Chinese conglomerates beat SIA in Virgin Australia acquisition



IN a separate article I wrote about Singapore Airlines’ interest in taking up Air New Zealand’s stake in Virgin Australia, its concern being that “if it did not step into the void left by Air NZ, it might op[en the door to a competitor” (What price for SIA in its pursuit of a Virgin bride? TODAY, Apr 27, 2016), I mentioned the likelihood of Chinese carriers making that move. And so it has come to pass.

The HNA Aviation Group which owns China’s fast growing Hainan Airlines (the fourth largest in the country) was the first to move in, acquiring 13 per cent of Virgin Australia with plans to increasing its stake to almost 20 per cent. Virgin chief executive John Borghetti welcome the acquisition as “a big coup” that “sets us up for very, very good growth going forward in that very lucrative inbound but also outbound, traffic between Australia and China.”

Indeed, there has been a healthy growth in traffic between Australia and China in recent years. According to Mr Borghetti, more than one million Chinese travelers visited Australia in 2015 and this number is expected to grow to 1.5 million by 2020. Clearly HNA sees the potential and the opportunity could not have come a better time.

Now a second Chinese conglomerate Nanshan Group hopes to reap the benefit of increased tourism in Australia. The firm has bought a 20-per-cent stake in Virgin Australia from Air New Zealand. Air NZ chairman Tony Carter said: “We believe Nanshan Group will be a very strong, positive and complimentary shareholder for Virgin Australia. The sale will allow Air New Zealand to focus on its own growth opportunities, while still continuing its long-standing alliance with Virgin Australia on the trans-Tasman network.”

Both HNA Aviation Group and Nanshan Group will now join SIA and Etihad Airways as co-partners in the Australian carrier. While Etihad has not expressed any interest in buying off Air NZ, SIA appears once again to have lost the lead in a game that started out as the Singapore carrier’s to play.

Qantas is Asia Pacific’s new star performer

Courtesy Getty Images

Courtesy Getty Images

THE new star performer of Asia Pacific is Australian flag carrier Qantas. Move over, Singapore Airlines (SIA) and Cathay Pacific. The flying kangaroo posted a full-year profit of A$557 million (US$400 million), a dramatic turnaround from a loss of A$2.8 billion the previous year and an impressive report card for chief executive Alan Joyce. Critics of Mr Joyce, some of whom had called for his resignation last year, may now sing a different tune. Yet could you blame them then, considering the airline’s record loss with little more than Mr Joyce’s convictions to move forward? But if they had been impatient, does this signal the turning point for Qantas on the road to better performance?

Qantas Domestic, Qantas International and Jetstar Group all reported improved performance. Qantas Domestic posted a profit of A$480 million, far exceeding last year’s A$30 million. Both Qantas International and Jetstar Group sprang back into the black. The long bleeding international arm finally made a profit of A$267 million compared to a loss of A$497 million last year. Budget subsidiary Jetstar made A$230, reversing the loss of A$116 million a year ago.

Interestingly, the achievement came on the back of an improved yield by 1.1% despite a relatively flat growth in passenger numbers of only 0.8% from 46.8 million to 49.2 million. Net passenger revenue grew by 3% from A$13.24 billion to A$13.68 billion. A more apparent contributor is the falling fuel price as consumption fell 13% from last year’s A$4.5 billion to A$3.9 billion. But then Mr Joyce pointed out that every airline had benefitted from lower fuel prices, yet none have been as successful as Qantas in the past year. That suggests the honour is well-earned and unique to Qantas, and, according to him, the fruit of the transformation program he introduced some three years ago.

Mr Joyce said: “So every airline gets the benefit, but Qantas is outperforming the market and the rest of the airline groups because of its transformation and it’s only because of the transformation that we have these strong results.”

The transformation program contributed benefits of A$894 million in the past year, exceeding the expected minimum of A$675 million, with all planned initiatives being delivered on or ahead of schedule. The benefits stemmed from non-fuel expenditure reduction, fuel efficiency, and increased utilisation of aircraft on both international and domestic routes. Cumulatively since its introduction, the benefits have reached A$1.1 billion. But the program was not one without pain at its onset, faced with union protests over job cuts and the diffidence of naysayers. Mr Joyce admitted there were some very tough decisions to make. “But because we made the conscious choice to move fast,” he said, “we are delivering one of the biggest turnarounds in Australian corporate history.”

