Don't expect a tussle over Virgin

There’s a lot of history behind Air New Zealand’s response to Singapore Airlines’ move earlier this year to lift its shareholding in Virgin Australia from 10 per cent to 19.9 per cent.

Air NZ confirmed today that it acquired 3 per cent of Virgin Australia, increasing its own shareholding to 22.99 per cent if it obtains the required regulatory approvals. It also said that, while it wasn’t seeking a board position and had no intention of obtaining control of Virgin Australia, it would consider acquiring a further three per cent if and when it is allowed to under the Corporations Act and foreign investment approval processes.

It would be easy to see the movements on the Virgin Australia register as presaging an eventual contest for control between Singapore Airlines and Air NZ. While that can’t be completely ruled out it isn’t, however, the most likely rationale for Air NZ’s move. Its actions appear more defensive than offensive.

Both Singapore Airlines and Air NZ have separate alliances with Virgin as part of John Borghetti’s strategy of creating a virtual international network and the desire of his allies to get exposure and access to the Australian domestic market.

The shared ambition of Singapore Airlines and Air NZ to get access to that market has a long, and sometimes shared, history.

Back in 1995 Air NZ, anxious to reduce its reliance on the small NZ market, paid $475 million to acquire TNT’s 50 per cent interest in Ansett. The other 50 per cent was owned by News Corp, which had partnered TNT in acquiring Ansett to get its hands on the Ten Network. Four years later News announced the conditional sale of its half of Ansett to Singapore Airlines for $500 million.

Air NZ, however, had pre-emptive rights and ultimately exercised them, acquiring the News stake in 2000 for $680 million, a decision that ultimately had disastrous consequences for the under-capitalised Kiwi carrier.

During what became quite a protracted Ansett sales process, Brierley Investments, a major shareholder in Air NZ, had been buying more Air NZ shares to take its shareholding to just under 50 per cent. During, and after, the News’ sale process, Brierley tried hard to convince Singapore Airlines to get its exposure to Ansett and the larger Australasian market by buying into Air NZ. Singapore acquired a 25 per cent stake in the NZ group.

Ansett, starved of capital by Air NZ and under attack from first Impulse and then Virgin Blue, of course, collapsed in 2001 – but not before Air NZ, with funding support from Singapore Airlines, tried to acquire Virgin Blue. Its offer was rejected by Sir Richard Branson.

Even after Ansett collapsed Singapore Airlines considered buying the airline from the administrators but the amount of capital required and the liabilities assumed made it too daunting. Singapore itself got squeezed out of relevance at Air NZ when, under the weight of nearly $1 billion of losses related to its ill-fated Australian ambitions, that group was effectively privatised by the NZ Government.

While Singapore might well like to control Virgin Australia, which has essentially inherited Ansett’s share of the Australian market, Air NZ clearly wants a major seat at the table to protect its own interest in maintaining access to the Australian market.

Interestingly, and perhaps importantly, Singapore Airlines and Air NZ aren’t competitors and share the same ambition of reducing the risk of being based in small domestic markets.

Singapore Airlines and indeed Singapore Inc would also be anxious to prevent Virgin Australia’s other strategic shareholder (and other ally) Etihad from gaining influence over the Australian airline. Etihad has a 10 per cent shareholding in Virgin Australia.

Singapore is concerned about the emergence and dramatic growth of the Middle Eastern airlines, where Emirates and Etihad have transformed Dubai and Abu Dhabi into major hubs on the routes from Australasia and Asia to Europe that Singapore Airlines flies.

Qantas, as part of its alliance with Emirates, has shifted its regional hub from Singapore to Dubai and Singapore Inc would be very focused on ensuring that it doesn’t also lose Virgin Australia’s passenger flows to Etihad and Abu Dhabi.

It would also be conscious that the Qantas/Emirates deal frees up Qantas capacity and resources to enable it to have a greater focus and better flight schedules to compete more effectively within Asia.

The lack of significant competing interests between Singapore Airlines and Air NZ would suggest, once they felt they had protected their own strategic interests in having a level of influence over Virgin to support their alliances, that they were more likely to co-operate than engage in a potentially destructive contest for control.

A tripartite alliance between Singapore Airlines, Air NZ and Virgin Australia – anchored in the joint interests in Virgin Australia, would seem to make some sense, particularly given the recent Qantas/Emirates alliance.

Etihad’s James Hogan’s response to the activity on the Virgin Australia register and the implications for his relationship with the local carrier and his own regional strategies and aspirations will be fascinating.