US investor plots rival airline to Virgin Australia

A US-based investor specialising in budget airlines could pursue its own operation down under if Virgin Australia is liquidated.

The Indigo Partners-controlled Frontier Airlines

A US-based airline investor specialising in budget carriers could pursue its own operation down under if Virgin Australia is liquidated after amassing $6.8bn worth of debt.

Indigo Partners, which already has stakes in Wizz Air, Frontier Airlines, Volaris and JetSmart, is believed to have made inquiries about acquiring an Air Operator’s Certificate in Australia.

The private equity firm, which has more than 600 narrow body aircraft on order from Airbus, has been named as one of 20 parties interested in Virgin Australia.

Eight of those have signed nondisclosure agreements to gain access to the data room and another 12 are in negotiation with administrator Deloitte.

Indicative offers are due in a fortnight, and Deloitte wants binding offers made by early June in the hope of finalising a sale by the end of the month.

Indigo Partners reportedly sought to acquire a controlling stake in the Australian carrier 18 months ago but could not convince major shareholders to sell.

The company is thought to remain keen on snaring Virgin Australia with a view to returning the airline to its low-cost roots with a single-type aircraft fleet, and a predominantly domestic network.

But the administrator’s stated goal to minimise redundancies and return Virgin Australia to the skies largely unchanged is believed to have Indigo Partners exploring other avenues, including potentially a new AOC. The cost of maintaining the Virgin brand — thought to be as much as $15m a year in payments to Richard Branson — was also considered to be a disincentive.

A Civil Aviation Safety Authority spokesman said it would normally take between six and 12 months to approve an AOC for a high-capacity public transport airline, providing much of the framework was already in place, including fleet and key personnel.

With demand for air travel expected to remain weak, aviation expert Neil Hansford said it could take 12 months before a second major carrier was needed.

“I wouldn’t start one from scratch but Indigo have certainly shown they have the business model right for ultra-low-cost carriers,” Mr Hansford said.

“Their (Denver-based) Frontier Airlines is five or 10 years ahead of everyone else in the US market, in terms of what they’re doing with technology. They’ve got a reputation for squeezing every pip out of the lemon but they run a very tidy operation.”

He said his biggest concern with an Indigo-run airline in Australia was whether Australians would accept that ultra-low-cost model.

“Australians talk a lot about price but I’m not convinced Australians will take no-frills.”

A financial expert who did not want to be named said it would be madness to launch another airline if Virgin Australia was successfully restructured and recapitalised. “The only avenue for a new airline operating under a new AOC would be if Virgin Australia was liquidated.”

A second creditors’ meeting is expected on August 22, well after the administrator’s June 30 “deadline” for a sale.

Others believed to be interested in Virgin Australia include private equity firm BGH Capital, distressed securities investor Oaktree, Wesfarmers, Macquarie, Singapore government investment arm Temasek, and mining magnate Andrew Forrest.

Meanwhile on Friday, Virgin Australia’s credit rating was downgraded to a “D” by S&P Global, following the freeze on creditor payments while the company is in administration.

Administrator Deloitte had announced the company would not pay its next coupon payment on $657m of senior unsecured notes on May 15, due to a moratorium on all creditor payments.

S&P analysts Joel Yap and Craig Parker said they considered the payment moratorium to represent a default. “We expect that unsecured lenders will be forced to accept less value for amounts owing,” they said.