Now for the Borghetti juggling act
Virgin Australia chief executive John Borghetti has his own corporate family - his four alliance airline partners of which three have equity stakes in the Australian airline.
Keeping them all happy will be stretching even Borghetti's diplomatic skills.
Singapore Airlines on Wednesday proposed to buy 10 per cent of Virgin Australia to take its stake to just under 20 per cent and in doing so it has upset the delicate politics in Virgin's airline family.
Etihad - which is Virgin's alliance partner through the Middle East to Europe has about 8 per cent and isn't happy with Singapore's move.
Etihad's particular beef is that Singapore didn't buy its stake on market. Instead it picked up the 10 per cent from Virgin Australia's founding shareholder, Richard Branson.
This deal will make Singapore the largest shareholder in Virgin Australia, followed by another of its alliance partners, Air New Zealand with about 19 per cent.
Assuming the Foreign Investment Review Board allows Singapore to increase its stake, Branson will no longer be the controlling shareholder.
The response from Etihad will probably be to build its stake to match Singapore. The Middle Eastern airline has stated previously that this was an option.
The reality is that Virgin Australia is a central player for both Singapore and Etihad and both appear to be vying for more control of the Australian airline.
Both players entered into a long-term partnerships with Virgin over the past couple of years, encompassing code sharing, reciprocal frequent-flyer program benefits and lounge access, co-ordinated schedules, and joint sales, marketing and distribution activities.
These arrangements allow Virgin's international business to operate a virtual global network while Virgin gives these offshore players a feeder network for Australian domestic services.
Virgin Australia needs its partners and its partners need Virgin. But the alliance partners don't need each other. Indeed they are competitors on numerous routes around the world and there is generally no love lost between Etihad and Singapore Airlines.
This competition even extends to Virgin services out of Australia. For example, a customer wanting to travel to Europe using the Virgin Australia network could use Etihad via the Middle East or use Virgin's Singapore partner to Asia and then use Singapore to fly on to Europe.
How Borghetti treats these two partners is a juggling act.
Meanwhile, the response to Wednesday's move by Singapore Airlines to move to 19.9 per cent has not sparked speculation that it could mount a takeover bid.
(This doesn't preclude Singapore Airlines from using the creep provisions to build its stake.)
In part this is because industry experts believe the other alliance partners, particularly Etihad would not be sellers.
Earlier this week Singapore Airlines further cemented its relationship with Virgin Australia. Singapore Airlines-controlled Tiger Airways sold 60 per cent of its Australian subsidiary, Tiger Australia, to Virgin.
This has been received positively by the market, albeit with question marks over how how long it will take to resuscitate the ailing Tiger.
Singapore makes it clear that Australia - which accounts for about 18 per cent of its global business - is a very important market.
For its part, Etihad has demonstrated that it likes to retain close ties with its international partners and has a history of taking equity positions in most of them. But it has also stated that it has no interest in buying control of Virgin Australia.
Reports out of New Zealand suggest Air New Zealand could be willing to lighten its stake in Virgin so it might be getting a call from Etihad's boss, James Hogan.
Whether Branson is a seller of his remaining 13 per cent of Virgin is a matter for conjecture.
Once established he will sell down or get out completely - leaving his legacy brand rental agreement in place.
Borghetti has been a world pioneer in the creation of an international virtual network, but in doing so he will need to deal with one of the most incestuous industries in the world.
Frequently Asked Questions about this Article…
Singapore Airlines proposed to buy 10% of Virgin Australia from Richard Branson, taking its stake to just under 20% (around 19.9%). If approved by the Foreign Investment Review Board (FIRB), Singapore would become the largest shareholder, ahead of Air New Zealand, and Branson would no longer be the controlling shareholder.
Industry commentary in the article says the move has not sparked takeover speculation. However, the article notes Singapore could still use 'creep' provisions to slowly build its stake over time — but experts believe other alliance partners, particularly Etihad, are unlikely to be sellers.
The purchase upset the balance among Virgin’s alliance partners. Etihad, which holds about 8%, was reportedly unhappy because Singapore bought the stake directly from Branson rather than on-market. The arrangement complicates the relationship Borghetti must manage between partners who are also competitors on many routes.
The article suggests Etihad may try to build its stake to match Singapore. Etihad has previously stated matching stakes was an option and has a history of taking equity positions in international partners, though it has also said it has no interest in buying control of Virgin Australia.
Virgin’s long-term partnerships include code sharing, reciprocal frequent-flyer benefits and lounge access, coordinated schedules, and joint sales and marketing. These arrangements let Virgin operate a virtual international network while providing partners with a domestic feeder network into Australia.
Singapore Airlines-controlled Tiger Airways sold 60% of its Australian subsidiary, Tiger Australia, to Virgin. The market responded positively, though there are questions about how long it will take to revive Tiger Australia. The deal underscores Singapore’s commitment to the Australian market, which accounts for about 18% of its global business.
The article identifies Singapore Airlines as moving to about 19.9%, Air New Zealand holding about 19%, Etihad holding roughly 8%, Richard Branson retaining about 13% after the sale, and the possibility that Air New Zealand might consider lightening its stake.
Investors should watch for FIRB approval of Singapore’s increased stake, any moves by Etihad or Air New Zealand to adjust their holdings, possible further stake increases via creep provisions, and how the Tiger Australia transaction and alliance dynamics affect Virgin Australia’s international feed and domestic performance.
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