The moves by Etihad and Air New Zealand to raise their stakes in Virgin Australia pose questions of why they and Singapore Airlines are so keen to own part of the Australian carrier – and what their long-term intentions might be.
In October Etihad raised its stake in Virgin to 19.9%, matching the shareholding already owned by Singapore Airlines, and reaching the limit currently permissible for either carrier under Australian law. A week earlier Australia’s foreign investment review board cleared Air New Zealand to raise its Virgin stake to 26%. Despite these growing stakes, all three airlines disclaim any interest in taking over Virgin Australia.
Cross-border equity alliances – in vogue between airlines in the late 1980s – have generally fallen out of favour due to global alliances. But Etihad, which belongs to no alliance, has pioneered their revival. Stakes by three foreign airlines in Virgin Australia are possible only because Virgin changed its structure last year, so that its international air rights are held in a separate company. This allows foreigners to buy into the domestic airline, with approval from Australia’s foreign investment board, without jeopardising Virgin’s air rights.
Air New Zealand bought an initial 14.9% stake back in January 2011, even before this corporate change. Rob Fyfe, then chief executive, justified it as “part of our strategy to develop scale and reach in this region”.
He cited the trans-Tasman alliance recently entered with Virgin, plus Air New Zealand’s interest in more access to Australia’s domestic market.
Christopher Luxon, the airline’s current chief executive, stresses the same point. He recently told investors: “The strategic rationale for the investment is very clear – it’s about us having access to a large, connected, adjacent, growing domestic Australian market.”
Given the close ties between Australia and New Zealand – and the immunised alliance Air New Zealand and Virgin operate trans-Tasman – the former’s initial and growing stake in Virgin has surprised few. Under Australia’s “creep” rules, the Star Alliance carrier could, with investment board approval, notch up its stake by 3% every six months without having to make a takeover offer. Whether it will remains an open question.
Etihad became the second airline to buy into Virgin Australia when it acquired 4% in June 2012. Unlike Etihad’s shares in Air Seychelles and Air Serbia, formerly Jat – which resemble turnaround projects – the Gulf carrier has pursued network growth through a group of equity alliances. These now include Air Berlin, Aer Lingus and most recently India’s Jet Airways. Its Virgin stake fits this pattern.
As Etihad chief executive James Hogan said at the time of the Virgin purchase: “We don’t intend to become a majority investor. We’re keen to have a strong minority stake that strengthens our partnership with Virgin Australia.”
Hogan sees these alliances not only in terms of access, but such mutual benefits and synergies as traffic feed and cost savings through joint purchases. But the underlying reason for putting equity into Virgin, he explains, is that “we felt if we had more skin in the game we could improve the top line”.
Etihad’s Virgin stake preceded Singapore Air’s by five months. Some analysts point to the potential rivalry between Etihad and SIA, because both want to carry Virgin’s “Kangaroo route” traffic over their respective hubs.
John Thomas, manager director at Boston-based LEK Consulting and head of its global aviation and travel practice, is Australian himself, and closely follows Australasian aviation. He believes SIA acquired its Virgin stake in response to Etihad. “Given the competitive tension between Etihad and Singapore Airlines, Singapore saw that having a similar relationship with Virgin Australia meant they would have to step up and take some equity as well,” he says.
Some analysts suggest that SIA also hopes to leverage its Virgin stake into access on the Australia-US route – something it has long sought – but Thomas doubts this. Instead, he believes that SIA’s main interest is in the alliance potential with Virgin. “The jury is still out on the Qantas-Emirates deal,” he says. “Singapore believes that its combination with Virgin Australia may be more powerful than Qantas-Emirates on the Kangaroo route.”
Air New Zealand, Etihad and SIA together are now authorised to hold two-thirds of Virgin’s shares. Add the 10% owned by Richard Branson’s Virgin Group, and the limited free float prompts observers to wonder how much longer Virgin Australia’s shares will be publicly traded. Macquarie analysts paint a scenario where Air New Zealand and SIA, who have “overlapping strategic interests”, might jointly acquire control and take Virgin private.
Now that Etihad and SIA have reached ownership parity, the question remains whether Virgin Australia can expect a period of stability, or more jockeying for position among its owners.