QATAR: Days away from landing on a minority stake in Virgin Australia?

It’s nearly one and a half years since Bain Capital put off its proposed float of Virgin Australia. The AFR Street Talk column is predicting that Qatar Airways is days away from signing for a minority stake in Virgin Australia.

Any purchase would be subject to approval from the Foreign Investment Review Board (FIRB).

Background

The AFR first reported the possibility of this deal back in June. Since then the Australian domestic airline scene has seen two high-profile collapses, Bonza Airlines, the regional holiday low-cost operator lost all hope in June and REX (Regional Express) went into administration in late July. REX is currently still flying its regionally but has dropped all its capital city routes.

This leaves Virgin Australia as the only viable competitor to the Qantas/Jetstar group.

Qatar Airways

Relations between Qatar and the Australian government have not always been smooth. The Labour government notoriously knocked back their request for additional flights to Australia, citing amongst other things, threats to Australian-based international airlines, which is code for Qantas. This decision was seen as the government cosying up to Qantas and criticised accordingly.

Government-owned Qatar Airways has deep pockets, so holding a stake in Virgin Australia could upset the current balance of the domestic market and international flights into and out of Australia.

Qantas/Jetstar holds just shy of 62% of the domestic market as of March 2024, with Virgin sitting on a little over 31%.

Stake sale advantages

Bain Capital which bought Virgin out of administration in 2020 would see some immediate financial benefit from a sale of a portion of Virgin to Qatar. Not as big a pay-day as if the float had gone ahead, but at least some cash in the pocket of Bain and other Virgin stakeholders. Bain would still maintain a majority stake in the airline.

Virgin Australia has performed well under Bain, with rising revenue and an AU$129 million profit in the 2023 financial year.

2PAXfly Takeout

If Qatar does take a stake in Virgin as rumoured, this could stabilise Bain’s ownership intent. It might mean that Bain is willing to hang around for longer. If Bain does want to sell, the price Qatar pays for its stake could set the bed for any float price for Virgin Australia in the future.

Presuming that Qatar does get approval for at least some expansion of its frequencies into Australia, even if not the full 28 flights it has requested, then it will benefit from a relationship with Virgin Australia. Virgin Australia will benefit from the ownership stake Qatar gains, both feeding traffic to Qatar, and receiving domestic traffic from the international partner.

The potential downside I can see, is that Virgin will end up with a messy ownership structure like it had pre-administration. Then, it had several competing owners with airline interests who found it difficult to see eye to eye. Stakeholders included everyone from Virgin Atlantic, Singapore, and China’s HNA Group, owner of Hainan Airlines.

For the smooth operations of the company, one major shareholder would be the preference.