Virgin’s John Borghetti sees blue skies as China comes on board

Virgin Australia boss John Borghett sees nothing but blue skies as the airline takes Chinese stakeholders on board.

Virgin Australia CEO John Borghetti. Picture: Renee Nowytarger

The chic Virgin Australia boardroom overlooking Sydney’s Circular Quay is a world away from Glenroy tech college in Melbourne’s northern suburbs.

But late last year and into the first few months of 2016, as he gazed from the comfort of his leather boardroom seat out the window at Sydney Harbour Bridge in the distance, Massimo John Borghetti might have remembered what he learnt all those years ago.

In the playground at Glenroy, when he was bullied for being a “wog’’, the young Italian quietly vowed to never walk away from a fight. And the Virgin chief also probably remembered what he later learned as a teenager about his fear of failure: the harder something is, be more determined to do it.

“Failure is not in my thinking ever on anything,” Borghetti tells The Weekend Australian. It is now history that Borghetti and his chairman Elizabeth Bryan saw off Air New Zealand chief executive Christopher Luxon’s push to orchestrate a boardroom coup and even run the airline.

In the process Borghetti and Bryan closed yet another chapter in the tortured history of Air New Zealand’s Australian ambitions. But they also opened the door for a new story to be written, for which there is no playbook.

For the first time in Australian aviation history, two Chinese companies own big equity stakes in a member of the local aviation duopoly.

While Qantas has previously secured alliances with state-backed Chinese carriers China Eastern and China Southern, none has taken equity in our national carrier in the same way Chinese conglomerates HNA Group and Nanshan have snared close to 40 per cent of Virgin.

On the face of it there is enormous opportunity — the dream of Virgin flying Australians into China and, more importantly, providing another vehicle for the aspirational Chinese middle class to come Down Under.

But as Virgin yesterday ­unveiled a full-year loss of $225 million, which was dragged down by restructuring charges, there are also great unknowns.

What will the Chinese expect for the money they have sunk into Virgin?

How will one Chinese party work with or against the other? How will they work with regional rival Singapore Airlines, which also has a cornerstone stake in Virgin. And will they keep Virgin in the public domain?

For Borghetti, though, the addition of its new Chinese shareholders is simply about blue skies.

“Seriously, I am so excited I can barely sit here. This is the ­future of Virgin,” he says.

“It will be huge. The fact that we will be able to access all of their domestic network — and they own about nine or 10 airlines — and they will be able to access all our domestic networks, so that’s just the start. Then think of the frequent-flyer program, think of operating end to end.’’

“There are 700 travel agents they own in China. They own the biggest chain in China and in Hong Kong, which is great for ­distribution. They carry about 70 million people a year on their planes. The opportunity is just huge.”

For the moment, the Virgin chief can be content that he has an extra $1.1 billion on his balance sheet that has bought more time to finally get his house in order to make the kind of profits his new and legacy shareholders are ­demanding.

As he said again yesterday, Borghetti is “proud to have contributed significantly to the development of a strong aviation industry in this country.’’ And for that he deserves enormous credit.

But while the altruism is noble, his shareholders and directors have seen enough of the deals and the transformations. The time has come to deliver on the numbers and Borghetti knows it.

Ironically, it was that lack of delivery that so enraged Luxon, who had apparently hoped that Borghetti might step down last year after five years at the helm of Virgin.

But Virgin’s then chairman, Neil Chatfield, got in first. The slightly laconic Chatfield was a hands-off chairman who preferred to let Borghetti deal with the delicate issue of managing his shareholders.

He also saw the wisdom of Virgin no longer remaining as a listed entity on the sharemarket. Despite his encouragement privatisation waxed and waned during Chatfield’s chairmanship, but in the end none of the shareholders had the will to make it happen.

Borghetti, however, claims that any desires Chatfield had of taking the company private were never shared with him. “If he (had those plans) then I didn’t know about it,” Borghetti says.

When Chatfield’s departure brought new chair Elizabeth Bryan to the boardroom late last year, Borghetti had a powerful new ally in his battle with Luxon. She was a stickler for governance. On board teleconferences, she would regularly remind all the directors of their obligations before addressing the formal business of the meeting.

It is a far cry from January 2011 when Air NZ took a 14 per cent stake in Virgin with all the good will in the world under then chief executive Rob Fife. Air NZ declined to comment to The Weekend Australian about Virgin.

Eighteen months later Air NZ was followed by Gulf airline Etihad, which took an initial 4 per cent stake in Virgin that grew to over 20 per cent. Four months later, Singapore Airlines bought a 10 per cent stake before taking its interest over the 20 per cent mark.

Fife’s move was the fourth time in three decades Air NZ had tried to cement a permanent place in Australia’s domestic aviation market. The first came when Air NZ completed its privatisation in 1989. Its new owners included Qantas as well as Japan Air Lines and American Airlines.

Seven years later Air NZ took a 50 per cent stake in Ansett, which prompted Qantas to sell its 19.4 per cent stake in its trans-Tasman rival.

In February 2000, Air NZ agreed to buy the remaining half of Ansett from Rupert Murdoch’s News Corp, trumping Singapore Airline’s offer the for stake. But a year later, with cost pressures and a stretched balance sheet, Air NZ put the Australian carrier into voluntary administration. Ansett subsequently collapsed.

