Low-cost Wizz Air, Frontier backer has Virgin Australia in its sights

A US investor and champion of low-cost airlines is stalking Virgin Australia, and not for the first time...

By David Flynn, April 28 2020
Low-cost Wizz Air, Frontier backer has Virgin Australia in its sights

Private equity firm and airline investor Indigo Partners is said to be making a second tilt at taking over Virgin Australia, on the back of a failed buy-in attempt in late 2018.

Indigo's track record as a backer of low-cost carriers will fuel speculation that, should its play for the embattled Virgin be successful, the airline could be recast along the same lines as its original Virgin Blue incarnation – making it a solid challenger to Jetstar but little threat to Qantas.

The US-based firm is believed to be one of at least ten interested parties circling Virgin, which entered administration one week ago and faced debts of $6.8 billion spread across some 10,200 creditors.

Managed by Bill Franke, a veteran low-cost airline investor, Indigo owns US budget carrier Frontier Airlines – ranked as the country's eighth-largest commercial airline – and holds stakes in an array of other LCCs including Europe's Wizz Air (which Indigo co-founded and where Franke serves as Chairman), Chile's JetSmart and Mexico's Volaris, and also has its eye on launching a low-cost Canadian play in partnership with Enerjet. 

Indigo was a cornerstone launch partner in Singapore's Tiger Airways with a 24% stake, and planned to buy out Iceland's low-cost Wow before the airline collapsed in March 2019.

Will Virgin 2.0 go back to basics?

The firm's extensive roster of and expertise in low-cost airlines leaves little room for doubt that Indigo would want Virgin Australia 2.0 to be a full-service black sheep of the LCC family.

As it turns out, this is Indigo's second swoop at Virgin Australia. The Sydney Morning Herald reports that towards the end of 2018, Indigo agreed to buy the 20% stake in Virgin held by Chinese conglomerate HNA, contingent on being able to purchase similarly-sized packages from other investors in order to gain control of the airline.

Indigo pitched to China's Nanshan and Etihad Airways about acquiring some or all of their 20% shareholdings.

"However, the deal fell apart because one or both of the other shareholders rejected the offer," the SMH reports. "Indigo did not want to be left with the same level of control over Virgin as three other major shareholders, a situation it believed was responsible for the company's strategic paralysis."

Virgin Australia administrator Deloitte expects to present the restructured airline to potential buyers in early May, field "non-binding indicative offers" through to the middle of May and "serious, binding offers" by mid-June, with the intention of signing contracts by the end of June. 

Read more: Could Virgin Australia 2.0 be flying in as little as three months?

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

18 Jul 2018

Total posts 17

Terrible news; European LCCs offer horrible service.

Hopefully the new owners retain some resemblance of a business service offering.

Virgin Australia - Velocity Rewards

05 Sep 2013

Total posts 53

Horrible service, Hardly. Did they get you from where you book to where you booked to land?

Experience is a different question.

Can Australia really sustain two full service business airline like in Japan where companies are the ones who buy tickets in bulk? Or are we like Europe where there is more self-booking on the cheaper available ticket and consumers travel more for leisure too?

18 Jul 2018

Total posts 17

Yes of course they got me where I needed to go (many times while living in Europe) - but the experience compared to flying with Virgin or Qantas or even Jetstar in economy was terrible. It's partly the whole airport experience as well though; most European city airports were designed and built for 1970s level traffic and were barely coping with the passenger numbers before this crisis.

Speaking of Wizz specifically; trying flying out of one of their bases like Budapest into Berlin or Warsaw and you'll appreciate Aussie terminals. They basically herd passengers into areas with minimal or no seating - sometimes outdoor sheds that look like a cattle station loading dock before flights.

We may pay relatively large amounts to fly around AU but it's not as terrible as commuting between European cities by plane on LCCs.

