The Australian Financial It was always going to be an eventful day for Virgin Airlines as it returned to the stock market on Tuesday, but no one predicted it will be this dramatic.

Israel's Defense minister has acknowledged that they have carried out strikes against Iran, the first time in month of Iran.

Fired two waves of missiles overnight towards Israel.

The United States as dramatically entered Israel's war against Iran.

News of the temporary closure of Katari airspace threatened to overshadow Virgin's float.

In the days leading up to its listing, Israel and Iran traded missiles and the US entered the fray.

The prospect of a broader conflict and a spike in fuel prices was not good news for the airline industry.

But then suddenly, on Tuesday, the conflict deescalated and there was talk of a ceasefire.

Time for a relieved Virgin CEO Dave Emerson to ring the bell.

Investors are buying Virgin shares today as the airline goes public in one of the most hotly anticipated floats.

In a strong result, Virgin's shares jumped eleven percent on the first day of trading.

But now the airline must stay on track and ensure history doesn't repeat.

There's just something about airlines, There's something about aviation executives is so tempting for these guys to expand and try and compete with the likes of Quantas.

Welcome to the Finn.

I'm Lisa Murray.

This week, senior reporter Aisha decrets Her and chanticlear columnist Anthony McDonald on Virgin's way back to the market, why it could struggle to stay in its lane, and whether Australia can ever sustain more than two airlines.

It's Thursday, June twenty six.

Hi Aisha, Hi, and thanks for coming on the podcast.

Thanks for having us, Lisa.

Thanks Lisa.

And when a company lists on the AOSX, it's usually an exciting day, but Virgin's IPO was particularly dramatic on Tuesday.

Its executives were up in the early hours of the morning dealing with the diversion of flights following Iran's decision to launch missiles at a US base in Qatar, But the day ended well.

How would you rate Virgin's return to.

The market, Lisa, This was in the hands of the gods, and the gods.

Smiled, so so much could have gone wrong, Like Virgin did well to raise at six hundred and eighty five million dollars for its IPO, but that was three weeks ago, Lisa, like so much has happened in the past three weeks, so much that could have really impacted investor's sentiment.

And how would trade on listing.

You know, you had Israel and Iran and the US bombing Iran, the oil price spike every the weekend, the threat of retaliation strikes like at worst could have sunk the float.

Lisa, like Bayan might have had to have pulled this float.

I mean, at best, you would have thought it would scare off some investors and the stock would trade down, But almost miraculously, the whole thing calmed down Monday night in the US right ahead of the listing on Tuesday morning austral In time, Trump was even talking about a ceasefire in the Middle East, which is something that we certainly didn't see coming.

And by midday when it was time to list, the market's mood was risk on.

Investors were keen to by stocks, and Virgin landed in smooth markets.

It opened up seven and a half percent and held those gains for most of its first day.

Now normal times, Lisa, you'd say that's a solid debut.

It's nothing miraculous, But given what the market conditions were like, given what's been happening in the Middle East, you'd say it's a remarkable daboot.

And before we get to what happens next, take us back to mid two thousand when the airline launched as Virgin Blue in a marketing blitz led by Richard Branson.

How did Virgin secure its place in the Australian aviation market.

They launched with a mystery flight to Marichid of all places.

At the time, it was called Virgin Blue because its first planes were red and blue is the Australians saying for redhead now at least.

It started services in August two thousand, in the lead up to the Sydney Olympics.

Set up by Branson and Brett Godfrey, based in Brisbane as a low cost carrier.

At first it had only two planes, but then in September two thousand and one.

When the last flight touched down in Sydney this morning, Ansets passed into aviation history.

Antet Australia, which was the number two airline in Australia.

It collapsed and Virgin all of a sudden became the second biggest airline now.

It's I'm say Virgin contributed to the collapse of Inset because it had turned down and off from Singapore Airlines an Anset to buy Virgin and Branson he actually called a press conference pretending he'd accepted the deal.