Two years later, Qantas chief executive Geoff Dixon proposed a trans-Tasman alliance with his New Zealand rival but it was ­opposed by the competition regulator.

Luxon had perhaps the best chance of creating something lasting between the two countries, and made sure Air NZ pushed its stake above the 25 per cent threshold, which meant he could block a scheme of arrangement if one of the other shareholders moved to take control of Virgin. In reality this was never going to happen.

He might have stepped down from the Virgin board but Singapore Airlines and its quietly spoken chief executive chief executive Goh Choon Phong would always stand behind Borghetti.

As would Etihad boss James Hogan, even if Hogan had some misgivings about parts of Borghetti’s strategy — in particular the big spending and the determination to copy Qantas with expensive lounges such as “The Club’’, Virgin’s answer to the exclusive Qantas chairman’s lounge.

The wildcard in the boardroom became David Baxby, a board member since 2004 and a former senior executive in Richard Branson’s global empire.

As the only independent director on the board with aviation experience, there was a view that Baxby could get more involved in Virgin’s operations when he ­returned to live in Australia late last year. He chaired the board subcommittee that worked on the capital raising with investment bank UBS and quickly became a valuable source of advice for Bryan.

Baxby is said to have played an important role in getting Singapore and Etihad aligned on supporting the capital raising.

The HNA deal also happened very quickly — in fact Borghetti is said to have told friends that he has never done a faster deal in his entire corporate career.

But at the same time the Virgin boss was also taking a hard look at his own management team.

Rather than allowing Baxby to take a more hands-on role, Borghetti chose to bring in global aviation consultant John Thomas to head its domestic and international operations.

Thomas has been heading up the Asia-Pacific business and global aviation practice at management consulting firm LEK. Over the past 25 years, he has advised many of the world’s leading airlines on their commercial, operational and financial strategies.

His appointment served a dual purpose for Borghetti. It provided a succession plan. Even if Borghetti did choose to leave last year, having secured a truce in the brutal domestic capacity war with Qantas, there was simply no-one ready to replace him.

But more importantly, Thomas, when he starts in September, should be able to take carriage of the operational aspects of the airline, freeing his chief executive to manage the uncharted waters of dealing with his two new Chinese shareholders.

Australian companies are increasingly looking to China for new growth opportunities and to tap into the region’s burgeoning middle classes.

But the addition of Chinese directors on to Australian boards has not always been smooth.

One has to only look to Telstra’s on-again, off-again hunt for Chinese representation on its board to understand that navigating the differences between the two corporate cultures is not always as simple as it seems.

But Borghetti is adamant that there will be no such troubles with its new Nanshan and HNA directors, and that the past ructions that threatened to split its board and led to Air NZ’s departure from Virgin are well and truly behind the airline.

“We are experts at navigating relationships. This is the bloody United Nations and we’ve navigated very well and will continue to do so because everyone has a common interest in making the business profitable,” he says.

“I’m expecting the board to work together for the benefit of this company and I don’t see that changing.”

Certainly HNA has shown a penchant for controlling aviation-related assets around the world.

Last year, the Chinese conglomerate agreed to buy airport luggage handler Swissport International from PAI Partners SAS for $US2.81bn and in April HNA bought Gategroup Holdings, the world’s second-biggest airline-catering company, for $US1.5bn.

“What a lot of people haven’t clicked on to is that this isn’t just about the airline to airline side; this is about all the other businesses that HNA own, from catering to ground handling, you name it,” Borghetti says.

Virgin and HNA have already applied to Australia’s competition regulator to establish a commercial partnership and alliance, which will include Virgin operating flights to Beijing and Hong Kong from June 1 next year.

And Nanshan, which set up Qingdao Airlines in April 2014 and already has extensive agricultural, tourism and hotel investments in Australia, has already talked up doing more business between the two countries.

But asked if Nanshan planned to use its 19.98 per cent stake in Virgin to influence the airline’s strategy, its chairman Jianmin Song — the younger son of one of China’s richest men — replied: “Nanshan does not believe it has any more or less influence than other shareholders; it will always act in the best interests of Virgin and all its shareholders.’’

In the past Nanshan has also been named in anti-corruption cases in Chinese courts, allegedly paying bribes totalling $1.6m to a government officials.

Asked how Australian investors and regulators could be certain Nanshan does not engage in this type of activity, Song said: “We are committed to meeting the highest standards of corporate governance and our duty to serve our people. We make no comments on court cases in the past.’’

With the full participation of its major shareholders in the latest equity raising and HNA agreeing to put in an extra $89m to top up its shareholding in the airline to 19.2 per cent, Virgin’s free float will shrink to about 7 per cent.

Already fresh questions are being raised about the necessity for the airline to remain listed on the ASX.

Borghetti is said to be, as he has always been, ambivalent to the prospect.

“For me to take the company private, I would need a lot of money,” he quips.

“It’s not up to us to decide whether the company is public or private — that’s up to the market.”

Given Singapore and Etihad have never seen the need to move, the long awaited catalyst could finally be the Chinese.

In the interim Borghetti is worrying about what he can control and piloting Virgin’s pivot to China.

He is said to have given himself two years at the most to get Virgin delivering the numbers he and his shareholders have long dreamt of.

Numbers that will entrench his legacy as the one man that not only survived but thrived after taking on Qantas.

But the clock is ticking.