I'm no expert but feel AU can sustain 2 full service carriers - we have some of the busiest intercapital routes in the world for the carriers and no alternative options on the horizon at all (forget high speed rail in Australia).

Virgin just needed/needs better management regardless of COVID situation.

16 Jan 2018

Total posts 95

@Planesa380 - I completely agree with you. I've flown a full service carrier in Europe economy (50 minute flight) - just a plastic cup of water given to everyone. European business class is a worse seat than exit row in economy - from a comfort perspective. I've also flown Wizz Air and Ryan Air and both of those were comparable. This is why the rise of LCC in Europe has been so successful. Australia and the US not necessarily. In Asia, like in Europe, airlines are starting to go hybrid and I recently saw MH is doing the bundled fares as well. Air Asia, FlyScoot, Malindo group, and Jetstar Asia are all doing really well on this front already.

14 Oct 2016

Total posts 67

I'm not sure that this would be terribly successful. Australia has high airport charges and a lack of secondary airports like you get in Europe, so the ticket prices would still be relatively high.

Jetstar and Tiger who do have already run LCC services already have only really been doing OK in the recent years, but certainly haven't been expanding like the American or European counterparts. I'm not terribly sure how they could do better than what Tiger and Jetstar have tried to do already.

Virgin Australia - Velocity Rewards

05 Sep 2013

Total posts 53

Haven't expanded or haven't bent allowed to expand.

Take Jetstar they don't fly to Canberra at all. Qantas gets the government contacts and they can say “yes this is the cheapest option”. Or look at the golden triangle routes Jetstar and Tiger don't really operate that many flight especially if you compare to their parent companies where they operate flight every 15 minutes at peek times.

If Jetstar and the same extent Tiger been allowed to grow organically and compete with their parent company they would be much bigger. However this would result in a cannibalised market at some point resulting is possible lower profits for the corporate parent company and possible lower tickets prices for consumers.

Virgin Blue Mk II here we come.

The other thing to note is that Indigo and its airlines are very big on Airbus A320s, Indigo actually places bulk orders to spread across its LCC outlets. This is of course incompatible with Virgin being pretty much all Boeing 737 for domestic and short-range international routes, only half of which VA owns anyway. And would a very cost-conscious owner like Indigo want to pay Branson $15m per year just to use the Virgin brand? Not likely!

If Indigo swoops in, I reckon you'd see basically an entirely new airline. A fresh new brand, the leased B737s handed back and the owned ones sold by the administrators to be replaced by a fleet of entirely A320neo jets flown by new pilots, the lounges scrapped, and Velocity probably sold off. Qantas would be thrilled!

07 Oct 2012

Total posts 1254

You wouldn't be selling 737s right now. Not many airlines looking to buy planes.

18 Jul 2018

Total posts 17

Also for anyone who has flown Wizz; they probably will find AU airports undesirable for them as we typically don't have large sheds with no seating and cattle-herding-like environments to channel customers into to be forced to stand around for on average 30 minutes before each flight. This is their modus operandi in Europe anyway... ;)

Virgin Australia - Velocity Rewards

05 Sep 2013

Total posts 53

Sheds: well when a LCC goes to the airport I have 20 planes that I would like to base at your airport but I don't want to pay 20EUR airport fees but we will pay say 5EUR, what is the airport to do? Let's assume that the airport would most likely want to expand (most European airports are owned by local governments and there is a brooder economic incentive to attracting more flights to their region). They can't cut security cost or cut maintenance cost to say the runway. So what is left? Passenger facilities.

30 min wait: a LCC basic business model is based on efficiency so with this in mind, most LCC aircraft do a 25 or 30 min turn. Typical this breaks down to: 8 Minutes to offload passengers, 4 Minutes to do mandatory security checks, another 8 Minutes to reload new passengers, and 3 Minutes for finalising documents. Within this timeline there is almost no room to wait for half a dozen passenger who get to the gate at the last minute. Airports can also charge the airline fees if they miss their original take off slot too. Therefore LCC's need to make shore that all passengers are at the gate in time for an on-time departure. Furthermore, if you are at the gate early ground crew has a chance to make shore that people aren't taking there whole house with them on-board and possibly get some extra revenue too.