Anyway, I'm off to England with my court pavillion dollar check and thank you very much.

Before announcing he was only joking and ripped up the check.

I'm just joking.

It's pitch was there was younger, funer and less expensive than quantious.

It did widespread marketing or.

Richard Branson will launch an assault on the Australian domestic travel market this morning, rebranding Virgin Blue as Virgin Australia.

The big sort of change came in twenty eleven when it rebranded as Virgin Australia.

What we're building here is an airline that he still has very competitive airfares, but he's also very competitive at the front end of the aircraft.

To try and move the company on from its low cost Virgin Blue roots.

It became a more full service airline and started targeting business flight.

Virgin Australia has a new strategy and its rivalry with Quantus.

It's unveiled a luxury aircraft for use on domestic roots Now.

Twenty fourteen, Virgin bought Tiger Airways, an airline you might remember now.

It was sort of copying Quantus, which had launched Jetstar as a low cost carrier to try and keep Virgin Blue out of the market.

And Virgin at the time was run by a guy called John Borghetti.

There is an alternative now and it is for the first time in over a decade, in fact, sinceanst stopped playing Did you have a two carriers now that can serve us all elements of the market.

It was trying to take on Quantas that was spending lots of money on lounge's furniture, business class flights, all this costly sort of premium stuff.

And that's because there was a bit of rivalry between Borghetti and Alan Joyce, who was running Quantus.

Virgin chief executive John Borghetti took over Virgin after being post over for the top job at Quantus three years ago.

They both worked at quantas Joyce had won the CEO spot and Borghetti went Virgin, and he decided to take them on.

John Borghetti, how satisfying is it to get this job given you missed out on the CEO role at Quantus.

I think this job is an incredible opportunity and one that I'm looking forward to very much, irrespective of any other job.

As part of it, Virgin built a frequent fly business called Velocity.

At one stage it even sold a stake and it's private equity, and then brought that stake back using a lot of debt, closed borders and grounded planes.

The coronavirus pandemic has the airline industry facing the worst crisis in its history.

So by that time the pandemic struck in early twenty twenty, Virgin all of a sudden had lots of debt as planes were in the sky, and the whole thing went into administration.

I share all airlines were grounded by COVID.

Why was Virgin affected more than other airlines and how did it manage to turn the business around?

So I think his aunt mentioned had just had too much debt.

More than five billion dollars had been racked up, and I think the recriminations can fly over who acquired all of that debt and on what and whether it was useful.

Some people would say that chasing quantas and trying to be premium was a good strategy.

Others would say buying the stake in Velocity back at the wrong time meant that Virgin tipped into administration.

So people can kind of argue over what was the straw that broke the Campbell's back.

But I think what we can say is that the foreign shareholders that sat on Virgin's register, which were Singapore Airlines, Eddie had China's nan Chan Group, all owned about twenty percent each, and they sort of weren't the most useful of shareholders because all state owned, they didn't have necessarily shareholder profits at the heart of what they did, and they all had a different strategic plan for Virgin.

The airline had to temporarily stand down about eight thousand of its workers while borders were shut during that pandemic.

Virgin Ground did eight thousand people now out of work.

It is what it is done, it is what it is.

We're all in this together.

There's nothing we could do.

Paul S Garret, the CEO who did buy back that stake in Velocity.

He'd asked the government, Morrison government for a one point four billion dollar loan.

There was an enormous man of estort Peter to try and get the support from the federal government.

And look, it was their decision and we respect that decision because of the effort we put in.

It felt a little bit disappointing, but there.

Was a bit of lobbying behind the scenes by a number of players, including Quantis and ultimately Scott Morrison and Josh Fredenberg, who was the Treasurer at the time.

They went for a market based solution that was proposed by Nicholas More, the former CEO of Macquarie, who said that actually allowing the airline to tip into administration was a better kind of option and letting the market find a solution so very much.

