High airfares to kill airline mergers and see Bain push on with Virgin Australia IPO

Sky high airfares may motivate Bain Capital even more to float Virgin Australia. Picture: iStock

Airlines may be thriving globally in the current market with the appetite for travel among consumers remaining strong, as seen by the earnings of the Australian listed Air New Zealand and Qantas, but that is not expected to translate to corporate activity in the industry in the near future.

It may mean that Bain Capital will be more motivated than ever to push on with its initial public offering plans of Virgin Australia on the Australian Securities Exchange, despite market volatility, with few buyers expected to be interested in a $3bn acquisition.

Perhaps a carrier out of a part of the world like the Middle East may have some appetite, but it is not thought to be likely.

Part of the problem is that with flight prices sky high in the aftermath of the global pandemic, the aviation industry is under close watch by regulators looking to protect consumers, which means that any deal that will lessen competition in the current market right now would likely be frowned upon by competition regulators like the Australian Competition and Consumer Commission.

It comes as Qantas still waits for an ACCC outcome of its acquisition last year of Alliance Aviation that flies into Australia’s mining camps.

Earlier, there was speculation that Air New Zealand could have interest in Virgin Australia, but the New Zealand government, which is the 52 per cent shareholder of the carrier across the Tasman, is thought to have no appetite for a tie-up.

The government has a long memory of how it had to bail out Air New Zealand after it purchased the Australian-New Zealand airline Ansett and it collapsed.

There is logic to a tie up, because both target the mid-market.

The Air New Zealand code share partner is currently Qantas on Australian routes, a fierce competitor on the trans-Tasman routes and also soon to be for flights to New York, and with Qantas starting flights to fly there mid-year which will mean it goes head to head with its New Zealand rival.

Some analysts had earlier suggested that Air New Zealand may need to assess opportunities for future growth, but expansion by way of corporate activity is not understood to be on its agenda.

Last year, US-based low cost airline JetBlue agreed to buy budget carrier Spirit for $US3.8bn, creating the fifth largest US airline but the transaction was blocked by regulators.

Yet that attempted deal could offer insights into the sorts of tie-ups among airlines that could be seen in the future should mergers and acquisition deals once again take flight.

Rising costs ranging from catering to landing fees and staff are going to be harder to strip out for full service airlines for some time, which means that while they may be more profitable than budget carriers, the budget carriers over time are likely to gain more market share as the wide gulf between the cost of full service flights and budget flights increases.