A watchful Etihad reinforces its Australia strategy

With an eye on New Zealand and Singapore carriers, Etihad has reserved the right to up its Virgin Australia stake, keeping the multi-faceted airline war on an even keel.

It would appear that Etihad Airways has taken out an option to protect its position at the crowded Virgin Australia table by seeking and gaining Foreign Investment Review Board approval to list its shareholding from about 10 per cent to 19.9 per cent.

It’s an option that Etihad’s James Hogan doesn’t have to exercise but a useful one given that Air New Zealand lifted its shareholding from 19.9 per cent to 22.99 per cent earlier this month (subject to regulatory approvals) and has said it wouldn’t mind buying another 3 per cent or so in future.

More significantly, perhaps, earlier this year Singapore Airlines doubled its stake in Virgin Australia to just under 20 per cent by spending $123 million to buy the shares from Richard Branson’s Virgin Group, which still owns 13 per cent.

That would have been disconcerting for Hogan at two levels. He had been Virgin Australia’s first strategic alliance partner as part of a global strategy that he had developed, and Virgin Australia’s John Borghetti was anxious to pursue, of developing a "virtual" international network via alliances and equity relationships.

Etihad’s strategy has been very successful, turning it into a major international carrier – and a profitable one – in the space of a decade.

Apart from its investment in Virgin Australia it has alliances supported by investments in Ireland’s Aer Lingus, Air Seychelles, Air Berlin, India’s Jet Airways and is reported to be negotiating a stake in Serbia’s JAT Airways. Apart from the ability to code share and coordinate schedules, the alliance partners are extracting significant synergies by leveraging their joint buying and maintenance requirements.

The Virgin Australia relationship is an important one for Etihad given the access it gets to Virgin Australia’s domestic presence and customer base and its ability to flow Europe, Middle East and Asia-bound passenger volumes through its Abu Dhabi hub.

In the wake of Qantas’ alliance with Emirates and the shifting of Qantas’ Asian hub from Singapore to Dubai, however, Virgin Australia is equally important, if not more, to Singapore and its flag carrier and Singapore Airlines’ joint venturing of its Tiger Australia business with Virgin Australia and its now substantial investment in the Australian group signals its determination to protect its interests.

Abu Dhabi and Singapore are competing hubs on the routes from Australasia into Europe and Asia and Singapore Airlines would be very wary of Etihad, the world’s fastest-growing carrier even though there could be some potential for the two to cooperate and leverage Singapore Airlines much bigger footprint throughout Asia.

Despite Air New Zealand’s larger shareholding, designed to protect its access to the Australian domestic market and to create a dominant partnership on the highly-contested trans-Tasman route, it is the development of the competing ambitions of Singapore Airlines and Etihad which has the potential to ignite tensions.

Borghetti wants and needs both of them at the table to give him access, through Singapore Airlines into Asia and Europe, and through Etihad into Europe and the Middle East.

Of particular interest to him will be Hogan’s recent acquisition of a 24 per cent shareholding in India’s Jet Airways, giving Etihad and its allies access to its massive domestic market as well as the vast Indian diaspora around the globe. Former Qantas senior executive (and, fleetingly, Ansett chief executive) Gary Toomey has been appointed Jet’s chief executive.

Hogan has signalled that he would prefer a bigger Virgin Australia shareholding – he had been negotiating to acquire the Virgin Group shares for some time before Singapore Airlines was invited into the process and out-bid him.

With Branson still owning 13 per cent, the option to increase Etihad’s stake to match Singapore Airlines’ interest remains available, although it is an interesting question as to whether doubling its shareholding would give him any more influence than he has today given that Virgin Australia does gain considerable strategic and economic benefits from the relationship.

To date none of Borghetti’s allies have gained board representation (although Virgin Group, which launched the airline, does have a presence in the boardroom).

A decision to double-up on Virgin could be rationalised as a pure investment in a business with upside or tactically as insurance against a rival with a bigger presence on the register (or some combination of the other strategic shareholders) using their shareholdings to gain more direct influence over Virgin Australia’s affairs.

If that were Hogan’s concern he’d be having further serious negotiations with Virgin Group, although there is time for him to think his way through the priorities (he’s no doubt been somewhat pre-occupied with Jet and perhaps JAT) given that he gained his FIRB clearance this week; that neither Singapore nor Air NZ can buy more shares until late this year at the earliest and even then they would only be able to lift their holdings in increments of 3 per cent each six months.