Virgin's Branson Starts Talk to Set Up Budget Airline In Asia Media Man Australia

Virgin's Branson Starts Talk to Set Up Budget Airline In Asia - 10th Dec 2004
(Credit: Bloomberg)

Richard Branson, who turned a A$10 million ($7.5 million) investment in Australia's Virgin Blue into a discount airline valued at A$2.8 billion, says he's eyeing other Asian nations to replicate his carrier's success.

``We are in discussions with one or two people about either working with them on a low-cost airline they have already set up or setting up a low-cost airline,'' Branson said in a televised interview with Bloomberg News in Sydney. He predicted a decision in three to six months.

Branson is entering a market where discount carriers are starting to flourish as governments relax traffic agreements to revive tourism after this year's outbreak of the SARS virus. He has also short-listed five U.S. cities as the base for a discount carrier called Virgin USA, prompting California governor Arnold Schwarzenegger to lobby on behalf of Los Angeles.

The focus on new markets comes after Virgin Express in Europe cut its fleet to 13 aircraft from 23. Price competition and travelers' concerns about the threat of terrorism caused profit at the airline to plunge 96 percent in the second quarter.

``I would be hesitant to throw my hands up in the air just because Richard Branson said he might do something -- he has had mixed success,'' said Mark Webb, an analyst at HSBC Securities in Hong Kong. ``Any country with a large domestic market and leisure market provides prospects. There are already low-cost carriers in Thailand, Indonesia and the Philippines.''

Since starting services three years ago with two planes, Virgin grabbed 30 percent of the Australian domestic market and will challenge Qantas Airways Ltd. on international flights next month. Branson's company has earned about A$750 million from its investment in Virgin Blue Holdings Ltd., including A$250 million from the initial share sale on Monday.

Partners

Potential partners in Asia may include Tony Fernandes, who plans to sell a third of his AirAsia Sdn. next year to raise as much as $300 million. The Malaysian-based discount carrier plans to more than double its fleet of nine Boeing Co. 737 aircraft to 20 by June next year.

Singapore Airlines Ltd. yesterday announced plans to set up Tiger Airways, a low-cost airline, with the island state's investment arm, Temasek Holdings Pte, Irelandia Investments, a stakeholder in Dublin-based discount airline Ryanair Holdings Plc, and another partner.

Thai Airways International Pcl is also considering a discount unit. Orient Thai Airlines Co., a privately owned carrier, this month announced a new unit to offer both domestic flights and routes linking Thailand and Malaysia. Other low cost carriers include Manila-based Cebu Pacific Air Inc., a unit of JG Summit Holdings Inc., and Lion Air in Indonesia.

Branson is unlikely to select airline hubs such as Hong Kong or Singapore, because of their high costs and small domestic markets, Webb said. Entering China may be hard because of regulations governing foreign investment.

He will probably avoid competing with Virgin Atlantic Airways, the No. 2 U.K. full-service carrier that's 51 percent owned by Virgin and 49 percent owned by Singapore Airlines Ltd, which offers long-distance flights in Asia.

`Most Successful' Investments

Virgin Blue's stock has risen 12 percent from its A$2.25 IPO price since trading started Monday, valuing Virgin Group's remaining 25 percent stake at A$700 million. Branson last year sold a 50 percent stake in the airline to Australian transport company Patrick Corp. for A$500 million. Patrick has retained a 45 percent stake in the carrier.

``Virgin Blue certainly must be one of our most successful'' investments, Branson said. ``There are other investments where we have managed to create that sort of value, like mobile phones, but it has taken longer'' than three years.

Some of the Virgin Blue money may be used to expand other Virgin companies, such as Virgin USA and a Canadian cell-phone provider, Branson said. ``We have lots of hungry mouths all over the world,'' he said.

In Australia, Branson said he's looking at the banking and radio industries for expansion. Virgin Money this year started offering a credit card in Australia in partnership with Westpac Banking Corp. In June, Australia's broadcasting regulator said it will sell radio licenses in the country's four biggest cities.

Virgin USA

Virgin USA aims to emulate the success of carriers such as JetBlue Airways Corp. and Southwest Airlines Co. They have remained profitable since 2001, when the Sept. 11 attacks on the World Trade Center worsened an air-travel slump.

Branson said last month he plans to invest about $200 million with partners to set up a low-cost airline in the U.S. next year, deliberately avoiding routes served by those two airlines.

``I got into trouble because Arnold Schwarzenegger has been campaigning to get us into Los Angeles and, of course, that has hit the headlines,'' Branson said. ``But we haven't actually settled on any particular city at the moment.''

Qantas Price War

Virgin Blue will use some proceeds from the A$666 million share sale to boost its reach. Its Pacific Blue unit will start flying between New Zealand and Australia in January, and it plans to add flights to Fiji and New Caledonia.

The company also is girding for a price war with Qantas, which has set up its own discount unit, Jetstar, to challenge Virgin Blue.

Qantas Chief Executive Geoff Dixon last week said Jetstar, which will start flying in May, will offer the cheapest fares in Australia. ``We will be price-setters in both ends of the market,'' Dixon said after announcing the purchase of 23 Airbus A320 aircraft for Jetstar.

Branson doesn't agree. ``We are so well capitalized now that we could last twice as long as Qantas could last in a price war,'' he said. ``It would be unwise for them to attempt to damage through a straightforward price war.''

Branson said Jetstar is more of a challenge for Qantas than it would be for Virgin Blue. ``The danger for Qantas is that it would bastardize their own airline,'' he said. ``If they are really going to try to get the cost down to Virgin Blue's levels, the quality may not be as good.''

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