Virgin Australia A330-200s like this one will do the lifting on its Beijing, Hong Kong flights
Virgin Australia A330-200s like this one will do the lifting on its Beijing, Hong Kong flights

Interesting hints or clues as to the future direction of Virgin Australia have arisen after its announced capital and efficiency restructuring this morning.

Virgin Australia CEO John Borghetti flagged one of them as being how it would work with its Tigerair low cost brand to gain more ‘footprint and frequency’ in the shorter haul international market, which is shorthand for the trans Tasman routes, the rest of the south Pacific and Bali and other nearish points in SE Asia.

Or maybe further out, if it is speculated that wide-body low cost operations like those by Virgin stakeholder Singapore Airlines’ Scoot brand, or competitor Qantas under the Jetstar banner might be undertaken by Tigerair Australia.

It’s a question of more than passing interest to the now residual Virgin investor Air New Zealand, which despite having sold down its equity in the Australian carrier, has a highly successful and continuing trans Tasman partnership with the Australian Virgins.

That partnership across ‘the ditch’ has withstood the open slather assault mounted on it by Qantas in association with Emirates (with A380s!) and a range of carriers who are neither NZ nor AU flag carriers, but seek to exploit its open-to-all comers status as a truly free market in international air travel.

One reading of the hints given at this morning’s media briefing is that a wide body operation by Tigerair Australia is an inevitability no later than in the medium term, using whatever model Airbus or Boeing is chosen by Virgin Australia to replace with one type its current small fleets of A330-200s and 777-300ERs in the 2020s.

The fleet rationalisation that Mr Borghetti spoke of today points to a future with one model of single aisle jet, which will be Boeing 737s gradually rolled over and grown into 737 MAXs, and one model of medium to long range wide body twins.

That could be 787-9s and -10s, or A350-900s and -1000s (or indeed unannounced versions of the high tech Airbus.) The 777-9 might be too much plane, and not all that efficient on shorter international routes, but this is a matrix of possibilities as seen from 2016 that will look clearer by say 2019.

Whatever Virgin Australia chooses for single aisle and twin aisle needs will also be the choice for its Tigerair subsidiary, which now flies a mix of 737-800s (for Bali) and A320s for all other destinations.

Mr Borghetti said today’s announcements needed to be put in the context of what happened five years ago, when a rebranded Virgin Australia began an ambitious repositioning of the airline using a very stretched balance sheet and dollops of debt.

It was he said (as he did several months earlier) “time to restructure our finances.”

Of the $852 million equity raising announced today, and the $159 million flowing from the share placement with HNA Innovation, $425 million will be used to replay loans made earlier this year by the airlines which then owned stakes in Virgin Australia Holdings.

Those airlines, with the exception of Etihad, which is in the process of its own reoganisation, are together fully funding the capital restructure findings as detailed in this morning’s filing with the ASX.

Mr Borghetti says he wasn’t concerned with Etihad not being a participant in the plan, as it had been fully funded. As fair comment on his statement, it could be said that with almost 40 percent of the restructured VAH being owned by the two very different China entities, HNA Innovation and Nanshan Group, this may mean Etihad no longer matters as much to Virgin Australia as it did.

Etihad remains a very valuable commercial partner in the airline, but the balance of ‘energy’ for want of a better world, lies with PRC investors with very divergent business models who nevertheless bring financial depth, and access to the booming China inbound market to Virgin Australia.

Etihad (as of this moment) seems to be in an alliance partnership similar to that of US giant Delta, except that Delta never bought any equity in Virgin Australia. Delta gives Virgin crucial US domestic network access in America, just as Etihad gives it connections and code shares into the European and Middle Eastern market. Neither Chinese investor nor Singapore Airlines could acquire Etihad’s one fifth stake in Virgin Australia without making a takeover offer to all stakeholders.

This statement, issued early this afternoon in eastern Australia makes it clear that Etihad is content with playing the role of passenger for at least the time being.

Etihad Airways is a long-term strategic investor and partner to Virgin Australia. We are fully committed to this partnership and to remaining as a shareholder.

Our comprehensive 10-year commercial agreement is further evidence of our confidence in and support for Virgin Australia, and our commitment to the airline and Australia.

We will continue to review our option to take up the pro-rata entitlement, and will announce our decision at the appropriate time.

Or to put another way, Etihad will be a happy prisoner of these events until it decides otherwise.

Mr Borghetti told the briefing the effect of the capital restructuring would be to lower Virgin Australia’s debt level by between 15-18 percent.

The pursuit of further efficiency in Virgin Australia would see jobs change rather than than disappear in total. It had already grown its workforce from 6000 to 10,000 in five years, but in that interval replaced many of them with new positions.

There would be an increase in international flying by Virgin Australia branded aircraft because it had traffic rights between Australia and China that were unused by Australian flag carriers and were in large part not available to the airline interests of either the HNA or Nanshan Groups.

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