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| Buckle up and fold away your tray table because Virgin Australia ($VGN) is set for take-off. Australia’s second largest airline is relisting on the ASX on June 24 following an IPO that raised $685m at an issue price of $2.90 a share. It’ll hit the ASX with a market cap of $2.3b. It’s been a turbulent five years for Virgin. Launched as Virgin Blue in 2000, it fell into voluntary administration in 2020 - a rough landing for an airline that became Qantas’ main rival following the collapse of Ansett. Private equity firm Bain Capital acquired the airline and bolstered its finances: cutting unprofitable routes, simplifying the fleet, and paring underperforming assets. Qatar Airways is now a partner with a 23% stake. This deal allows long-haul flights and access to a major hub in Doha under a ‘wet lease’ Investors will soon find out if Bain’s transformation sets Virgin up for success as a listed company against Qantas ($QAN) and its discount subsidiary Jetstar. As it prepares to take flight, Virgin Australia enjoys tailwinds from a strong domestic travel market, though a rising oil price will need to be watched. |
| FLIGHT PATH |
| Virgin Australia operates more than 100 aircraft on 76 routes to 38 destinations across its domestic and short-haul international business. The company also operates a charter business that services the mining industry in Western Australia. The domestic aviation market is the main battleground. Virgin’s 32% market share comes from premium leisure, small business and value conscious corporate customers. Qantas’s 38% is thanks to big corporate and government contracts. Jetstar’s 25% share comes from budget leisure travellers. In 2024, domestic aviation generated $19.6b in revenue - a sizable and unique market shaped by vast distances, limited rail alternatives, and just three major players. The Sydney–Melbourne–Brisbane ‘Golden Triangle’ remains one of the world’s busiest corridors. Between 2000 and 2024, passenger kilometres outpaced GDP growth: up 3.2% annually vs 2.7%. Naturally, Virgin Australia is eyeing a bigger slice. But it’s not all about planes: it’s also about loyalty. Virgin’s Velocity Rewards is one of the biggest loyalty programs in Australia with 13m members. It boosts customer stickiness, drives repeat sales, and enables targeted pricing, which means fuller planes. |
| GAINING ALTITUDE |
| Bain’s turnaround shows in the numbers. Underlying revenue of $5.80b is expected in FY25, up from $5.35b and $5.01b in FY24 and FY23 respectively. Underlying net profit is forecast at $331m in FY25, up from $259m and $223m in the prior two years. Passengers carried are expected to hit 20.8m in FY25, up from 19.2m in FY24. Better still, Virgin reckons its three core customer segments generate fares 20% to 50% higher than those paid by budget travellers. Jet fuel is a cost to watch, as are oil prices. Virgin spent $1.1b on fuel in 2024 but it hedges to cushion the impact of oil price swings. A US$10 change in Brent can shift FY25 net profit by $2m down or $9m up. CEO Dave Emerson is focused on margin uplift. Virgin expects $950m in benefits from its Transformation Program by end-2026. Half is expected from revenue initiatives, 45% from cost savings and 5% from Velocity. Underlying net profit margin is expected to rise to 5.7% in FY25 from 4.8% in FY24. Velocity is a high margin and cash generating business: its EBIT margin was 28.2% in FY24. The beauty of Velocity is that it receives cash upfront when points are issued, allowing it to generate investment revenue on that cash. It contributed 7% of underlying revenue and 23% of underlying EBIT in FY24. Competition is an issue to watch. Virgin Australia has signalled it wants rational fare pricing. That’s code for it being happy to take the middle market while Qantas takes the top end and Jetstar grabs the budget end. It‘s not clear Qantas is listening: it recently shut down its Jetstar Asia subsidiary, redeploying aircraft to the domestic market. But Qantas would benefit from avoiding a price war given it needs a major fleet renewal. |
| PREMIUM ECONOMY |
| Bain has timed the IPO well. Travel demand is strong, oil prices are rising but aren’t alarming (yet), and Qantas shares are trading at record highs. Virgin Australia is listing at 7x forecast FY25 profit. That’s a discount to the 10x at which Qantas trades. This makes sense given Qantas’ strength in the domestic market. One analyst thinks the stock is overvalued citing competition and exposure to oil prices. Bain is selling down its stake from 70% to 39.4% with investors in the IPO owning 30%. But the private equity track record on IPOs is patchy. Escrow terms mean no further sell-down until FY26, which might offer some comfort. Inclusion in the S&P/ASX 300 Index should also drive buying from ETFs and fund managers - a smart move from Bain. |
| LIFT OFF |
| Virgin Australia’s return to the ASX gives investors another choice when it comes to aviation stocks. The IPO coincides with a strong travel market. But potential headwinds from a rising oil price and a big rival keen to protect its market share will determine whether or not Virgin Australia flies high or hits turbulence. Stake....Under the Spotlight |
