ANALYSIS: SIA's Virgin stake-sale may open new doors in Asia

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Singapore Airlines' (SIA) potential sale of its stake in Virgin Atlantic could allow it to focus on other investment opportunities in Asia.

The airline says it is in talks with "interested parties" to sell its 49% stake in the London-based carrier, which "may or may not lead to a transaction".

The news of the potential sale has been expected for some time, with SIA admitting some years ago that the Virgin stake was under-performing, both financially and strategically.

"The investment sum itself has been written down substantially, so I think any price they can get would be a gain for them," says Paul Yong, an analyst with DBS Vickers.

The sale may also generate cash that the airline could use to fund its expansion over the next few years.

Andrew Orchard of CIMB Research says that the sale of the Virgin stake could help SIA finance its aircraft orders.

"They are due to take a number of aircraft over the next five years and capex [capital expenditure] will accelerate over that time," he says.

SIA currently holds orders for five Airbus A380s, 40 A350-900s and eight Boeing 777-300ERs. It also has an order for 23 737-800s and 31 737-8s for its SilkAir subsidiary, and 20 787-9s for its long-haul, low-cost carrier Scoot.

SIA may also be stocking up its war chest to pursue investments in other carriers, something that chief executive Goh Choon Phong has recently said the carrier is open to doing.

Since SIA completed its purchase of a 10% stake in alliance partner Virgin Australia in November, the airline could buy into other carriers to form new alliances around Asia, particularly in China.

But China has been a sore spot for SIA in the past. In 2008, it tried to buy a 15% stake in China Eastern Airlines, but was prevented from doing so after Air China lobbied the Chinese government to block the purchase.

Still, Yong believes that SIA could make another play for a stake in China Eastern.

"If you look at China Eastern today, it is stronger now than it was before especially since it bought out Shanghai Airlines," says Yong. "We think that probably the relationship is still there but they will be very careful given they were rejected in the past."

But Orchard believes that SIA would only invest in a Chinese carrier if there is a greater chance of having it cleared by regulators.

"I think if they got some indication that they would be allowed to do it, I don't see why they would not," he says. "At the same time, I don't know how much the regulatory environment has changed in the last five years since they last tried that."

Another option for SIA may be to invest in an Indian carrier now that the government there has relaxed restrictions on foreign ownership of airlines.

Yong says that India would likely be a country where it would invest, but considering the challenges faced by the industry there, SIA would want to ensure that it has a strong hand in whatever carrier it buys into.

"India is probably interesting, but it would probably have to be a very carefully structured deal," he says. "They would always want to have as much control and influence as possible, and I think that is reasonable given that SIA is one of the more successful airlines out there."

Orchard disagrees, and says there is likely to be little strategic benefit to SIA from buying into an Indian carrier. He adds that SIA has recently placed more importance on its intra-Asian and long-haul services, and has been able to use both SIA and SilkAir to fly to a number of Indian cities.

"If they were to take a stake in a domestic Indian carrier, that would make some sense, but they don't seem inclined to do so now," he says.

Ironically, SIA's disappointing experience with Virgin Atlantic could cause its management to avoid making more investments in other airlines.

"The fact that they have been through Virgin Atlantic would make them a little bit more cautious going into these type of partnerships, which seem like a good idea but don't necessarily bring much benefit," says Orchard.

Yong agrees, adding that SIA would want to ensure that it has a greater say in the airlines that it buys into.

"I think given SIA's past investment experience, control and influence is quite important to their management," he says.