ANALYSIS: SIA's Virgin stake buy underlines Australian focus

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Singapore Airlines (SIA) has signalled that it has big plans for the Australian market with its acquisition of a larger stake in Virgin Australia.

Together with the 10% Virgin stake it purchased in November last year, SIA now holds a 19.9% stake in the Australian carrier.

Unlike its previous investment, which was a new share issue, SIA purchased the stake from Sir Richard Branson's Virgin Group. This reduces the founding shareholder's stake to approximately 13%, placing it above the 9% share owned by Etihad Airways.

Shukor Yusof, a Singapore-based aviation analyst with Standard & Poor's, says that the purchase is a "long-term investment from SIA to seal the alliance with Virgin".

He adds that with Virgin chief executive John Borghetti, SIA's management has "found somebody they can really work with and be more aggressive with".

Borghetti does appear to have a more aggressive approach, having successfully moved the carrier up the value chain from a budget carrier to one that has become more competitive against Qantas Airways in the premium market segment.

Derrick Heng, deputy head of research at Singapore-based Phillip Securities, says that the increased stake from SIA could give Virgin the financial resources it needs to grow, following the acquisition of regional carrier Skywest Airlines and a majority stake in Tiger Airways Australia.

"Virgin benefits from having the necessary capital to fund their fleet expansion plans and the acquisition of 60% in Tiger Australia," he says.

There is some speculation, however, that the different priorities of those shareholders will make for turbulent times for Virgin's management going forward.

In particular, some commentators have cited that the SIA and Etihad's overlapping networks are likely to lead to some tensions among the shareholders.

Etihad and Virgin's relationship goes back to 2010 when John Borghetti was appointed as chief executive of the Australian carrier. He had previously negotiated an alliance with Eithad when he was the executive general manager of Qantas, but was able to convince Etihad chief executive James Hogan to shift allegiances.

At that time, the Etihad alliance provided an immediate solution for Virgin to access a virtual European network via its Abu Dhabi hub. This also led to the carrier's launch of its thrice weekly services to Abu Dhabi.

Virgin then secured an alliance with SIA in 2011 and this was initially promoted as providing Virgin access to a virtual network through Asia. It allowed the Australian carrier to offer connections to Europe from ports such as Darwin and Perth that were not served by Etihad.

More recently, however, Virgin has been building a stronger relationship with SIA. That has included the adding of more European codeshare destinations via Singapore and codesharing to some destinations on both SIA and Etihad's services in some cases.

To further complicate the issue, Etihad took a 5% stake in Virgin last year, which it has gradually increased to 9%.

Etihad has also been growing its European network, and now, SIA and the carrier have many overlapping destinations - although Virgin does not codeshare on all of those services.

 

Etihad/Singapore Airlines network Australia-Europe: April 2013

map showing routes between australia and europe operated by etihad airways & singapore airlines

Innovata FlightMaps Analytics    Etihad=blue / Singapore Airlines=red

 

Despite the tension that could arise between the two alliance partners, Heng believes that it will remain within Virgin's strategic interest to maintain the alliance with the Abu Dhabi-based carrier rather than placing all its eggs in the SIA basket.

"Etihad still provides Virgin with valuable access to the European markets through the Middle East," he says.

Heng adds that as both carriers are not represented on Virgin's board, they may not be able to hold much influence over the strategy adopted by Borghetti.

In the longer term, Yusof believes that SIA will leverage its relationship with Virgin to start services between Melbourne, Sydney and the west coast of the USA in future.

For many years, SIA tried unsuccessfully to lobby the Australian government to allow it to operate trans-Pacific services utilising fifth-freedom rights. The government however rebuffed these approaches for many years, keeping the market as a duopoly between Qantas and United Airlines until Virgin launched its long-haul operations in February 2009.

Virgin now has a sizable presence in the Pacific market. It also has an immunised alliance with Delta Air Lines and operates daily services on the Sydney-Los Angeles route.

Despite the higher level of competition, Yusof feels that SIA could still offer a compelling product on the route.

"I think if we look at the market there, SIA would appear to be the only airline that is capable of delivering a product that would appeal to not just only the Australian but also the US West Coast markets," he says.

Overall however Yusof says that SIA has shown that it will continue to have a large amount of influence on the Australian aviation market.

"In terms of Australia being a key market for SIA, that's never been in any doubt," he says.