Captain could be in search of an airline

11/05/2020 - 15:12

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Going against the grain is nothing new for iron ore magnate Andrew Forrest.

Captain could be in search of an airline
Virgin’s new owners could be a syndicate of investors, with Andrew Forrest reportedly having expressed interest.

Going against the grain is nothing new for iron ore magnate Andrew Forrest.

If Andrew Forrest did not have the nickname of ‘Twiggy’, he would certainly be entitled to the moniker Captain Courageous.

The obvious reason for awarding Mr Forrest an honorary captaincy is his interest in helping rescue the failed Virgin Australia, a business that needs a new captain in the cockpit.

Another reason is his defence of China over the COVID-19 outbreak in the face of US and Australian government criticism.

Flying solo is nothing new for Mr Forrest and, like all entrepreneurs, sometimes he gets it right and sometimes he gets it wrong.

His big win, and the one that forms the base of his $12 billion fortune, is the iron ore business, which he entered at the right time with the right product.

However, on the way to founding and developing Fortescue Metals Group into one of the world’s leading iron ore producers, Mr Forrest suffered a few rough landings, firstly as a young stockbroker and then as a producer of nickel using a tricky technology that took years to master.

To his credit he persevered, shrugging off failures until he hit the jackpot selling iron ore to a fast-growing China.

The question today is whether Mr Forrest is backing a pair of winners with his suggested entry into aviation and his defence of China, or whether both issues will be added to his list of failed adventures.

On Virgin, it is highly unlikely that anyone who invests in the airline will receive a return on their money in years, and perhaps never, given the history of aviation in Australia.

Public interest in keeping Australia’s number two airline flying is high and there’s a fair chance that state and federal politicians will direct government money, in some form, into the rescue process.

It’s also likely that the new owner of Virgin will be a syndicate consisting of rich investors, private and corporate, and a proven airline operator able to satisfy the testing requirements of air safety regulators.

Set against Virgin and its potential backers is the reality of an industry hit hard by travel restrictions that will struggle to get back into the air (and even if/when it does fly again, it will be a dramatically different business).

The April 30 cover of The Economist magazine neatly summed up the problem for aviation, and a number of other industries, when it referred to the post-coronavirus world as ‘the 90 per cent economy’.

Anyone who runs a business that operates on fine margins, such as retail or aviation, knows that losing 10 per cent of your turnover is profit that just went down the drain.

In retail there is the option of developing an internet solution to sell goods and services that once passed across a counter.

There’s no internet solution in aviation, just a vastly enlarged cost base and customers who have an entirely new reason to suffer from fear of flying.

Attempts to restart aviation are under way, with internal travel in countries that have low levels of coronavirus infection first to get back in the air.

But the limits that seem likely to be applied by health authorities, such as no middle seat and intense screening to eliminate anyone with a cough or sore throat, will add enormously to costs and reduce the appeal of air travel.

While no-one knows precisely how airlines will satisfy strict new health regulations to resume regular services, an even higher hurdle will be demonstrating that, once back in the air, the business is profitable.

Arguably the world’s canniest investor, Warren Buffett doesn’t believe aviation will be a profitable business for years, with his assessment based on the reliable business test of too much spare capacity chasing too few customers.

Last month, as the rescue of Virgin was a topic of speculation in Australia and Mr Forrest held his hand up as an interested party, Mr Buffett was busy selling every airline share owned by the company he runs, Berkshire Hathaway.

On his $US6 billion investment in American Airlines, Delta, Southwest and United Airlines, he said: “It turns out I was wrong.

The airlines business, and I may be wrong, has changed in a very major way.”

The sight of Mr Buffett exiting as Mr Forrest considers a move in the opposite direction is a fascinating comparison because it leads to the obvious question of who’s right.

China cheerleader

A similar question can be asked of Mr Forrest’s defence of China, a country that has helped make him rich but also one that is less a friend of Australia and more a business associate.

By assuming the role of chief China cheerleader, Mr Forrest has clearly stated his view of how the COVID-19 pandemic started, where it started, and what China did to alert the world. In effect, he reckons China deserves praise for its role in what’s happened.

Some people will agree with him but a lot will not, and it is deeply unfortunate that the virus appears to have emanated from the city of Wuhan, which is home to China’s principal virus research facility.

Taking a contrary position to popular opinion and challenging the entrenched belief of rivals is what made Mr Forrest rich, as he rode a tide of high iron ore prices to befuddle BHP and Rio Tinto.

He’s playing the same game today, backing his judgement to argue the case for China being a benign and trustworthy country when the growing view at a political and diplomatic level is the opposite.

Supporting China in an argument with the Australian government (and the opposition) is a courageous stance.

If he wins, and China is cleared of hiding the severity of COVID-19, then Mr Forrest will win big.

If he loses than Captain Courageous might be in for a rough landing.

Cruising confident

If aviation is in trouble then cruising, another industry blamed for the global spread of COVID-19, appears to be getting off lightly.

Very much a love-hate arm of tourism, cruising comes in a number of forms: from small luxury ships that carry a few hundred passengers to mega-carriers.

Whatever the form of cruising, and despite the fact that most of the world’s cruise ships are mothballed while the COVID-19 crisis passes, there are signs that it will burst back to life next year.

According to the German tourism leader Tui Cruises, early bookings indicate that the business will be back to normal in 12 to 18 months.

Half the passengers who had a cruise cancelled this year have already rebooked, Tui says.

Great unknown

It might be a bit harder for another COVID-19 troubled industry to emerge successfully, with early hints that the online lending business, which focuses on people unable to get a bank loan, is starting to experience an outbreak of bad debts.

Seasoned financiers might be inclined to say ‘we told you so’, given online lending defies the basic premise of good business - to know your customer, which is obviously impossible given the two sides of the transaction never meet.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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