The imperative from Moore and others at the time was to make sure that whatever happened coming out of the pandemic, there was still a strong competitor Aquantas.

So what happened was Deloitte was appointed as the administrator.

Virgin's the biggest casualty so far as COVID nineteen ricks havoc on Australia's locked down economy.

There was a sale process run and in the end it was US private equity firm Bank Capital that won to rescue Virgin out of administration.

Private equity fund Bain Capital looks set to become the new owner of Virgin Australia after New York hedge fund Cyrus Capital Partners withdrew its offer.

They sacked three thousand staff and they really bought an airline that had halved the number of aircraft and renegotiated hundreds of contracts to reset its cost base.

And former CEO Jane Hrdlicka came on board once Bain took over.

How much credit can she take for the turnaround and why didn't she take the airline all the way to the IPO.

Jane used to work for Baane and Company.

That's the management consulting arm that's the sister company to Baane Private Equity, and there's a lot of crossover between the two.

They know her, she knows them.

She was involved in this from the start before Virgin collapsed.

When Bain Private Equity opened its file, they pretty quickly got her on.

She used to work for Jetstar.

She knows airlines she knows Bain and she was available.

She's quite dogged, she's well known in the market, she's got a particular style, and they thought this is someone who can really be involved in the turnaround with us.

It was a bit controversial at the time because Jane can be a divisive character, but she can also be quite effective at what she does.

Virgin, as I just said, was run by a blake called Paul Scurra.

It was sort of widely anticipated that he would continue to run Virgin under Baine's ownership, but pretty much as soon as Baine got the keys, they threw them over to Jane and said do your best.

Yeah.

There was always this tension though, I think, and between Scurr's plan for the airline, which was to ke keep it internationally focused, to keep it as a competitor Aquantus on more levels, and what Bain and Herloko wanted to do, which was keep this a very low cost, more domestically focused the airline that wasn't flying long haul international anymore.

So Bain's turn around under Jane it was a bit of good management.

It's some good luck.

I mean, they used the administration framework and the laws around it to completely reset the airline, get rid of aircraft's, renegotiate contracts, refine the customer proposition, change the routes it flies like.

In meetings with investors in April, it told them it had changed five hundred contracts since it first went into administration, which is a huge number, Lisa, and it saved a lot of money.

So Bain then has the airline after the pandemic.

I mean the sector was always going to bounce back.

It took a while.

Remember that the lockdowns lasted through twenty twenty, twenty twenty one.

They were on and off.

But then this revenge travel boomed.

People were sitting on savings.

The flood gates really opened.

Aline capacity was lower, and so if you did have a plane with seats on it, prices were up and you were laughing right at the same time, Lisa.

Quantas, which is undisputably Australia's biggest airline, number one, it's got two thirds of the domestic market, it shot itself in the foot.

You know.

It's customers were raging against flight cancelations, COVID credits, lots, baggage, all this basic customer service stuff that Quantus either forgot, how to do during the pandemic, or just wasn't set up to do anymore.

It's brand plummeted in the rankings, while Virgins, which looked a bit more sensible and had its act together, perhaps was easier because it was smaller, It's rose up as a result.

Now, through it all, Virgin created a new lane for itself and it stayed in it.

Jane's an absolute force.

She did a good job in firing up the Virgin's staff, getting deals done with unions, even locking in guitar airways as big shareholders.

But the problem is Lisa that investors were a bit wary of her.

She wasn't the one to take it to the IPO.

She did a lot of the heavy lifting, a lot of the prep work, got this turnaround on track and sort of helped design it.

But she wasn't the one ringing in the bell at the ASEX on Tuesday.

And you have to ask why, And it's just because the investors did push back against her.

Bain realized that, so they replaced Jane with another Bayin and Company former consultant called Dave Emerson.

I mean, he has also been involved in the turnaround for a few years now.

And the message that he's been selling to investors is that Virgin has found its lane.

It's a third of the domestic aviation market.

You've got Conscious above it, you've got jet Star below it.

