Virgin is raising capital to fill its war-chest, with more cash to undercut Qantas on its domestic routes. And the national carrier is not happy.
One section from a November 14 report by Credit Suisse aviation analyst Nicholas Markiewicz helps explain why:
An end-game is near though the outcome remains uncertain: With the heavy lifting of Virgin’s turnaround largely complete, in the coming 12 months we will be in a better position to judge the final shape of the domestic market.
With Virgin now competing in all three market segments, we still see Qantas’s 65% market share as a natural casualty, though the extent of its market share loss will likely depend on Virgin’s final cost base advantage in each market segment coupled with ongoing risks around whether Tiger can be turned into a viable alternative to Jetstar.
The answer to which in our view is still unclear and is a key risk to the success of the “tri brand” strategy going forward.
Qantas needs its domestic business to run well, so it can pump cash back into its international arm. Virgin Australia is making that difficult, by undercutting its domestic accounts.
This comes at a price for Virgin, though with a $350 million injection (from the 38 cents per share raising) — it looks as though it can keep it up for a while yet.
It is safe to say Qantas is worried.
Alan Joyce is in Canberra lobbying this week. He has also written a letter to the prime minister, along with other senior politicians, complaining that his airline is not competing on a level playing field.
Virgin is majority-owned by three overseas airlines, which are getting board seats out of the equity raising. Joyce pointed out in his letter these companies — Qantas competitors — can raise money in the international market, and pour it into Virgin.
This lets them put pressure on Qantas where it hurts the most: at home. It’s like a proxy war for airlines, but Qantas doesn’t get a proxy to fight with.
Which is why Joyce wants the Foreign Investment Review Board to have a look at the capital raising. As the Credit Suisse note points out, things are certainly coming to a head.
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