Sir Richard Branson's decision to sell half of Virgin Blue to Australian transport giant, Patrick Corporation, raises as many questions as it answers, especially over the carrier's ability to stick to its low-cost model as rapid expansion beckons.
The two companies first considered an equity link last November when they bid to buy Ansett assets. Administrators turned them down and the Virgin-Patrick deal went into limbo. But after Ansett collapsed and its assets became available again, Virgin and Patrick renewed talks.
Patrick has agreed to buy half of Virgin Blue for A$260 million ($136 million), plus a premium based on Virgin's performance over the next three years. How much of this payment will be for shares versus added capital now depends on what Ansett assets Virgin can buy and at what price.
Armed with this backing, Virgin has entered serious talks with administrators about Ansett's maintenance base and other assets, notably four terminals in eastern Australia, although not its Sydney terminal for the time being. Virgin insists it will buy the Sydney terminal only at the right price. But now that Ansett's demise makes it Australia's number two airline, and Patrick sees it as the missing link in its transport empire, Virgin looks likely to end up in the Sydney terminal. The airline is also closer to acquiring from 30-40 additional aircraft as it seeks to boost still further its Australian market share. A mixed order of leased and purchased aircraft will be placed in the next three months.
Patrick's 50% stake also will make Virgin Blue an Australian airline, entitling it to fly to and within New Zealand and to apply for other international routes. Some also see Patrick's connections in Canberra as a plus.
But questions loom over the effect of Patrick on Virgin's business model as a discount airline. If it moves into high rent terminals and starts carrying air cargo, it will lose some of the cost advantage that now shields it from rival Qantas. In addition, Patrick's purchase poses questions about Virgin's plans for a public flotation. Some analysts see its investment as a form of interim financing that will allow both Patrick and Branson to profit if Virgin Blue eventually does goes public.
Source: Airline Business