Naturally Mr Joyce would remind his critics that “if it wasn’t for our transformation program, Qantas would not be announcing a profit today.” There are things he could be proud of, among them achieving the Group target of paying down more than $1 billion in debt and turning around the loss-making Qantas International as targeted, the result of restructuring initiatives. However, some critics may still consider Mr Joyce to be blessed by a relatively peaceful year of industrial relations at Qantas, which had in the past been plagued by costly workers’ strikes; the favourable climate of falling fuel prices; and a recovering global economy that boosts the airline’s chances of success.

But give credit where it is due. The transformation program has translated into an aggressive growth spurt for Qantas – seeking partnerships for better network connectivity (WestJet, American Airlines, China Airlines, China Eastern and Bangkok Airways among them), responding to seasonal demands and expanding its reach into lucrative markets, particularly in China and the Americas. Qantas Domestic was able to adjust to shifts in economic conditions and demand, with capacity reductions in mining-intensive Western Australia and Queensland and the introduction of new routes in east coast markets. The running rivalry between Qantas and Virgin Australia that sometimes turned into a bitter spat between Mr Joyce and his counterpart John Borghetti has reasserted Qantas` dominance in the market. Internationally, the excellent results testify to Qantas` shift of the kangaroo route from via Singapore to Dubai in partnership with Emirates Airlines while retaining Singapore as an Asian hub for regional connections.

Few airlines are as successful in branding a budget subsidiary as Qantas, and in complementing its operations. All Jetstar Group airlines reported improved earnings, with the combined losses for Asian operators halved compared to the previous year. While Jetstar Hong Kong’s write-off might have been costly following the disappointing outcome of the Hong Kong Air Transport Licensing Authority’s rejection of the airline’s licence application, it only suggests the local operators’ apprehension of the impending competition.

Qantas was among the early airlines to introduce the new and improved premium economy. New “Business Suites” with lie-flat beds were introduced on reconfigured A330 aircraft on medium haul routes to Asia. In-flight amenities for premium passengers boast high-end brand names, and on the ground, new luxurious airport lounges. The airline will acquire eight Boeing 787-9 aircraft, to be delivered from 2017 to gradually replace five older Boeing 747s. “New aircraft types have always unlocked opportunities for Qantas,” said Mr Joyce. “When our red tail Dreamliners start arriving in two years’ time, their incredible range and fuel-efficiency will create new possibilities for our network.” Fuel efficiency will add to the savings from falling fuel prices if the trend continues.

But what’s really new? SIA and Cathay too have rolled out similar aggressive plans to upgrade and expand (and cost-cut in hard times). Perhaps, more than just the enumerated initiatives per se of the transformation program is the spirit of the program and what the transformation is about. In Mr Joyce’s own words: “Getting our foundations right. Being smarter with our costs; faster with our decisions; more productive with our costs.”

This article was first published in Aspire Aviation.

Qantas’ stellar turnaround: To whom is the credit due?

qantas- courtesy qantasQantas reported a stellar half-year performance (June to December 2014) which may have surprised some observers. To whom is the credit due? Or, is this willy-nilly a matter of rolling back on a favourable global economic tide?

The Australian carrier made an underlying profit of A$367 million (US$289 million), its best in four years. This was all the more impressive following on a record annual loss of A$2.48 billion ending in June last year. Plus, the international arm made a profit of A$50 million for the first time ever since the global financial crisis, during which long period it was bleeding the airline at the expense of domestic earnings and which led Qantas to decide on splitting its operations into separate autonomous divisions. The domestic market continues to be profitable, with Qantas and low-cost subsidiary Jetstar reporting earnings close to A$300 million.

