In the wake of Virgin Australia’s collapse, there was an assumption that another player would fill the void in the Australian domestic flying landscape. There was also an assumption that Virgin Australia’s administrators would carefully manage the process. Everything would be wrapped up nice and neat.
Could one potential bidder have a back-up plan?
But there are indications one powerful and cashed-up potential bidder has a back-up plan. That plan is simple, legal, and has the potential to turn the local flying landscape on its head.
It is reported that Indigo Partners is looking at acquiring an Australian air operator’s certificate. That would enable them to set up an airline in Australia subject to meeting local regulatory and licensing criteria. Foreign ownership does not impede operating an airline in Australia. However, management does need to be headquartered locally.
They could circumvent the Virgin Australia bidding process entirely, avoiding all the overheads, infrastructure, and responsibilities that come with buying a collapsed airline.
Indigo Partners is a private equity firm focused on low-cost airlines based in Phoenix, Arizona. They own significant stakes in Wizz Air, Frontier Airlines, JetSMART, and Volaris. The founder and managing partner at Indigo Partners is Bill Franke. He’s done spells as Chairman of America West Airlines, Tiger Airways, and Spirit Airlines.
Indigo Partners is one of the biggest buyers of commercial aircraft in the world. They buy big and disperse the planes around their various airlines. In 2019, they had over 600 jets on order.
Peter Harbison, Chairman at the Centre for Aviation told Simple Flying;
“I’ve known Bill Franke and his group for many years. They take a very clinical approach to which markets they enter – or not.”
A long-standing interest in Virgin Australia
It’s no secret that Indigo Partners is interested in Virgin Australia. They made a concerted effort to buy a controlling stake in the airline in late 2018. That bid fell over at the last hurdle when other shareholders raised concerns.
Since Virgin Australia went into voluntary administration two weeks ago, Indigo Partners has re-surfaced as a potential buyer. It is rumored to be linking up with the powerful Macquarie Bank lead consortium.
But the private equity firm is a low-cost-airline specialist. The administrator of Virgin Australia, Deloitte, has a stated preference for re-booting the airline and seeing it back in the skies as a full-service airline, employing most of Virgin Australia’s 10,600 strong workforce and flying the majority of their 130 odd aircraft.
But that’s not the Indigo Partners operating model. Any air operator’s certificate means Indigo Partners could sidestep the Virgin Australia bidding process if they choose to and go it alone in a new market.
“With Indigo’s profile, any entity they’d set up would be fiercely low cost,” said Peter Harbinson.
The entry of an Indigo Partners backed airline would raise some interesting scenarios
That raises an interesting scenario. You’d have the established full-service operator, Qantas, flying in the Australian domestic market. There would be a re-booted Virgin Australia, perhaps called by another name, but trying to gain a foothold in the market. In the low-cost environment, there’s local powerhouse airline Jetstar. And then you’d have the new Indigo Partners backed airline.
Matt Graham of Australian Frequent Flyer thinks the market would present challenges for any new airline. He told Simple Flying;
“In a scenario where Virgin Australia was bought by a party other than Indigo Partners, and the new owners decide to discontinue the Tigerair brand and leave VA as a full-service airline, then a gap in the market could emerge for a third airline – a low-cost carrier – owned by Indigo Partners. This could be a competitor to Jetstar. But they would need to have a very good strategy, and there would likely still be some market saturation.
“If the new VA owner was to discontinue Tigerair and pursue a hybrid model, I think there wouldn’t be much room left for Indigo Partners. You would have a good full-service airline (Qantas), a good LCC (Jetstar), and something in between. Where does that leave Indigo?”
The short odds are on the Tigerair brand being discontinued. A lot will come down to the strategy pursued by a re-booted Virgin Australia, but there is widespread political and market preference for a full-service airline.
Would it be a problem for local low-cost carrier Jetstar?
That would put the Qantas owned Jetstar squarely in Indigo’s competitive sights. Jetstar has the advantages of incumbency, infrastructure, brand recognition, and customer loyalty. But would the lure of ultra-cheap fares and a new Frontier Airlines style model be enough to tempt low-cost flyers away from Jetstar?
A lot of analysts think the generally pampered Australian passengers wouldn’t have a bar of the ultra-low-cost model. I’m not so sure.
Speaking yesterday in Sydney, Qantas CEO Alan Joyce had this to say about what might come in the wake of the Virgin Australia collapse for both Qantas and its subsidiary airlines.
“I have no doubt that there will be challenges and opportunities as Virgin comes out of administration. It’s very clear there will be a competitor, it’s very clear that we will be in a position where we have to adjust and adapt to it.”
It’s an exciting scenario, and it puts a spin on the generally accepted train of thought that a new, albeit a better-managed version of Virgin Australia will arise from the ashes of the current collapse. Things will fly on like before, just more efficiently. But Indigo Partners’ apparent interest in the Australian domestic suggests this may not be the case.
Simple Flying put a series of questions to Indigo Partners. A spokesperson declined to comment.