Virgin Australia Holdings Ltd. is known for offering bargain airfares, including Happy Hour sales that last a few hours of the afternoon. Still, even shareholders aren’t getting the kind of deal that Richard Branson is.
Branson, keeper of the Virgin brand, has made more money in royalties from Virgin Australia than the airline has earned in profits since its 2003 initial public offering. The carrier’s Chief Executive Officer John Borghetti extended its brand licensing agreement with Branson past an original 2015 expiration date, he said in an interview.
The airline has benefited from the “halo effect of Virgin globally, which just — money can’t buy,” the head of Australia’s No. 2 carrier said last month. The Virgin brand, which a 20-year-old Branson founded in 1970 as a mail-order discount records business, has “been absolutely tremendously helpful, tremendously cost-effective,” Borghetti said.
Branson’s companies charged about A$103.1 million ($82 million) in licensing fees to Brisbane-based Virgin Australia in the 10 years through June 2013, the last time the payments were disclosed, an analysis of annual reports by Bloomberg News shows. The payments have outstripped the aggregate A$90 million of annual profits net of losses the airline posted since its December 2003 listing, according to data compiled by Bloomberg.
Virgin Australia is recovering from a bruising price war in its home market that drove market leader Qantas Airways Ltd. into the red last year and prompted its CEO to plead for government aid.
Virgin Australia, which is adding business-class services and extending its network to draw high-end fliers, will lose money for a third straight year in 2015, according to the median of seven analyst estimates compiled by Bloomberg. It should post a A$63 million profit in the year to June 2016, according to eight estimates.
Paying royalties to Branson’s Virgin Group has been cheaper than building a new image, Borghetti said in the interview. The brand is also used by airlines Virgin America Inc. and Virgin Atlantic Airways Ltd., as well as the space tourism company Virgin Galactic Ltd.
“We have a long-term agreement,” he said. “We’ve done very well” from the relationship.
The original royalty agreement entitles companies controlled by the British billionaire to about one-half percent of Virgin Australia’s gross sales. The deal was set to expire at the end of 2015, according to the prospectus for the airline’s 2003 initial public offering.
That end date no longer applies, Borghetti said. He declined to specify the term of the renewed contract or give details of its fee structure.
The royalties paid from 2004 to 2013 were equivalent to about 55.2 million pounds, based on average exchange rates in those years. That’s about 20 percent of the 274.2 million pounds that Virgin Enterprises Ltd., the Branson-controlled company that licenses the Virgin name, recorded as revenue over the 10 years to March 2013.
Virgin Australia no longer discloses the value of the payments because Virgin Group fell below 20 percent of its shareholder register in June 2013. The two companies are no longer considered related parties so the numbers don’t need to be disclosed, according to the airline’s latest annual report.
“The Virgin name is one of the strongest consumer brands in the world and especially in aviation,” Virgin Group spokesman Nick Fox said by e-mail from London. The brand “has been a great strength for Virgin Australia since its inception, enabling it to stand out and will continue to be so in future.”
Virgin Australia was set up in 1999 with a $10 million equity investment from Virgin Group as a budget carrier with a single route between Sydney and Melbourne. After converting to a full-service airline in 2011, last year it posted A$4.29 billion in revenues and carried 20 million passengers to 62 destinations in Australia and internationally.
Over the 11 years since its December 2003 initial public offering, the airline’s A$90 million in annual profits has been equivalent to about 0.3 percent of its A$30.74 billion in revenues, according to a calculation by Bloomberg News. That’s a lower margin than the 0.5 percent of gross sales the airline has paid to Virgin Group.
Branson’s share in the Brisbane-based carrier has fallen to 10 percent as Air New Zealand Ltd., Singapore Airlines Ltd., and Etihad Airways PJSC have taken combined stakes of 73 percent, according to data compiled by Bloomberg.
Air New Zealand chief executive Christopher Luxon, who represents his company’s 26 percent shareholding on Virgin Australia’s board, said at a Dec. 8 lunch event in Sydney that he had no view on whether the royalty represented good value for shareholders.
“Direct your questions to John Borghetti,” he said. “I’m just a director.”
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This article was written by David Fickling from Bloomberg and was legally licensed through the NewsCred publisher network.