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  • ANALYSIS: Qantas blindsides Virgin with Alliance raid

ANALYSIS: Qantas blindsides Virgin with Alliance raid

Qantas has potentially snookered rival Virgin Australia with a raid on the share register of one of its key allies, Alliance Airlines.

The Oneworld carrier disclosed on 1 February that it had amassed a 19.9% stake in Alliance through a series of trades at a cost of A$60 million ($43.4 million).

It also signalled that it plans to make an application to the Australian Competition and Consumer Commission “to build on its current shareholding, with a longer-term view of taking a majority position in Alliance Airlines in order to better serve the charter market by unlocking synergies.”

The Qantas raid seems to have surprised Alliance, which had its shares forced into a temporary trading halt by the Australian Securities Exchange. It responded soon after, issuing a disclosure stating that its board “has not received any approach from Qantas.”

On its part, Qantas has said that it is not (yet) pushing for board representation and it will be “business as usual” in the short-term.

Alliance has appointed financial and legal advisors ahead of what could be an intriguing battle for control of the carrier, which keeps a low profile but is strategically important to both Qantas and Virgin Australia.

In a statement provided to FlightGlobal, Virgin says that the announcement “raises significant concerns and we will be looking closely at the potential impact to competition in the domestic market.”

“We remain committed to our partnership with Alliance who are a strong and important partner for Virgin Australia,” it adds.

A TANGLED WEB

Alliance started in 2002 essentially through the acquisition of some of the assets of collapsed regional Queensland carrier Flight West Airlines by a group of local aviation entreprenuers.

Since then, the independent operator has established itself as the major player in the resource charter market across the country, building up its fleet of Fokker jets and turboprops in the process. It has also conducted charter work on behalf of government agencies, tour operators and for sporting teams.

Alliance has been a long-term wet-lease provider to Qantas and Virgin, particularly on both carriers’ services from Brisbane to destinations in North Queensland.

In the past few years, Alliance has been particularly important to Virgin as that carrier drew-down its fleet of ATR 72s and Embraer 190s. A large amount of that capacity has been back-filled by Alliance’s Fokker jets, which have also been used to launch new services, such as its twice-weekly Brisbane-Alice Springs flight.

The ties also extend into the charter arena. Virgin’s charter unit and Alliance were granted regulatory approval in 2017 for a tie-up of their respective charter businesses. That allows them to jointly pursue new contracts, while maintaining their respective contracts.

In part, that was likely a response to the aggressive growth of Qantas’s Network Aviation unit. Like Virgin Australia Regional Airlines and the bulk of Alliance’s operations, Network is based in Perth, and operates a fleet of 17 Fokker 100s on a mix of scheduled and charter services.

In that respect, Virgin potentially has a lot to lose should Qantas gain control of Alliance. That gives Virgin an incentive to take at least a 10% stake in Alliance to try and block a full takeover, potentially sparking a bidding war for control of the Brisbane-headquartered operator.

But Virgin has been in cash-conservation mode, following years of heavy losses that savaged its balance sheet. It appears unlikely that its board would authorise chief executive John Borghetti to invest in Alliance or launch a takeover bid. Moreover, any expensive bidding war would be best avoided – particularly as Borghetti is due to step down at the end of the year.

POTENTIAL CONSOLIDATION

There is a long way to go in what could eventuate, but assuming that Qantas wins control of Alliance, it would gain control over a large part of the contract charter market, and a handy source of additional aircraft and spares – albeit old ones by world standards.

Alliance cut a canny deal in 2015 to buy Austrian Airlines’ fleet of 21 Fokker jets for $15 million, part of which was paid for by issuing shares totaling a 12% stake to Austrian.

“They recognise that we will earn good money out of these aircraft. They are a shareholder so they see that there is upside in our share price,” managing director Scott McMillan told FlightGlobal in 2016 of the deal.

At that time, the airline considered that few of those aircraft would transition to Australia, with most to be stored in Slovakia and used as a source of spares to support its operational fleet, and open up parts and aircraft trading opportunities.

Indeed, it subsequently sold two Fokker 100s to Qantas and leased another to Virgin, while the expansion of its wet-lease and scheduled operations saw some more airframes make their way into its Australian fleet.

Nonetheless, the large number of Fokker jets it has acquired in recent years has largely allowed it to control its own future with a fleet that, which geriatric by world standards, delivers economics that suit its operations, largely due to their low acquisition costs.

That has allowed it to retain a number of significant resource charter contracts with mining companies such as BHP, St Barbara and Glencore – and it seems that is what has attracted Qantas's attention.

If that comes off, Qantas will control well over half the resource charter market in Australia, at a time when commodities are strengthening and mining is returning to favour. Along with its strong domestic network, that would make it a formidable bidder for future charter and travel contracts.

It would also pose a major headache for the smaller players in the market, most notably Cobham Aviation Services Australia. As well as operating QantasLink’s Boeing 717s, Cobham has its own charter operations, but has lost some contracts in recent years to Alliance and others, leaving it more of a niche player. Assuming Qantas takes Alliance under its wing, that could have implications for the QantasLink operations when that contract comes to an end.

That is largely speculative for now. Alliance appears to be setting itself up to defend against a cheap takeover bid, and will no doubt also talk to Virgin about what the future might hold.

The Australian Competition and Consumer Commission could also be a major roadblock for a Qantas takeover. Indeed, Alliance fought an uphill battle with the ACCC to get its charter tie-up with Virgin approved. The regulator is likely to take exception to the potential competitive effects of a takeover.

For a Virgin short of cash, it will be hoping that the ACCC blocks Qantas’s action and Alliance remains independent.

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