Virgin Australia today did its bit to make news by adding to leadership tensions at Qantas.

Virgin Australia’s CEO and ex-Qantas senior executive John Borghetti delivered astonishing first half-year results, in which the smaller airline made statutory net profits after tax of $51.8 million, compared to the $42 million by the entire Qantas group.

It’s tiny international operation made $35 million (earnings before interest and taxes), compared to claims by Qantas CEO Alan Joyce that his group’s far larger Qantas long-haul operation lost more than $200 million. And unlike Qantas, Virgin Australia’s loyalty scheme earnings contributed comparatively little to the overall result, which was based overwhelmingly on profitably flying people rather than selling halo points to third parties such as grocery chains or hotels.

If that wasn’t bad enough for Qantas, Borghetti also announced a plan to split the company into a domestic Virgin Australia Holdings company and a new Virgin Australian International Holdings unit with a view to greatly increasing investment in the domestic operations where Qantas/Jetstar and its major competitor make most of their money.

The complex split plan, in which existing shareholders are given shares in the new international company by way of an in specie dividend, has a rather simple but unstated objective, which is to bring Etihad Airways into the share register as a significant and rich equity partner that will help fund a major assault on the Qantas Cityflyer domestic trunk routes as well as grow the connecting traffic Virgin Australia is bringing to its hub at Abu Dhabi.

This will require Foreign Investment Review Board approval, and it might be fought tooth and nail by Qantas, but it potentially allows an already profitable challenger airline group to fund ambitious expansion plans.

For Qantas, the pressure points are obvious. Joyce is being outflanked where it hurts, and has a poorly articulated Asia savior plan for a part-owned premium carrier that is somehow going to fund the recapitalisation of a shrinking and loss-making, long-haul Qantas operation with profits from a venture that will be part-owned by Jetstar’s most potent Asian competitor, Air Asia and based in Kuala Lumpur, a centre from which it will compete with the existing Qantas investment in Singapore as a combined Qantas/Jetstar hub.

These inherent absurdities in the Joyce plan, and investor doubts about its rationality and  practicability, are growing by the day, explaining in part his statement last week that he now wanted it to be “capital lite” with a fleet that Qantas paid for in the smallest possible measure.

The “hello Asia, we want a free ride to take your business away” message is not going down well.

Borghetti said Virgin Australia was committed to keeping up the competitive pressure on Qantas domestic business class and full-fare services with a growing investment in Australian-based jobs, including lifting its heavy maintenance work to more than 50% based in Australia rather than offshore.

He said there would be more and better lounges, more pride in its Australian identity, more involvement with its Australian employees, and better, newer, more efficient jets than Qantas could afford.

“We have forced business-friendly fares down to the levels of 1996 on many routes in as little as a few months,” he said, which of course coincided with the period in which the Qantas industrial disputes and its locking out of its own customers caused major inconvenience and brand damage to the flying kangaroo.

Borghetti said the “Game Change” program that had been expected to kick in during the second half of the financial year had produced results ahead of schedule.

He emphasised that Virgin Australia had not been in any discussions with Etihad Airways concerning it plans to split the group into domestic and international components that would have different shareholders, but that it had for some months been working with financial advisers on ways in which it could increase institutional investment in its major domestic business without breaching the foreign shareholder cap of 49%, which was a condition for retaining its status as an Australian flag carrier in terms of securing and retaining overseas traffic rights.

Borghetti also announced a new business-class seat for the small E-jets, which serve most of its longer flights from Canberra where it has launched a major push to win more government and corporate account travel.

Peter Fray

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