It’s not a misconception Mr P. It’s my personal experience and It’s great for you if you experienced otherwise. My experience had been cost cutting for short term gain but not sustainable growth, lack of regard for people and in all the cases I have been involved with ( 4-5) a willingness to understand the finances but not really the business. All that I have been involved with sold within 3 years.
Private equity owners of virgin are likely to reduce routes to large ones only and reduce costs to bring it back to short term viability. What they are unlikely to do is build a true competitor to Qantas which will ultimately mean higher airfares for us.
Ideally it needs an airline investor imo which will be hard these days.
Whilst I tend to agree on some points regarding PE, yes some are just out to cut costs and mask the underlying performance issues in the business but others do strive to improve businesses. In terms of timelines that's exactly what they follow. They want distressed businesses as they buy them relatively cheap, restructure, hive off underperforming assets and bolt new ones one.
In Virgins case and with all due respect, they've already gone down the route of airline investor. There 5 largest shareholders own over 90% of the business, made up of 20% Etihad Airways, 20% Singapore Airlines, 10% Virgin Holdings (Branson) and also 20% from Nanshan Capital and 30% with HNA Tourism both of who have significant investments in airlines throughout Asia mainly through China and Hong Kong. They are already 90% controlled by overseas airlines.
The problem with these airlines, is they provide "services" and "airline leases" to Virgin. These are significant, over $116m / year paid out for these services, yet the International business loses close to $100m / year. Between the International business and the level of financing, they have 2 main areas to fix, the problem is the airline investors they currently have, will not allow them to cut these services as they make more out of the leases and services than they do out of earning any profit in the group (despite the massive tax losses they have carried forward).
What they need is to bin the entire International business, there is no real purpose for it. It loses way too much money and exposes them to the level of debt that they have. The debt will almost certainly be completely restructured whoever buys Virgin, especially with there being a significant amount of debt that is unsecured. They had $1.8bn in unsecured bonds (some of this was only issued end of last year), good luck to any of these investors getting any money back, but overall they need to break the links that they now have with these International airlines which are hamstringing the rest of the business.
The Domestic business is very strong and something which isn't going away, all the media talk that they need to restructure, make it no frills etc is IMO complete crap from people that don't understand the business, they don't need to do this, the Domestic business is very healthy and they are improving on the Tiger business. With that and the $75m cost saving process they are focusing on they have all the tools to turn the business around but the 2 drags on their business need to be fixed. The debt will be fixed by going into administration, it remains to be seen depending on who buys Virgin whether they have the balls to deal with the International business. To be a direct and strong competitor to Qantas they do not need this, they can continue to codeshare potentially with these routes, but more likely IMO if they want to remain in the International business, this should all be done through the Tiger brand and should be low priced, no frills International business without compromising on the higher quality Virgin Domestic business.
Anyway, its all my opinion, but in the attached example, this is exactly the type of work required of a P/E firm. They will review the business and identify that Virgin Domestic is generally a strong business segment, Tiger will support that but the debt, cost saving and International business needs to be addressed.
The most attractive thing to a P/E group is they will be able to take a significant stake in the business for a relatively small sum for most of them, but having taken a large stake it enables a much easier exit strategy. They can over time reduce their holdings as they progressively improve the fortunes of the business. With the level of tax losses and underlying potential of the business they can certainly see a significant ROI and a very strong exit strategy through sales on market etc.