Courtesy Qantas

Courtesy Qantas

Once again, Qantas’ success reads like an Alan Joyce story. Chief executive Joyce faced pressure to resign following the “shocking” dismal result last year, but was now able to say, “We will be a company able to withstand tough times, capitalise on the good times, and deliver sustainable and attractive long term returns to our shareholders… And today we can see a bright future for this great Australian company.” (Qantas’ performance: Is it about the singer or the song? 15 Sep 2014)

Mr Joyce attributed Qantas’ turnaround to “the impact of transformation”, without which he said the airline would not be profitable. The restructuring started in 2011 when Mr Joyce took action to avert what he called an Australian “tragedy”; among the proposals was an expanded thrust into Asia that would include setting up a premium airline in the region and plans to lift its international operations out of the red. It has been a long and rough road riddled with industrial disputes and staff strikes, Mr Joyce in 2012 blaming the unions for damaging the Qantas brand and driving away customers. He said then: “We continue to work towards returning Qantas’ performance to profitability in the short term.” The Asia-based premium carrier never took off, but international operations are finally making a profit in 2015. Has it taken too long? It depends on how you define the short term. In fact, Mr Joyce reminded his distracters that “we expect to achieve that goal this year, on target.”

For an industry that is highly capitalised, competitive and weighed down by long implementation lead times, up to five years may not be considered that long a time to expect sustainable results. But investors are apt to be impatient people. Mr Joyce’s problem may have to do with the lack of certainty in the direction towards recovery from 2011 till now. In June 2011, Qantas expected deeper losses for its international division for the financial year in question, affecting group’s profits with a forecast dip by as much as 90%. The red ink was later confirmed with the carrier posting a net loss of A$244 million, largely because of the deepening loss of A$450 incurred by international operations. The much hyped Qantas-Emirates tie-up could not save the Australian carrier.

The following year, Qantas bounced back with improved results for the first half (July to December 2012), helped by reduced losses for the international division. A pleased Mr Joyce, said then: “We are now beginning to realise the benefits of the tough decisions we have made over the past 18 months.” This was a direct reference to the transformation programme that includes additionally the restructure of the airline operations into autonomous domestic and international divisions. Full year results showed that losses for international operations shrunk by half to A$246 million. Mr Joyce pointed to the strategic alliance with Emirates as contributory. He said: “The Qantas-Emirates partnership gives the group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.” Few observers would dispute that.

Then came another setback as Qantas announced at the end of 2013 it was expecting a half-year loss of up to A$300 million for the Group, so much so that Standard & Poor downgraded its credit rating to below-investment level. The only way forward was more drastic cost-cutting measures that would include shedding 1,000 jobs. Mr Joyce said: “We will focus relentlessly on cutting costs and improving productivity, while maintaining our competitive advantages as a business.” The confirmed loss later of A$252 million was worse than the loss of A$91 million a year ago. What much more new could Mr Joyce say but the promise of more “tough decisions” ahead? Was the transformation package really working? One thing that it may have failed to adequately anticipate or address is the growing competition posed by rival Virgin Australia. At that material time, Virgin CEO John Borghetti was quick to point out that although both airlines lost money, Virgin outperformed its rival in key measures of growth such as yield and load factor.

What happened next was the carrier’s biggest loss in Qantas’ history – A$2.84 billion for the year ending June 30, 2014. The uncertainty that has marked its road to recovery might cast doubt on its future even as its most recent report card showed yet again a turnaround. Will history repeat itself? Given that the original transformation programme is running out its five-year course, are the positive results finally here to stay, attesting to its success? One may be cheeky to ask if indeed Mr Joyce had been forced out following the dismal performance last year, would Qantas have achieved the same result any way in a year helped by the recovery of the global economy and the unprecedented fall in the oil price that has benefitted not just Qantas but other airlines as well?

But all’s well that ends well, and give credit where it is due. Qantas’ transformation success, according to Mr Joyce, may be quantified by a: lower cost base; free cash flow and revenue growth; an improved fleet, product and service; strengthened customer satisfaction; reduced debt and strengthened balance sheet; improved return on invested capital, the youngest fleet age in more than 20 years; and fleet simplification from eleven to nine aircraft types, aiming for seven. He said: “What sets this program apart is that we are reducing costs permanently, while at the same time delivering Qantas’ best ever fleet, product and service.”

Moving forward, the real test must be performance consistency to instill confidence. Mr Joyce added: “We now have a strong foundation for sustainable growth.” For that, popping the champagne is in order.

This article was first published in Aspire Aviation.

Is there a future for Tigerair?

Courtesy AFP

Courtesy AFP

IT has to happen, and it is happening. The anticipated increased control of the long ailing and unprofitable Tigerair by parent airlines in both Singapore and Australia was announced almost simultaneously, an unlikely coincidence.

