Ian McMahon's perspective: tensions at the Virgin board table

In December last year I warned that the make-up of the Virgin Australia board was potentially “a ticking time bomb”, writes Ian McMahon.

IN DECEMBER last year I warned that the make-up of the Virgin Australia board was potentially “a ticking time bomb”. As the first quarter of this year ended, the public gained its first insights into the simmering tension around the carrier’s board table.

At the centre of it is Air New Zealand, no stranger to disrupting Australian aviation. No single event destroyed more Australian airline value than the Kiwi flag carrier’s grandiose but ill-advised decision to exercise an option to thwart Singapore Airlines’ buying into Ansett in February 2000.

Air New Zealand was hopelessly underresourced for the task. By September 2001, Ansett had collapsed, leaving thousands jobless. Air New Zealand itself was only saved by millions of dollars of handouts from the country’s taxpayers. Disgracefully, following lobbying by Qantas, a Singapore Airlines offer to rescue Ansett was blocked by the Australian Government.

Out of this chaos, Qantas grabbed two thirds of Australia’s domestic air market and a virtual monopoly of premium and business travel while Virgin Blue consolidated a position as a cheap and cheerful budget carrier.

More recently, with former Qantas executive John Borghetti at the helm, Virgin Blue has morphed into Virgin Australia, a full service carrier that is proving to be a credible competitor for Qantas at the premium end of the market.

This has required huge investment and one of Borghetti’s most remarkable achievements has been to persuade three foreign airlines to provide the hundreds of millions of dollars required in exchange for equity and seats at the board table.

Those three airlines – Air New Zealand, Singapore Airlines and Etihad alongside Virgin’s Sir Richard Branson – collectively own about 80% of Virgin Australia.

While Virgin Australia returned a very modest profit in the first half of this financial year, the airline still requires further large injections of capital and now Air New Zealand wants out. Its chief executive Christopher Luxon, who reportedly called for Borghetti’s resignation, has quit the board and put its 26% stake in Virgin Australia up for sale.

There is furious speculation about the possible buyer of this stake with Singapore Airlines, Sir Richard Branson or one of the several Chinese carriers among those considered possibilities.

My own view is that Singapore Airlines would be the ideal buyer. It has a vital strategic interest in developing a thriving Australian domestic airline and it would also provide a fitting finale to the conspiracy of events that prevented its takeover of Ansett 16 years ago.

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