testing, which began in November 2023. Two months later, a Max 9 door plug blew out on an Alaska Airlines flight, and work grinded to a halt.

 

Who wants to fly in a Boeing these days?

Virgin is planning to swap this order with the Max 8. This is reportedly possible based on the contract signed between Boeing and Virgin, and this is something that other customers (particularly United) have done. But who knows:

    1. When they’ll be delivered – certainly not starting in 2025 as had been planned,
    2. Will customers want to fly them?

And of course, two further things. First, the airline will have fewer seats to sell than it otherwise would (if it got those MAX10s on time and within schedule). Second, it can’t just order the Airbus A320. Airbus’ order book is clogged for the rest of the decade, and it would take so long to activate a new type of aircraft in Virgin’s fleet. After all, having just one aircraft type was the selling point of the IPO

 

Just never buy an airline – so it is said

The fact that Virgin is in the only sector where Warren Buffett has said investors should avoid doesn’t bode well on top of everything else.

So, maybe it isn’t that bad a thing that the listing won’t happen anytime soon. Unless of course, you’re Bain Capital – hoping to cash out.

 

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