Virgin Airlines collapsed on April 21, putting over 16,000 jobs under threat. The cash-strapped carrier announced it had entered “voluntary administration” to rehabilitate the business after being battered by the pandemic, which has crippled the global airline industry. The move came after Virgin Airlines, which suspended almost all flights in March, failed to secure an $887.60 million loan from the Australian Government. Virgin’s fleet of 117 leased aircraft costs it around A$400 million. Indigo owned by Interglobe Aviation and has placed a bid to acquire Virgin AIrways. Will IndiGo acquire Virgin Airways?
The fall of Virgin Airlines
Richard Branson founded Virgin Airlines to “put the fun back into flying and bring glamour back to the skies”. However, the airlines failed to remain profitable in a hyper-competitive market.
About 10 years ago in 2010, John Borghetti took over as the CEO of Virgin Airlines. Mr. Borghetti transformed Virgin from a low-cost airline to a full-service airline to compete with Quantas Airways – a rival Australian Airline. Virgin Australia’s aircraft got a makeover, business class was introduced, and lounges were introduced. It was all very nice, but it costs money. Virgin Airlines experienced a brief period of profitability under Borghetti. It made about US$15 million in both 2010 and 2012. Since then, it has never turned a profit.
Apart from the Covid-19 pandemic widening the existing cracks in VA’s pillars, the following 3 basic factors led the decline in profits for Virgin Airlines–
- Wide range of aircrafts
Previously Virgin Australia had operated just one type of Aircraft, but now it picked up A330s, Boeing 777s, Embraers, ATRs, and A320s. The problem is that diverse fleets are much more expensive to operate than a single fleet airline.
- Chasing International Routes
Virgin Airlines faced massive failures, chasing lucrative international routes such as Hong Kong, China and Japan, which had to be ultimately shut due to issues like decline in demand and civil unrest.
- Entry into fierce markets
20% of the Australian airline’s customers bring most of the revenue – the Pareto Principle at play. The competition in Australia, for these best 20% customers is fierce. Quantas enjoyed nearly 60% of it. Borghetti’s decision to venture into this market by becoming a full-service carrier burnt cash and ultimately led to mounting debts.
IndiGo acquires Virgin Airways – Pros
Rahul Bhatia, the biggest shareholder in India’s biggest carrier, InterGlobe Aviation Ltd. is evaluating data and finalizing a strategy for the proposed acquisition. Around 19 parties including BGH Capital, Bain Capital, IndiGo Partners and Cyrus Capital Partners are looking to bid for the bankrupt Airlines.
In this section, we shall evaluate the pros of a successful acquisition of VA by InterGlobe Aviation Ltd.
- Large market potential
The Australian Aviation market is marked by greater wealth and a greater propensity to fly. This implies that while most Indians would prefer the railways for inter-city travel, the average Australian prefers air travel. In fact, Australia’s past year’s air travel were close to 71 billion revenue passenger kilometres, which is massive. In addition, the lower tax rates in Australia increase the market lucrativeness.
- Close links to India
Indian-Australians make up close to 2% of the population. These individuals are most likely to take regular flights back to the motherland. This makes Australia a great entry ground for an Indian player. There have, however, been stipulations that the Persian Gulf Countries would be more lucrative for IndiGo. However, this does not, in any way, endanger the potential of the Australian market.
- Assets acquired
Virgin has a fleet of nearly 117 leased aircrafts, 75 of which are Boeing 737-800 and Boeing 737-700 aircrafts. The fleet consists of several Airbus aircrafts as well. This would add to IndiGo’s existing fleet, which mostly consists of the Airbus series aircrafts, which are not capable of undertaking journeys from India to Australia non-stop.
IndiGo acquires Virgin Airways – Cons
The deal may not be as rosy as it may sound. The bankrupt Virgin Airlines shall bring nearly $7 billion. The company has also been shedding cash, with mounting operating debts. IndiGo’s Net Profits also fell from Rs. 585 crores to Rs. 288 crores. In this section, we evaluate the cons of the prospective deal-
- Australian market – A Graveyard for foreign airlines
The Australian Aviation market is basically a duopoly, consisting of Virgin Airlines and Quantas Airlines. This is quite similar to the Indian market consisting of the State-owned full-service airline Air India and low-cost airline IndiGo. In its ruthless efficiency in controlling its home turf, Quantas behaves a lot like IndiGo. IndiGo’s best opportunities lie in India or, at best, the Persian Gulf countries.
- Salary cuts
Like most other businesses, IndiGo has been making salary cuts on account of the Covid-19 crisis. Employees have undergone as much as 25% pay-cuts amidst the pandemic outbreak. The Airline may find it hard to explain the nearly $5 billion acquisition in the face of such a crisis.
- Lack of Synergy
While IndiGo adopts cost-effective techniques, Virgin Airlines is a full-service airline. Several reports suggest that IndiGo intends to convert VA to a cost-effective airline and add to its current fleet of airlines. This may lead to a loss in the individuality of VA, and cut every prospective benefit of synergy.
Battling Cash Crunch and Liquidity woes
The global economy is undergoing a major crisis at the hands of the pandemic. Even at such times, IndiGo continues to be the richest Indian Airline in terms of cash reserves. It reported a very strong Balance Sheet (sized Rs 18,922 crore) in its latest filings. The Indian Airlines also reversed their plan to cut staff salaries and waived rescheduling charges for customers, in spite of the crisis at hand.
However, the acquisition of Virgin Airlines shall be a major cash-burning exercise. Vaughan Strawbridge and three other partners from Deloitte, appointed for VA’s voluntary administration admitted that dealing with nervous creditors who are owed a staggering $6.8 billion and running an airline with no money and few planes in the air has been “gruelling”.
Rahul Bhatia, if successful in his bid, shall undoubtedly face his share of troubles, but this could overlook the start of something big. However, the value in Virgin Australia is its 10,000 staff and 11 million frequent flyer members, who are supportive of its existing market premium model. If InterGlobe was to run it as a super low-cost airline like IndiGo, Virgin Airlines may lose the very tenets that its founders and past administrators based it upon. The final winning bid is scheduled to be declared by the end of June. Only time can tell the rest.