Albanese’s flawed blocking of Qatar in 2023 paves the way for bigger Virgin takeover

Forget the IPO: Qatar is believed to have paid a whopping $1bn for a quarter of Virgin. Now the stakes are set for it to take even more of Australia’s second biggest airline.

Virgin Australia is about to have a new shareholder in Qatar Airways. Picture: Virgin Australia.

It was the deal Prime Minister Anthony Albanese clearly didn’t want to make.

On Thursday, the government approved Qatar Airways buying a quarter stake in Australia’s second biggest airline, Virgin — and with that deal, the effective rights to fly 28 new weekly return services between Doha and Perth, Brisbane, Sydney and Melbourne.

It’s effectively the same deal — but even better for Qatar — than the one it blocked citing undisclosed “national interest” issues in 2023. Back then, Qatar wanted to fly those 28 flights on its own metal with its own crew under a codeshare with Virgin.

Now it will fly them on its own metal with its own crew and own 25 per cent of Virgin as well.

“This is an even better deal than the one they knocked back last time,” says one former airline boss who did not want to be named.

What comes next could likely to be a majority takeover of the domestic unit of Virgin Australia.

Qantas chief executive Vanessa Hudson, whose airline is enjoying globally envied domestic margins of 17 per cent, is no doubt aware of this risk.

Unfortunately for Hudson, her ability to lobby against such a deal has been stymied by the all-too-public revelations of her predecessor Alan Joyce’s strings-attached relationship with Albanese at the expense of travellers, exporters and the tourist industry alike.

In the past few years, Albanese’s son gained access to the ultra-exclusive Qantas Chairman’s Club, Qantas put Labor Party “Yes” vote messaging on its aircraft, and then the government went against public advice to block Qatar increasing its services in competition with Qantas. Of course it could have all been a coincidence.

But instead of walking away and wiping its hands of Australia after being unceremoniously rejected two years ago (which it first found by reading the local press), Qatar has doubled down on its bet and won.

The Australian understands the Middle East carrier paid $1bn to buy the 25 per cent of Virgin from US private equity firm Bain Capital. Not a bad return for a PE firm that snapped up 93.5 per cent of the collapsed airline from administrators in 2020 for $731m in equity.

To be fair to the government, this deal comes with conditions that weren’t part of the knocked back 2023 deal. It should be great news for jobs in the tourism sector and the two airlines predict it will provide a $3bn boost to the Australian economy over five years.

It should also be good for Australian Virgin staff too as their airline is now expanding internationally.

This time, as a co-owner, Qatar has promised to second 20 Virgin pilots and 40 cabin crew in Doha in 2025 to gain long-haul flying experience, while creating at least 60 backfill positions in Australia.

Its 28 extra weekly flights will be done through a wet lease agreement where they are sold as Virgin flights — as opposed to simple codeshare — even though they are done on Qatar metal. The wet lease agreement has a cap of five years and after this time Virgin should theoretically start flying those routes itself.

This deal also means an Australian airline is the one benefiting from the international expansion (albeit it is now US-owned).

But that probably won’t be for long. Regulations dictate that Australia-based airlines who want to enjoy the nation’s bilateral air services agreements (flying rights) with other countries need to be 51 per cent domestically owned. The same is not true for domestic airlines, which have no foreign ownership caps.

(The exception to this is Qantas which is restricted via the Qantas Sale Act.)

Behind the scenes, Virgin is already set up with a legal structure that technically sees the international arm being 51 per cent Australian owned and 49 per cent foreign owned through various blind trusts.

The so-called “Rutherford Structure” was set up under former Virgin chief executive John Borghetti more than a decade ago with all the necessary regulatory approvals, to allow airlines such as Middle East carrier Etihad to buy a stake and Richard Branson’s Virgin Group to retain a shareholding.

When US-based Bain purchased the airline it was careful to retain this company arrangement. As a result, Virgin already has two separate boards for its domestic and international units.

Clearly Bain is now a seller, and while Qatar is often happy with minority investments in other airlines, it is likely to want to control who that buyer may be.

Bain’s stake was supposed to be reduced through an initial public offering last year but the markets for new equity collapsed and remain volatile to this day.

Given the premium Qatar paid for a quarter stake in the whole business, having it take out the remainder of its shares may be easier and more profitable.

Under this arrangement, Qatar may first move to buy another 24 per cent of the airline, which leaves Bain as the largest shareholder, with Virgin Group and Queensland Investment Corp also retaining their minor stakes.

The Australian domestic market is attractive because the Sydney — Melbourne — Brisbane routes are among the most profitable in the world.

Currently Qantas Group dominates this market, accounting for the vast majority of high-yielding corporate and public servant flyers on its Qantas-branded airline, and taking the bulk of the low-cost market through Jetstar.

Virgin sits in the middle of the two and at times runs a profitable airline.

In fact, it’s expected to announce a record profit in coming days, and could be dramatically bolstered by having a wealthy Middle East airline as an owner.

The domestic market is littered with the carcasses of failed airlines but most of these have either lacked the appropriated aircraft (Rex) or the money (Bonza, Impulse, Tiger, etc) to put up a long-haul fight with the giant in the room, Qantas.

Qatar has both the money and the patience to make it work.

Originally published as Albanese’s flawed blocking of Qatar in 2023 paves the way for bigger Virgin takeover