Manoeuvring continues as Patrick Corporation, Virgin Blue's largest shareholder, bids for control of the Australian low-cost airline.
Patrick, which already owns 45%, made an offer to buy all of Virgin Blue's shares shortly after the airline issued a profit warning that prompted a plunge in its share price. Most analysts believe that price drop motivated Patrick's bid. They also suspect Patrick is interested mainly in gaining majority control, but is required under Australian law to bid for all shares because it needs to buy more than 3% to reach that majority.
Patrick denies any desire to displace Virgin Blue's management. Explaining the bid, Chris Corrigan, Patrick's president, publicly praises Brett Godfrey, the airline's chief executive, for "a fantastic job" in bringing Virgin Blue to where it is. But Corrigan also cites concerns about Virgin Blue's response to low-cost rival, JetStar, a Qantas division.
"Qantas has essentially surrounded us," Corrigan complains. "They've got a lower-cost – certainly lower-fare – service offering at one end, and a higher-service, higher-fare offering at the other end. We're caught in the middle. "Corrigan claims that Virgin Blue must attract more higher-yield traffic. One option is a frequent flyer programme. Patrick also wants Virgin Blue to focus more on Australia and less on such off-shore projects as a joint venture with Macau or Samoa, or a proposed transpacific service.
Sir Richard Branson's Virgin Group, which owned less that 25% of Virgin Blue at the time of Patrick's bid, is reacting coolly. Branson's first response was to buy more shares at open market prices higher than Patrick's offer in a legal ploy designed to force Patrick to raise its bid. That would have cost Patrick another A$93 million ($72 million) on top of the A$1.1 billion it has already offered. But securities regulators have rejected Branson's view of the law on this point.
The fall in Virgin Blue's share price that triggered Patrick's bid came after the airline issued a profit warning for its financial year ending in March. It predicted its profit would be 10-15% lower than last year. Loads had been down most of the year after Virgin Blue boosted capacity in response to low-cost rival JetStar. Virgin had expected demand to catch up with capacity by the end of 2004, but it did not and that prompted the profit warning.
Yet, analysts claim that Virgin Blue still has long term value. Based on such views, the share price has recovered much of what it lost, leaving Patrick's bid below the current market price. Observers now speculate that Patrick will be forced to raise its bid. So far, there are no signs of a counter offer from Branson, while Singapore Airlines, which some thought might enter the fray, insists it is not interested.
Regardless of whether Patrick succeeds, the exercise is certain to focus Virgin Blue's management more on how to boost its competitive position against Qantas and JetStar.
DAVID KNIBB SEATTLE
Source: Airline Business
