The airline facing a double-whammy after Trump’s bunker-busting

You’ve probably never heard of Mike Murphy – but he is the guy who was choking on his smashed avocado toast at about 9am on Sunday when US President Donald Trump dropped his massive ordnance penetrators on three Iran nuclear installations.

Murphy runs the Australian arm of Bain, the majority owner of airline Virgin, which is set to list on the Australian market on Tuesday as the highest profile ASX entrant in years.

Before and after satellite images reveal the extent of the damage at three nuclear facilities in Iran.Credit: Maxar Technologies / New York Times

Timing is everything for investing, and for Bain, the timing of the Virgin listing looks atrocious.

Those investors who bought in pre-listing and who were looking to sell out immediately – for what are referred to as stag profits – may need to rethink.

Airlines, in particular, are highly sensitive to any geopolitical conflict and they are even more vulnerable to those in oil-producing territories.

First, this is because the oil prices surges, and for airlines, fuel is one of the major costs.

Second, international airline flights can be disrupted, redirected or in some cases, those that fly over affected areas will temporarily abandon services.

Already, British Airways and Singapore Airlines have suspended a number of flights to the Gulf, affecting routes to key hubs such as Dubai, Doha and Bahrain, citing safety concerns and evolving airspace restrictions.

And sometimes, travellers will even postpone during periods of increased risk.

Virgin is an overwhelming domestic airline, but it did introduce one international route from Australia to Doha two weeks ago. Any disruption of this route won’t have much (if any) impact on Virgin’s profit numbers this year but an elevated oil price, even in the short to medium term, will.

Shares in Virgin’s domestic competitor Qantas were down more than 2.7 per cent on Monday morning in what was a clear response to the US’s escalation of the Middle East war over the weekend.

It isn’t just airline stocks that feel the effects of geopolitical tension: stock and bond markets also respond negatively to risk.

Mike Murphy runs the Australian arm of Bain, the majority owner of airline Virgin.Credit: Peter Braig

Australia’s market is the first major market to open since the bunker-busting bombs were dropped on Sunday (our time), and as such, we are a bit of a taste-tester for how larger markets will react.

The ASX 200 was off by around 0.8 per cent – a response that realistically could have been far worse. The index is still sitting not too far off the record high it hit a few weeks ago.

Other than airline stocks that are considered at the riskier end of the spectrum, sectors such as technology were disproportionately hit, but nothing calamitous.

Our largest oil and gas company, Woodside, started the day strongly but it was trading flat by early afternoon.

If this pretty muted response is mirrored in the US and European markets, it suggests that investors are largely taking events in their stride.

At the time of writing, US S&P futures were down 0.3 per cent, well within the parameters of normal daily volatility.

Elevated oil prices, even in the short to medium term, will affect Virgin’s profit numbers.Credit: Rob Homer

Oil prices have certainly risen over the past 36 hours but fears that the price of crude could skyrocket have not been realised – at least not yet. And the price of gold initially bounced, but it has now re-entered the atmosphere.

Short of a serious escalation, the markets seem happy for now to assume the worst is over.

Whether this is true largely depends on whether oil shipping lines are affected, which depends on the response from Iran – whether it has the stomach, or even the capacity, to retaliate.

There are also question marks over the extent of the damage from the US attack on Iran’s nuclear installations. Trump said the sites had been obliterated, but independent agencies have not confirmed this.

There are, as always, plenty of political and market analysts issuing worst-case scenario warnings about the collapse of markets, or the potential for gold and oil prices to surge into the stratosphere.

For Virgin investors, the short-term timing is unfortunate. Longer term, this investment will rise or fall on its earnings performance for years to come.

But this week at least, sentiment won’t be Virgin’s friend.

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