Sheer folly to believe Virgin not a cash guzzler
HERE’S a fun fact for anyone who believes the State Government investing hundreds of millions of dollars in an airline is a spiffing idea.
The world’s most famous and successful investor has just done precisely the opposite.
Warren Buffett, known as the “Sage of Omaha” for his investment decisions, this month announced his Berkshire Hathaway company had sold all of its shares in US airlines.
“We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss,” Buffett said. “We will not fund a company … where we think that it is going to chew up money in the future.”
Notably, the four airlines Mr Buffet has turned away from – Delta, American Airlines, Southwest and United – were not in the same level of strife as Virgin Australia. But Mr Buffett has withdrawn his money in any case, arguing that it is far from certain the industry will recover any time soon.
“I don’t know whether, two or three years from now, that as many people will fly as many passenger miles as they did last year,” he said.
“Something that was a low probability event happened and it happened to hurt particularly the travel business, the hotel business, cruise business, theme park business, but the airline business in particular.”
What the world’s sharpest investor was clearly pointing to is the high probability that airlines are stuffed. Even the well run ones.
The airlines’ own trade association, the IATA, agrees, warning air traffic is unlikely to return to normal for three years.
But the Sages of William St appear to know better, desperately hawking a $200 million handout to the four consortia looking to pick meat from the bones of the Virgin carcass.
In one grimly appropriate way, the State Government is the perfect bedfellow for Virgin. Both are entities with an impressive talent for burning through cash.
Virgin has only made a profit once in 10 years, while state debt is hurtling towards $100 billion.
Newly-minted Treasurer Cameron Dick insists the government would not involve itself in the day-to-day running of the airline. However, in return for its investment the government would expect the airline to keep its headquarters in Brisbane, and continue to fly loss-making routes to regional Queensland.
The latter condition would make it doubly hard for a resurrected Virgin to ever turn a profit.
If successful in its bid to take a stake, it is important to realise that $200 million may not be the end of the matter. The government would be creating a headache for future ministers which would likely see the public purse further drained. As Mr Buffet said, airlines are likely to continue “chewing up” money in future. Should that be the case for a reborn Virgin, it surely would not be long before investors including the State Government were asked to tip in more to keep it afloat. If the alternative was to take the blame for a second, final collapse, and the job losses that would follow, few politicians would have the strength to say no.
One wonders if much thought has been given to this potential liability on William St.
One suspects not. These are, after all, the same people who have accepted at face value the fantasy economics that suggest the 2032 Olympics can be held in Brisbane at no net cost.
The same people who are merrily sinking more than $5 billion into a train tunnel in Brisbane with no federal help, adding massively to state debt.
The same people who have still not accepted an offer worth $100 million from The Star to upgrade the Gold Coast Convention Centre, despite their tawdry second casino plan being dead in the water.
They are desperate to save Virgin and keep it in Queensland because they are desperate to cling on in the October state election. But it hardly looks wise to be pouring money in while the likes of Mr Buffet is pulling his money out.
There’s another wellknown investor, with much experience of the travel business, who once famously quipped that “if you want to be a millionaire, start with a billion dollars and launch a new airline.”
Who said it? Someone who knows quite a bit about Virgin. Fun fact, it was Richard Branson.