Sir Richard Branson, newly knighted in the UK's millennial honours list, calls the deal between his Virgin Atlantic group and Singapore Airlines (SIA) a "marriage made in heaven", but Star alliance members in Australasia are having heartburn over its implications.

The codeshare access that SIA gains from London's Heathrow to the US East Coast largely justifies its purchase of a 49% stake in Virgin Atlantic for £600 million ($960 million).The sum, which values the airline at £1.2 billion, includes a capital injection of £49 million into the airline, to which the Virgin group will add an additional £51 million.

Virgin says that the airline stands to save around £10 million from the alliance, but insists it would anyway show profits this year without the deal. Some analysts, however, believe that last summer's bloodbath on the North Atlantic has taken its toll and that the airline may struggle to stay in the black.

The deal has wider implications. After abortive tries, SIA has finally formed a major equity alliance with China Airlines, South African Airlines, and Ansett Australia. Virgin, which was running low on potential partners after British Midland opted to link with Lufthansa, has also gained access in Asia and a feed to Australia, where it plans to launch a low-cost airline in July.

The accord gives both SIA and Virgin a degree of independence from global alliances, which each has viewed with reticence. After a long-delayed decision, SIA has said it plans to join Star in April. Virgin's pact with SIA gives Branson, who has never been keen on global alliances, more scope to retain the airline's individualism.

The first evidence of this could come in Australia. Branson has invited SIA to join his proposed Virgin Australia. After buying into Virgin Atlantic, SIA still has half its S$3 billion ($2 billion) cash reserve left, which leaves it free to explore other investments. Dr Cheong Choong Kong, SIA's chief executive, says the partnership with Virgin opens up "all sorts of options - in Australia and elsewhere".

This prospect has caused a stir in Australia. Qantas shares sank to an 11-month low on the spectre of SIA backing Virgin in Australia and Virgin-SIA competing with Qantas-British Airways on the Kangaroo route.

The more perplexing questions, however, involve SIA's relations with Ansett and Air New Zealand (ANZ). SIA codeshares with both and supposedly plans to join them in the Star Alliance. If it backs Virgin Australia, SIA will be competing head-to-head with Ansett Australia on domestic routes, and challenging ANZ, which owns half of Ansett.

SIA expects to decide on Australia this month. It could have two proposals to consider - Virgin's plus one from ANZ. According to New Zealand analysts, ANZ will move quickly to reach agreement with SIA to forestall a deal between Virgin Australia and SIA.

Part of Virgin's initial attraction to SIA may have been the opportunity to invest in an Australian operation. Last year ANZ thwarted SIA's attempt to buy half of Ansett Australia. If SIA joins Virgin in Australia, some observers think the resulting tension with its Australasian partners could prompt SIA to delay joining the Star Alliance.

Source: Airline Business