Tigerair (Singapore)

Singapore Airlines (SIA) will increase its stake in Tigerair from 40 to a majority of 55 per cent. The low-cost carrier reported its biggest loss to date for the quarter July to September, posting a loss of S$182.4 million (US$145.9 million) compared to a profit of S$23.8 million last year. By January 2015, SIA’s stake is expected to increase to as much as 71 per cent following a rights issue to raise up to S$234 million.

Despite the growth of air travel in the region and budget carriers accounting for more than 50 per cent of the traffic at Singapore Changi Airport, Tigerair seems embattled by the competition. Tigerair CEO Lee Lik Hsin was “heartened” by SIA’s support, reiterating the familiar standard strategy for a turnaround: “We have resolved our excess capacity issues and we also stemmed further losses from overseas venture.” Overcapacity was already cited in the preceding quarter’s report. In May the carrier said in a statement: “Tigerair Singapore had started the process of consolidating its services in preparation for a decisive turnaround in its prospects.” The carrier had since ended its costly partnerships in the Philippines (Tigerair Philippines) and Indonesia (Tigerair Mandala).

Granted, it may be early days. Yet how different would SIA’s increased dominance make in the future of the ailing Tigerair? Hitherto, the SIA hand has long been suspected to be writing the Tigerair story. Underlying the appointment of Mr Koay Peng Yen – Mr Lee’s predecessor – as CEO of the carrier was the expectation that Tigerair would benefit from an injection of new ideas from outside the SIA family, but that apparently had not seemed to work. Even with a makeover involving a name change and logo, the carrier continued to bleed. Replacing Mr Koay with someone from within the SIA Group only affirmed the parent airline’s intention to reassert a greater influence to hopefully steer it back to profitability. (See Can leadership change save Tigerair? May 16, 2014)

SIA in its own right continues to be one of the world’s most successful airlines in aviation history, and among the best for premium service. But the same could not be said of its investments outside the airline in joint ventures and subsidiary operations. The name itself should work some magic on Tigerair, yet it does not as the budget carrier faces stiff competition from the likes of AirAsia and Jetstar, including even sibling Scoot. It has long suspected that the day would come when SIA divests its stake in Tigerair, as it did with the Australian offshoot with first a majority share sale of 60 per cent to Virgin Australia and then finally relinquishing it totally for A$1. Further efforts to save the Singapore-based Tigerair may yet lead to the same outcome of counting the days for the carrier. It does not make sense for SIA to operate or maintain two budget carriers within its fold if they are competing for the same market within the region, although Scoot is supposed to ply medium to long-haul routes. Besides, there is also regional carrier SilkAir, albeit a full-service airline. (See Is Singapore Airlines better off without its subsidiaries? Aug 6, 2014)

Tigerair Australia

Is Virgin Australia in the same dire straits as SIA to have gone this far that it only makes sense to continue going?

Observers may be surprised by Virgin buying the unprofitable Tigerair Australia for A$1 (US$0.88). But its complete takeover of the budget carrier was hardly a surprise. Virgin’s earlier 60-per-cent acquisition augured the complete divestment by SIA in a matter of time. Troubled carriers have been known to be sold for a dollar, such as Malaysia’s AirAsia which was transferred from a government conglomerate to new owner Tony Fernandes for one Malaysian ringgit (US$0.26). But note that such acquisition usually comes laden with heavy debts. Mr Fernandes’ success in turning around the heavily indebted AirAsia into Asia’s largest budget carrier might offer the much needed optimism for the ill-reputed Tigerair to look ahead to better days under Virgin’s undivided attention

Virgin chief executive John Borghetti said: “We will benefit from the economies and achieve profitability ahead of schedule by the end of 2016.”

Unlike its Singapore counterpart, Tigerair Australia is less buffeted by competition though not necessarily less intense competition. Virgin’s interest in Tigerair is fueled by the competition posed by Qantas’s subsidiary Jetstar; Tigerair would provide an expanded network and the necessary links domestically. To that end, Virgin may have already achieved the satisfaction of knowing its rival is now more wary of its presence. In view of the subdued domestic demand (which Qantas has also cited as affecting its domestic operations), Virgin would slow down the growth of Tigerair than originally planned. Mr Borghetti said Tigerair’s fleet is likely to be reduced. The general consensus in the industry is that with full control of the budget carrier, Virgin is probably in a better position to speed up its plan to improve Tigerair’s performance. Q1 losses from Tigerair Australia amounted to A$11.6 million.

