Bain Capital is selling down its stake in Virgin ahead of a likely record profit for the airline. Following the IPO, Bain (and its co investors) will have a diluted stake of about 39%.

No new capital is being raised for the airline, with the sale proceeds all going to existing shareholders.

The next stage in a bumpy journey

Virgin found early success in Australia under the budget brand Virgin Blue, prompting Qantas to launch Jetstar in 2004. But a 2011 re-brand to Virgin Australia and new strategic direction to go head to head with Qantas as a full service carrier proved ill fated.

We think the strategic shift, which included the fiscal 2015 acquisition of budget carrier Tigerair, destroyed shareholder value. From fiscal 2011 until entering administration in fiscal 2020, Virgin barely turned a profit.

Since Bain’s acquisition in 2020, Virgin has exited its budget Tigerair brand, long haul flying, and freight operations. This has materially reduced complexity, lowered capital intensity, and improved margins.

Today Virgin is focused on competing in the most lucrative routes: a few short haul holiday destinations and the Australian domestic market, notably the lucrative “Golden Triangle” of Sydney, Melbourne, and Brisbane.

These high frequency routes are a critical driver of volume and yield and are likely to remain central to Virgin’s strategy. Select short haul international routes to leisure destinations like Fiji, Bali, and New Zealand complement the core domestic network.

Low competition won’t last forever

Australia’s airline market is among the most concentrated in the developed world. As of fiscal 2024, Virgin Australia and Qantas (including Jetstar) accounted for 95% of domestic capacity, with Virgin holding one-third of the market.

This concentration sharply contrasts international markets, where 80% of domestic capacity is served by seven airlines in the United States, and 28 airlines in Europe. International travel to and from Australia is fragmented, with Qantas and Virgin together accounting for about one third of international passengers.

Competition in the Australian market is probably at a competitive nadir, with the collapse of Australian domestic competitors Bonza and Rex Airlines in 2024. But we don’t expect Australia to only have two airlines forever.

Barriers to entry are low, as new entrants can lease aircraft and acquire slots relatively easily. However, barriers to exit are higher because of long term lease obligations and gate commitments, often lasting over a decade, which leads to excess capacity, weak pricing discipline, and persistent value destruction.

A tough industry with no loyalty

While Virgin has simplified operations under Bain, including a three (soon to be two) aircraft fleet and a focus on capturing smaller businesses and leisure destinations, these changes do not alter industry structure.

It is unlikely Virgin Australia, or any airline, earns durable economic profits. Within the greater air travel industry, it is aircraft manufacturers, suppliers, and owners of critical infrastructure that reap economic profits, not the airlines.

Aircraft manufacturers like wide moat Boeing and Airbus benefit from selling more-efficient aircraft, which airlines must operate to successfully compete. Similarly, airports like wide-moat Auckland International Airport are natural monopolies with pricing power and diversified contractual revenue.

Durable differentiation is near impossible. Most airlines offer similar booking systems, aircraft, and service models. With little to distinguish one carrier from another, consumers book based on price and schedule, not loyalty.

Virgin’s mid-market positioning doesn’t change this. It competes directly with Qantas and Jetstar on core domestic routes and cost based advantages are fleeting. While a low cost model may have greater efficiency, it is easily replicable by competitors and offers little lasting protection.

Volatile inputs

Airlines also face constant margin pressure from volatile inputs. Around 75% of Virgin’s revenue is consumed by operating costs, such as staff, fuel, and maintenance. Fuel typically accounts for 20% 30% of Virgin’s revenue and is the most volatile input. Virgin hedges its exposure and uses fuel optimization strategies to manage oil price volatility, but these efforts are common across the industry.

While movements in oil prices often lead to short term swings in ROICs, we believe carriers’ long term profitability has little to do with fuel given all players wear the cost almost equally. Reductions in fuel, and other input costs, are typically competed away, and savings are passed through to customers, reflecting the intense competition in the airline sector. Likewise, investment in more efficient aircraft will eventually be taken on by the entire industry, eroding any cost advantages.

Virgin’s loyalty program, Velocity, contributes about 20% of underlying EBIT (and our valuation) at midcycle. It now has around 13 million members and a growing partner network. But we don’t believe it warrants a moat. We think loyalty programs are expected by consumers, and not a source of competitive edge.

Taken together, we do not think that Virgin has an economic moat. Nor does any airline in Morningstar’s global coverage.

Offer price above our Fair Value estimate

Our fair value estimate for Virgin is AUD 2.60 per share. The valuation gap to the AUD 2.90 offer price, about 12%, is not extreme. But we believe the offer price slightly overestimates Virgin’s market share growth and the durability of current market conditions.

We forecast a relatively stable market, with Virgin maintaining one-third of domestic market share. This is despite Virgin’s aspirations to increase market share, especially with corporate and small to medium business customers. We anticipate potential gains to come at a cost, either through lower prices or better service.

Our AUD 2.60 valuation implies a fiscal 2025 price/earnings ratio of 6.3. While this seems cheap on surface level, we expect rising depreciation expense amid fleet renewal to constrain net profit in coming years.

We expect a material capital expenditure bill over the next few years as Virgin renews its fleet. While new aircraft can offer higher customer appeal and significant benefits, including lower fuel costs, these benefits are often offset by the additional capital cost and are typically competed away over time.

Over the long term, we expect fleet expansion, replacement, and refurbishment to absorb meaningful cash flow and constrain returns to shareholders.

This is an extract from Morningstar’s full pre-IPO report on Virgin Australia, which was published on June 14 2025.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.