Forced to stand: Well the airport doesn't have the funds to pay for extra seats it if terminal fees have been cut. If you look at Heathrow T2 from memory there is only 800 ish seats in the general area but an extra couple thousand seats in there restaurants and cafes. Therefore the airport get some more revenue too by "encouraging" people via design to visit cafes and restaurants. Same thing at a LCC airport, no money for free seats and you are more likely to go to a café and buy something = greater airport revenue.

No Seats at the gate: Simple it takes longer to get a hundred+ people who are sitting down onto the plane verses if they were already standing, and each second counts.

18 Jul 2018

Total posts 17

Makes perfect sense; wasn't questioning how it works. Just saying it makes the flying experience pretty crap compared to what any typical Aussie-economy with Virgin or Qantas flyer through our major airports is used to.

Qantas - Qantas Frequent Flyer

04 Nov 2011

Total posts 348

Lets hope these guys are not successful, we need two full service carriers in Australia. This would be a terrible outcome.

Virgin Australia - Velocity Rewards

05 Sep 2013

Total posts 53

Do we thought, LCC carrier have a rapidly growing share of the aviation market.

And if there is two full fare carriers it would be a great opportunity for disruption in the future.

23 Oct 2014

Total posts 182

This isn't the only bidder and it's not even a confirmed bidder, the ACCC and the government has repeatedly advised the preference is an Australia wide Full service carrier, there are 10 other parties interested and that's widely publicised. Nothing indicates this will be the winning bid or the final outcome. No preliminary proposals would have even been submitted, the reported preliminary submission date is MID MAY 2020. My belief is that the government want an Australia wide Full service airline and have inserted well respected Nicolas Moore, ex Macquarie banker to “oversee and advise”, the outcome I think will be that, lounges included, Business class and the only cuts will be on balance sheet to turn into a fantastic business as well as an already fantastic airline product. The FSC bidders would take more time to formulate their bid so I'm being patient, they will come but prob not till May.

FSC on a LCC balance sheet is the sweet spot.

09 Aug 2015

Total posts 28

Although Indigo clearly is very LCC focused you'd have to wonder if they see Australia as being a large enough market for a second low cost airline when there's really just two airlines in either the full-service or low-cost segments. Hopefully it would reposition Virgin as a middle of market 'hybrid', more like JetBlue for instance, but if Indigo's whole experience is LCC and that seems to be the case then I don't see why it would change its stripes now. I would expect Indigo to want to transform VA into an LCC, ditch the branding and lounges etc, or just pull out of the running entirely as it did with Wow.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 153

Money is on Wesfarmers...I think that's be best case for most successful Virgin 2.0. Combine Flybuys and Velocity into one...mammoth business.

14 Oct 2016

Total posts 67

Yeah, could see Wesfarmers getting involved. The are cashed up and a strong combination of Flybuys and Velocity might be good for them. I could also see them partnering with maybe another airline too, like All Nippon Airlines (NH), so they have someone with a bit of experience in running an airline.

01 Apr 2014

Total posts 90

If it's Wesfarmers, then I hope they provide a Bunnings sausage sizzle for in flight catering....... That would hit the spot.

British Airways - Executive Club

28 Mar 2014

Total posts 75

Looks as if wizzair has found some capital...

https://www.headforpoints.com/2020/04/28/wizz-air-gets-a-300-million-uk-government-bailout/

Virgin Australia - Velocity Rewards

06 Mar 2015

Total posts 151

Another wild card has emerged..

Singapore's sovereign wealth fund Temasek is said to be in the running through it's partnership with BGH Capital.

Temasek has $340 billion in its fund so it's probably quite a good possible outcome.

Time will tell.


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