So, is there a future for Tigerair? The ground may be more favorable in Australia as demand in the domestic market improves. In Singapore, SIA may already be thinking of how else it may metamorphose the loss-making carrier.

This article was first published in Aspire Aviation.

Virgin Australia outperforms Qantas

Photo: Facebook

Photo: Facebook

Virgin Australia’s statement on its half-year result (Jul-Dec 2013) issued soon after Qantas posted a dismal half-year performance could irk Qantas chief Alan Joyce, as if Virgin CEO John Borghetti was rubbing salt into an open wound. It was definitely not intended that way, but the way that performance reports go, Virgin’s statement is as much about Virgin as it is about its major competitor, which is not mentioned by name.

Qantas posted a loss of A$252 million (US$225 million) (See Qantas’ dismal performance: The singer or the song? Mar 3, 2014). Virgin too posted a loss of A$83.7 million after tax. But while while Qantas lamented a deepening loss from a loss of A$91.million of the previous year, Virgin was quick to point out that it outperformed its rival on the key measures of growth in Total Group Revenue, Domestic Yield, International Yield and Group Revenues Load Factor. What matters is that Qantas did worse but Virgin did better. Mr Borghetti said that despite the tough economic conditions that affected the industry and the increased capacity that impacted the Australian domestic market, Virgin continued to improve its proportion of domestic revenue from the corporate and government segment. He added: “We remain on track with our consistent strategy and have delivered on all the first-half targets.” So it looked like Virgin’s five-year Game Change Program is working, while doubts have already begun to cloud Qantas’ five-year transformation plan.

The mood was different in both camps. Mr Joyce reiterated an old call: “We must change.” He announced plans to cut 5,000 jobs as one way to reduce costs by A$2 billion in three years. Mr Borghetti paid tribute to his staff, but added: “We have also identified several additional cost saving initiatives over and above this program, to be implemented over the next three years.” If there was any subtle difference in the approach of both men at the helm, it would appear that for one of them the strategy was not working as expected and for the other, it would continue to build upon its successes.

During the first half of the current financial year, Virgin focused on consolidating its position as an effective competitor in all key market segments while not expecting the full impact of the initiatives that it had introduced. The result was capacity growth of 1.4% and an increase in total group revenue of 5.6%. On-time performance (OTP) improved, with Virgin outperforming Qantas in the month of Jan 2014. The pride of Virgin during the review period must be that of winning the accolade of Domestic Business Travel Airline of the Year for 2013 for the first time. So much it was for Qantas claiming to be the preferred choice of Australians because of its domination of the domestic market, raising the question as to whether the preference is slowly shifting.

An interesting development is the improved operating performance of Tigerair Australia since Virgin acquired a 60%-stake in the ailing budget carrier. Tigerair’s aircraft utilization improved 12.7%. Load factor went up 4.7 points to 88.0% through maintaining a low cost base and delivering improvements to OTP, which achieved 80.4% in Dec 2013. It seemed Virgin was able to do whatever Tigerair and erstwhile majority shareholder Singapore Airlines (SIA) could not do. Mr Borghetti said: “The goal is to ensure Tigerair Australia remains an effective and sustainable competitor in Australia’s budget travel market segment.” The carrier is launching a base in Brisbane to address what Mr Borghetti thought is an underserved market. Perhaps Jetstar might now heed the challenge, especially after the group has posted its first loss.

Already observers are criticizing Mr Joyce for the lack of directions in the months to follow. But for Virgin, Mr Borghetti said the airline would focus on optimising the business for consistent and sustainable performance through “accelerating efficiency and productivity initiatives” and through “leveraging the scale of our alliance partners.” He really got Mr Joyce’s goat there, particularly when Mr Borghetti reported a positive cash flow and his rival would be quick to point out the unfair support provided by investments of foreign partners, long time a sore point and the contention that the restriction imposed on Qantas on foreign ownership has disadvantaged the flag carrier.