Virgin's just in the middle, making pretty good, middling sort of margins from everyday business customers and holiday makers.

At least, it's a nice little lane to swim in.

Now.

The problem is Virgin's been in a nice little lane before.

Remember it was the budget carry out I was doing reasonably well.

There's just something about airlines.

There's something about aviation executives that avgas can go to their heads and it's just so tempting them to go up market, to have business class flash lounges, so tempting for these guys to expand and try and compete with the likes of Quantus.

So you have to wonder whether Virgin will be able to stay in its lane long term.

I share.

We're talking about Virgin Airlines, which floated on the Stock Exchange on Tuesday after managing an impressive comeback from its collapse during the pandemic.

What's the outlook for Virgin?

Will it stay in its lane or do you think like Ant says it might try and take on Quantus and at some point upset the state of play in the aviation market.

I think it's very that Virgin has told investors that it knows its place.

It wants to be the great second airline in Australia and it's very comfortable doing that.

It's a very very profitable place to.

Be right now.

So the outlook right now is helped by very very solid domestic aviation industry.

Australia is unique in having only two airlines at the moment.

You know, the Regional Express that tried to take on Virgin and Quantus on capital city routes and ended up in its own administration process.

We also saw discount airline Bonser that came and tried also failed within a year.

So I think when it comes to staying in your lane, the thing that always happens, and you know, we can say that it's a market for two airlines until we're blue in the face.

There will always be a third competitor that comes and goes.

You know, whether they last for more than twelve months is another story, but someone will try and I think at that point that's when airlines need to decide what is going to be your proposition, and I think that one of the things Virgin has emphasized as a point of growth as it goes to investors with a growth story is that the Velocity frequent flyer program will grow.

Now, growing your frequent flyer program when you don't have a long and big international network like Quantus is quite challenging.

Do people want to be part of a frequent flyer network where you can redeem on flights from Melbourne to Sydney or to the Gold Coast versus going to London or flying business class life flat to New York.

Probably not.

It's a less attractive proposition, So there will always be the temptation to get back into long haul.

The problem is scale, So getting new planes to be able to fly enough to make your network a genuine competitor to Quantus is going to take a long time.

You know, right now we're seeing uncertain fuel prices with what's happening in the Middle East.

There are a lot of unknowns in the market, and that's always the case with aviation.

But I think we can be sure of you kind of two things.

One that a third competitor will spring up, and two, as ant says that at some point they'll get ambitions to.

Grow at least a Virgin's time.

That's float quite nicely.

I mean, Bain did get lucky.

It's taken a couple of years of IPO preparations for it to get its ducks in line here and relist the business.

The domestic aviation industry backdop just sort of got better and better in that time.

And if you're buying Virgin shares now, you have to ask, is this as good as it gets for the industry.

If so, is Virgin doing anything internally to increase its margins to be more robust and a better position.

Should should the industry not be as good as it is now in the future.

I mean there's always skepticism buying shares of private equity, and that's healthy.

You know, Bain's made truckloads of money or ready from Virgin.

It's probably made three or four times the amount of money put into it, and it's still going to own thirty nine percent of the listed Virgin.

As far as private equity stories go, I'd say this is a good one.

You know, it's a financial investment that's stepped up in a tough period, took risk oversur sensible turn around story.

But now, of course it's private equity and it's trying to get some bang for its buck.

It's trying to make money and to do that it is selling shares to ordinary Australian investors, to super funds, to institutional investors, basically anyone that can Baine picked this up at the bottom.

It's now floating it is it floating at the top?

If not, where's the top?

And what Convergent do between now and then?

I think that that's a good question ed.

But they have said that they still have costs that they can keep on eliminating.

They say the five years behind Quantus when it comes to taking some of those transformation challenges around it, around how they sell tickets, how they do a lot of things.

So they see that there is still growth that they can make through just you know, continuous improvements and incremental kind of revenue and margin improvement that probably isn't there for Quantus.

