Virgin Australia IPO steers through Air India crash, war and a rising oil price

Virgin will float in exactly one week, but for a market that’s heard it all before, it may as well be cursed. First the tragic Air India crash, then fears of war in the Middle East.

Virgin is wet leasing Qatar aircraft to resume long-haul flying. Picture: Getty Images

It was not for nothing that former Qantas boss Geoff Dixon coined the phrase “constant shock syndrome,” to describe aviation.

In any other reality, the crash of an Air India Boeing 787 last week for reasons yet to be confirmed would still be front page news.

But it seems like a million years ago. Since then, tensions have boiled over in the Middle East. Israel has attacked Iran, which has responded, and now US President Donald Trump has tweeted that everyone should evacuate Tehran. Oil prices may skyrocket; they rallied 15 per cent last week.

All of these issues could dramatically reshape the aviation industry. At first glance, none are good news for the much delayed attempt to re-float Virgin Australia on the ASX in exactly one week.

Virgin’s majority shareholder Bain Capital would undoubtedly be war-gaming how bad things have to get before it seriously considers pulling the pin again on the initial public offering.

This IPO has been five years in the making and clearly, the US private equity firm wants a significant exit. But wartime is notoriously unfriendly to aviation stocks.

The bookbuild is well priced and has been over-subscribed, but any sharemarket collapse in the first week might perhaps unfairly invite comparisons with Canadian private equity giant Brookfield, whose private hospital business Healthscope is in the hands of receivers.

Virgin underwriters UBS, Goldman Sachs, and Barrenjoey would undoubtedly have a force majeure clause written into their contracts. What that entails is anybody’s guess; attempts to find out were directed to external PR advisers, who couldn’t answer and probably don’t know.

And yet… Virgin is expected to be the biggest Australian IPO in four years, bringing bountiful fees to bankers.

And Bain has been actively working on the float for two and a half years.

Virgin Australia chief executive Dave Emerson.

Strangely enough, these aviation headwinds are proving a positive for Australian airlines.

Things would have to get very bad for Bain to pull the float.

Qantas shares have shed 5 per cent in the past five days but remain close to last month’s record high.

Both Qantas and Virgin are making money in the domestic market hand-over-fist.

Virgin produced underlying earnings of $349m for the full year and Qantas posted underlying earnings of $1.39bn for the half.

Already high margins have improved since the collapse of regional rival Rex, which tried and failed to compete on the Sydney/Melbourne/Brisbane routes considered among the most lucrative in the world.

Now, Virgin is pouring efforts into its branding and customer service proposition. The Brisbane-based airline is expected to have the best on-time performance and lowest cancellations when the official data is released on Monday, the day before the float.

Its prospectus proudly points to its Net Promoter Score (NPS) of 26 as being just ahead of Qantas (on 25, apparently) and dramatically ahead of Qantas’s low-cost unit on -7. NPS tries to gauge customer satisfaction and the likelihood someone would refer the company to a friend.

On Tuesday night the airline was awarded the Skytrax Best Airline Staff Service Australia/Pacific.

The two airlines are likely to keep their free rein and currently rational competitive policies intact for quite some time.

The global anxiety about war in the Middle East and the flow on potential for oil - the biggest cost to airlines - is likely to help deter any potential rivals from trying to enter the market.

The biggest deterrent of all though is the ongoing global aircraft shortage, and it is still unclear if the Air India crash of a B787-800 will have any mechanical consequences for operators of that aircraft.

For Boeing, the answers can’t come soon enough. Boeing was found to be at fault in two separate deadly crashes of B737 Max aircraft in 2018 and 2019, and was lucky there were no fatalities on an Alaska Airlines flight in 2024, where a plug filling an unused emergency exit blew-out midflight.

Investigators are currently evaluating data from the black boxes. At this stage, the most informed speculation centres around pilot fault, bird strike or contaminated fuel.

Virgin currently flies 94 B737s and is expected to take a further 11 in the next year and a half. It wet-leases B777s from part-owner Qatar for its newly launched services to Doha. It does not currently fly any 787s, but those are capable of servicing routes such as Sydney-Doha and up until last week, this aircraft type had never been involved in a fatality.

Qantas flies 14 787-900s, which is a longer-range variant, as well as 75 Boeing 737s and its raft of Airbus aircraft.

Airlines with enough fleet are enjoying not having to pay the kind of prices that come from a lack of supply.

Both Boeing and Airbus have struggled to repair supply chains damaged during the pandemic and which are now significantly hobbled by Trump’s tariff trade war. Both manufacturers build parts for their various aircraft types in multiple countries to show their commitments to those nations when it comes time for aircraft orders.

According to Forecast International, Boeing’s backlog of production now spans 11 years, while Airbus has a slightly better ten years.

“These figures are unusually high, highlighting the ongoing challenges Airbus and Boeing face in ramping up production,” says Forecast International. “With continued uncertainty around tariffs and persistent supply chain constraints, the timeline for scaling up production remains unclear for both manufacturers.”

So lacking is decent new fleet that Qantas’s decision to axe its loss-making Singapore-based low-cost subsidiary, Jetstar Asia, can be viewed as positive as it frees up planes for the airline to use elsewhere.

But bumper conditions in the domestic market have not made Bain, which snapped up Virgin from the administrators in 2020, want to stay owning Virgin in perpetuity.

The private equity firm sold a quarter of its shareholding to Qatar Airways last year for about $1bn and is hoping that nothing happens to derail Virgin’s market re-entry in exactly one week.

Originally published as Virgin Australia IPO steers through Air India crash, war and a rising oil price