The final piece falls into place for Virgin listing

Conditions are booming in aviation, but Virgin Australia is gambling it can still land its multi-billion dollar IPO later this year.

Virgin’s owner is eyeing a sharemarket listing for the airline later this year. Picture: Bianca De Marchi

With a new boss on board, the final strategic piece has fallen into place for Virgin Australia. And if there were ever an ideal moment for private owner Bain Capital to take the airline to a multibillion-dollar stockmarket listing, it would be now.

But like its on again, off again, IPO plans of recent years, Bain knows it needs just a little more time. That means if conditions hold, Virgin could be headed for a spring sale.

Now into its mid-20s, Virgin Australia is finally growing up. The airline is minting money for the first time in years; its planes are running on time and with Middle Eastern major Qatar in its corner, it has locked in a cashed-up global aviation partner.

And this credit has to go to outgoing chief Jayne Hrdlicka, another Bain & Co alumni, for turning Virgin into what successive management could never achieve: A leaner and more profit-driven machine.

And finally, for Virgin there’s certainty over its biggest uncertainty – who is going to lead the airline.

Virgin’s board has tapped an internal candidate, chief commercial officer and former Bain & Co senior partner Dave Emerson, to replace Hrdlicka.

This ends a 12-month global search and follows Bain Capital’s messy handling last February when it decided it didn’t want Hrdlicka to take the airline through to an initial public offering. (Bain Capital, the US private equity player, was spun out of Bain & Co – the consultants, in the 1980s. Today they run as separate entities although, they share a close relationship, with staff moving between the two)

Even as Virgin is going through its own transformation, Emerson represents the continuity candidate, and that’s of strategic importance for future investors. They are getting the Hrdlicka strategy.

A former Texas-based global aviation lead, with Bain & Co, Emerson has been in the business of driving change in airlines over more than two decades. And as the chief commercial officer for the past three years it’s been his job to keep Virgin’s costs in check and find more revenue after a customer has paid for their ticket. At Bain & Co, he worked on transformation programs on airlines around the world including United Airlines, British Airways, American Airlines, Swiss International and Finnair.

Emerson’s naming comes just weeks after the decision of frontrunner Paul Jones, another internal contender, to withdraw from the race. The Virgin’s chief customer officer, was criticised by unions and had the Albanese government off-side for his role in sacking the 1600 ground handling staff at Qantas, a move that ultimately ended up in the High Court and resulted in a costly loss for the rival airline. The reaction of picking Jones would have been too much of a distraction, with Bain attempting to time its listing to perfection. Emerson offers a smoother run, at least when it comes to staffing.

Emerson takes charge next Friday, although Hrdlicka will stay on in a consulting capacity for the next few months. This will see her on the first Virgin Australia-Qatar long-haul flight to Doha to take off in June.

Price tag

Virgin plans to hit the market this year and the sharemarket, hungry for quality IPOs, is putting out the welcome mat for Virgin.

The strongest signal is shares in bigger and equally profitably rival Qantas have now jumped past $10 each to hit fresh all-time highs. The Qantas bounce has defied volatility in global markets which are busy fretting about Donald Trump’s trade war.

From the outside, Virgin Australia might have the same look and feel, but inside it’s a fundamentally different airline from the carrier that collapsed early in the Covid-19 pandemic.

Just like her old boss Alan Joyce during his time at bigger rival Qantas, Hrdlicka has been rebuilding Virgin in recent years with a much lower cost base. Financial collapse and a forced grounding makes it far easier to strip out the costs that have calcified over decades of operation.

Gone are the costly long-haul international routes. Also gone is the cash-sapping offshoot, TigerAir. The Virgin fleet has been streamlined into Boeing 737-800s. The lavish chairman’s lounges and their designer chairs are also a distant memory.

Today it’s about the business of flying. This mean earnings over market share, chasing the middle ground over the top end of town. There’s more focus on ancillary revenue like seat selection, extra baggage and food.

Hrdlicka shared some first-half numbers with her staff on Wednesday, and like Qantas’ own accounts last week, it shows conditions are booming in Australian aviation.

The December half is the traditionally stronger market, but through this Virgin posted record earnings for the period of $439m, with revenue of $3bn. This annualises at more than $800m earnings struck on nearly $6bn in revenue.

It puts it ahead of Virgin’s pre-pandemic revenue peak of $5.8bn – which was then generated by a far bigger airline.

Outgoing Virgin Australia boss Jayne Hrdlicka has delivered a commercially focused airline. Picture: Yme Tulleners

Importantly, Hrdlicka says Virgin is now generating an earnings margin of 14.4 per cent and this had widened 2.3 per cent on the past year. Qantas last week posted an operating margin of 12.4 per cent. The pre-pandemic Virgin could barely lift this figure above 5 per cent while spending much of this time closer to 1 per cent.

There’s been strong performance across all parts of the business – from domestic, regional, the Velocity loyalty scheme and short haul, Hrdlicka added.

She said Virgin’s transformation program was a key driver behind the results and in a reference to the cost control she said the outcome was delivered “at a time in our business and our industry where inflation is at unprecedented levels”.

Of course the figures need to be taken at face value, they’re not audited and lack context, however they give prospective investors something to work with.

This would see Virgin carry an enterprise value of about $4bn if the average of global airline multiples of 5 times EBITDA was used. It would be somewhere closer to $3.5bn-$3.7bn if the Qantas multiple of 4.2 per cent were applied. This suggests, even with the recent share surge, Qantas still has some headroom left over its own valuation.

On its collapse in 2020, Virgin had an enterprise value of between $3.1bn and $3.5bn, but after taking into account debt and leases that outstripped the consolidated value of the company, that equity value quickly came down to zero.

Bain refinanced Virgin’s debt in its early days, but any listing would be all upside given it has already paid itself more than $730m in dividends – equivalent to the equity it put into the buyout.

Time to move?

With aviation conditions now close to perfect and no telling what further trade chaos Trump can bring, isn’t this time for Bain and its junior partners, QIC and Branson’s Virgin Group, to move? Not so fast.

Fund managers said that although the new boss Emerson has experience, they need to see more. That is, colour around his management style and how his own longer-term strategy is distinct from Hrdlicka’s. Stepping up from an executive into the job of chief executive role is a different ball game all together, they said.

Emerson will not only face the immediate test of running an airline with all the myriad of pressures and union demands that come with it, he will also eventually face the challenge of steering Virgin through public markets and managing shareholders.

Big investors will want to see Emerson truly in charge.

Conditions are just about perfect in aviation but Virgin owner Bain needs more time. Picture: Flavio Brancaleone

While Virgin is moving quickly to install Emerson, Bain will discreetly get feedback on its man as he is carefully rolled out to big investors in the next few months. This means the June window for an IPO would be too early for a new CEO.

The first Qatar alliance flights also take off from June, in time to take Australians to the European summer – and investors want to get a sense of the partnership working.

Beyond that, Virgin Australia’s full-year numbers would be available around August profit season, taking the ideal window later into September/October.

Bain, which will profit handsomely on a Virgin listing, was initially tipped to be a short-term owner of Virgin, looking for a profitable escape ramp as soon as it possibly could.

However, it’s now proven to be the opposite. Through an initial earnings disappointment and management overhaul, it’s been remarkably patient – holding on to Virgin for almost five years.

This will be right in the sweet spot for a big private equity deal.

Originally published as The final piece falls into place for Virgin listing