So Aisha, then what does all this mean for the consumer and the cost of air travel?

You mentioned before fuel prices and the impact that the uncertainty in the Middle East is having.

What does that mean for the traveler?

I think what we can see from the Australian domestic market is that having two competitors only in aviation is not great for the consumer.

We're in a domestic aviation market where we've seen the price of airfares between Melbourne and Sydney routinely hit over one thousand dollars.

We've had periods where loads on planes have been over ninety percent full, which is historically unheard of.

So I think unfortunately for consumers, this probably isn't going to be a great thing.

Those incremental improvements will be passed on to investors.

If fuel prices spike, virgins hedged for six months out, so you know, the impact for investors will be minimal, but they do pass on the impact of higher fuel prices in fuel surcharges that are charged to consumers, So you know, as geopolitical tensions ratchet up, you should probably be prepared to pay a little bit more for your.

And the market hasn't had very many big floats in recent years.

We've talked a lot about the shrinking of the ax What does the virgin IPO mean for the local stock market?

This is a good news story for ax LESA like this is Virgin coming home.

There is no other owner for it.

Airlines globally are either owned by countries themselves or they're listed.

So yeah, this is good.

It comes for an AX the time when it needs more listings.

Public markets globally they are shrinking.

The asex is shrinking.

If you look at the number and the value of companies that are coming off the AX, you know, companies that are being bought by private equity or super funds or sovereign wealth investors or whatever.

The vary of those companies is much more than what's coming back through IPOs.

So this has been a big shift for Australia and for Australians, And at least the public markets have been so great for ordinary Australians for their super fund balancers and as direct investors.

We're all trying to work out where the private markets, you know that's private equity and the like, whether they can be so good for ordinary Australians assex trying to work this out as well.

And while it does that, it's tanking with the listing rules to try and encourage more IPOs.

But Lisa Virgin showed is you can get an IPO done.

There are buyers for shares, you just need the right story, the right structure and the right price.

I think this IPO just shows like, look at what they've been through.

They started these talks with investors before Trump went crazy on tariffs, so you know they've come through a monumental period in history to get this to market.

It shows the strength of the domestic Australian aviation market.

A final question for both of you, then, how will Virgin go from here?

And is Australia's domestic aviation sector destined to be a.

Duopoly for the foreseeable future.

Absolutely, Lisa Australia.

I don't think it's just not big enough for a big third player.

We've seen others try and fail.

Look at Rex recently, look at Bonza.

Australia's even too small sometimes for a second viable airline.

We had Virgin go bust, we had Anset go bust.

Yes, they're in wobbly markets, but it just shows you how hard it is to run a decent sized scale network in Australia, which I think makes it really hard to see a third player coming in and really sticking it to Quantus and Virgin.

That means I think we'll be a two airline town for a while yet.

And Lisa, that's actually similar to what Australia is like in a lot of other industries as well.

Look at supermarkets, we've got Woolworths and Coals.

Look at department stores it's Meyer and David Jones.

Look at energy it's agl and Origin.

Australia is a country of jeopolis and it's hard to see airlines being any different.

I think no matter what we say, whether it's rational or not, there will always be a third airline.

I think I disagree with you on this point ed.

History has shown us that someone will always try to challenge contestant Virgin.

They see this market as being big enough, but you do need the scale, and I think that that means that it will take a little bit of time before we get that third competitor.

And you know, conditions are really ripe for Virgin.

In the interim, I think the investors have appetite for this.

IPO has been really strong, and that's a testament to the fact that we know that no big competitor is coming to take these guys on for at least the next few years.

Thanks and thanks Aischa.

Thanks for having us.

Lisa Thanks Lisa, Thank you for listening to The Finn.

I'm Lisa Murray, with senior reporter Aisha Decretza and Chanticleer columnist Anthony McDonald joining the podcast today.

The Finn is produced by Alex gu with assistance from Mandy Coolan.

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