Virgin may turn out to the turtle in the race. While it is ambitious to spread its wings internationally, its strategy of first consolidating its home strengths and expanding its network through codeshare partners such as Air New Zealand, Etihad Airways, SIA and Delta Air Lines is probably a wise move, particularly in the context of present times when the airline industry is still on the mend.

Virgin Australia’s real challenge is market share

Photo courtesy Bloomberg

Photo courtesy Bloomberg

FROM the lacklustre performance of Virgin Atlantic to the loss-making results of Virgin Australia, Singapore Airlines (SIA) must be questioning its investment luck.

Virgin Australia, in which SIA has a 19.9-per-cent stake, is cutting its forecast for the year for the second time since May. It is predicting a loss of A$110 million (US$98 million).

Virgin Australia chief executive John Borghetti attributed the expected poor performance to weak economic conditions, so what’s new? He said: “Aviation’s a tough game.”

So it is. As Australia’s second carrier, it still lags behind rival Qantas which has a 65-per-cent share of the domestic market – a market that it aims to improve its share of, teaming up with Tigerair. Mr Borghetti said the market, in particular, the leisure segment, “needed a lot of stimulating to get people to put their hands in their pocket.” While that may increase the pie, the real challenge to Virgin Australia is still one of getting a bigger slice of the pie.

Jostling downunder

Photo courtesy Bloomberg

Photo courtesy Bloomberg

Underlying Air New Zealand (ANZ)`s increasing its stake in Virgin Australia to 23 per cent and thus becoming the Australian carrier`s biggest shareholder, the kiwi carrier said it was not seeking a position on the Virgin board nor was it interested in taking control of the airline.

Virgin chief executive John Borghetti was quick to check any speculations that things might change drastically as a consequence, reiterating that ANZ`s move would not in any way affect the business. He said: `I`m still going to work. Nothing changes for us. They don`t have a board seat.”

Courtesy Singapore Airlines

Courtesy Singapore Airlines

Singapore Airlines (SIA) which had only recently agreed to acquire an additional 9.9 per cent stake to add to its current shareholding of 10 per cent – making a total of 19.9 per cent – dispelled any concerns about the ANZ challenge, insisting it remains committed to the Virgin partnership and that SIA has no intention of further increasing its stake.

Billionaire Richard Branson’s Virgin Group holds a 22.4 per cent stake and Dubai’s Etihad Airways owns 10 per cent.

Is it really a round of handshakes auguring a permanent pact of peaceful co-existence among piecemeal partners which have not in recent aviation history boasted much in common except that two of them (SIA and ANZ) belong to the broad Star Alliance group? It may be the same tune that they will sing for now, to break into Qantas’ 65-per-cent hold of the Australian domestic market through the Virgin partnership, and that through this it will support its international operations. However, the collective strategy cannot disguise the individual agenda for each of these airlines, notably ANZ, SIA and Etihad.

Mr Borghetti who said “tomorrow is the same as yesterday” may soon find it cannot be so.

Courtesy wikipedia

Courtesy wikipedia

Interestingly, attention has already been turned to a likely tussle between ANZ and SIA, though both airlines have brushed aside any controlling interest. What is more interesting is how history has once again brought the two competitors together in a similar tussle for control of the ailing Ansett Australia in 1999/2000 and how SIA became badly bruised subsequently in its acquisition of a 25-per-cent stake in ANZ – a lesson that seems to have weighed heavily on the SIA in its subsequent approaches to acquisitions. Even in its stepped-up acquisition of the Virgin stake, it reflects a somewhat overly cautious step that took longer than expected.

Yet more interesting in the present situation is Virgin’s recent takeover of the Australian offshoot of SIA’s budget setup Tiger Airways. That was supposed to boost SIA’s presence across Australia. That should not change, unless Virgin changes course under new directions.

As for Virgin, it should thrive with renewed faith from its partners. Both ANZ and SIA have echoed their faith in the Australian carrier, hence their equity investments in it. But Virgin is facing tough competition from Qantas, having forecast a further slip in annual profit for the third time in five years. It has also been tardy in seeking breakthroughs internationally, much as it has boasted several commercial tie-ups with airlines such as SIA and Delta Air Lines. Something has to change, beyond the handshakes.