Airlines Virgin, Qantas in dogfight over China’s travel market

Virgin Australia’s strategy to crack the Chinese travel market is superior to Qantas’s, boss John Borghetti claims.

Virgin Australia

Virgin Australia (VAH) boss John Borghetti has declared the airline’s strategy to crack into the lucrative Chinese travel market is superior to Qantas’s and will give the carrier a “huge” competitive edge over its cashed-up rival.

China is set to become the next great battleground between Qantas and Virgin as the two airlines battle for access to the region’s burgeoning and travel-hungry middle classes.

But despite the China strategy being elevated to prime position by Mr Borghetti, the Virgin boss yesterday raised some questions about his long-term future at the company as it was revealed he had not fully participated in the company’s recent $852 million capital raising.

In filings released on the ASX it was revealed that Mr Borghetti — who has never sold a Virgin share — spent just $100,000 on 5 per cent or 470,000 of the almost 9 million shares he was entitled to under the raising.

According to the filings, Mr Borghetti was the only director on the Virgin board with a stake in the company who did not fully participate in the 21c-a-share offer. Taking up his full entitlement would have cost him about $1.8 million.

Speaking to The Weekend Australian on the release of Virgin’s full-year results, Mr Borghetti said if Qantas’s and Virgin’s Chinese strategies were placed side by side, there would be one clear winner.

“We have equity involvement in our business and they (Qantas) do not,” Mr Borghetti said.

“That says many things but one of the things you can be sure of is that if you have skin in the game there is always more co-operation.”

Earlier this year Qantas chief Alan Joyce shrugged off Virgin’s tie-up with its Chinese backer HNA Innovation, saying that Qantas’s partnerships with two of the three large state-owned carriers, China Eastern and China Southern, provided a stronger competitive advantage.

But Mr Borghetti said the deals with Nanshan and HNA — which will see Virgin 40 per cent owned by Chinese companies — not only provided it access to the 1.2 million Chinese tourists coming to Australia each year, but also an “end-to-end” play that Qantas would not be exposed to with its Chinese partnerships.

“They (Qantas) have a codeshare with two very large carriers that are government carriers, may I add. We will have codeshare arrangements … with two players, one of which has got multiple airlines that carry 70 million people a year,” he said.

“The ability for them to hub and feed our network when we eventually fly to China and feed our domestic network is much stronger (than Qantas). (HNA) also own a leasing company: they own a catering company. More ticks for us.”

Mr Borghetti’s comments came as the airline doubled its full-year loss to $225m after absorbing the bulk of $440.5m worth of one-off restructuring and cost-saving charges as part of a push to pay down debt after five years of heavy spending to take on Qantas.

Despite the one-off writedowns, Virgin was able to hit its underlying profit before tax forecast with a result of $41m for the 2016 financial year on the back of a 5.7 per cent increase in revenue to $5bn. Virgin’s costs, excluding fuel and foreign exchange movements, were down by 1.9 per cent over the 12 months.

With those writedowns behind it, Mr Borghetti expects the airline to deliver a better profit next year when its loss-making international business finally makes it into the black. The airline announced yesterday that it had also reached its target — ahead of schedule — of securing 30 per cent of its domestic revenue from the corporate and government travel sector.