VIRGIN AUSTRALIA will take a 10 per cent stake in regional airline Skywest in a bid to take advantage of growing demand for regional travel spurred on by the mining boom.
In its first investment in a listed company, Virgin has spent $8 million to gain "skin in the game" in Skywest, just weeks after the competition regulator approved an alliance between the two airlines.
Virgin's expansion in the regional travel market is one of the key planks of its efforts to improve its profitability under the leadership of John Borghetti. It has also been reshaping itself as an upmarket competitor to Qantas to win a bigger slice of the lucrative corporate travel market.
Virgin's chief financial officer, Sankar Narayan, said the equity investment was an obvious next step in strengthening its relationship with Skywest, and expanding its presence in the regional travel market, in which it had been under-represented for some years.
Virgin completed the sale of its fleet of Embraer jet aircraft in January after deciding that regional routes would be better served by more fuel-efficient turbo-prop aircraft.
As part of a deal reached early last year, Virgin and Skywest are now operating four ATR 72 planes under the Virgin moniker, and plan to expand the fleet to 12 during the next 18 months.
"This [equity stake in Skywest] is just another step in bringing the companies closer. We have very ambitious plans on the ATR side and we just want to make sure our interests are aligned," Mr Narayan said. "It cements the relationship."
Mr Narayan said Virgin had not discussed increasing its stake in Skywest beyond 10 per cent. Skywest has its headquarters in Singapore but is listed on the Australian Stock Exchange. The airlines main rivals in the regional travel market are Qantas's subsidiary, QantasLink, and Regional Express.
Virgin said yields from regional flying were among the strongest from any of its operations.
CBA Equities' transport analyst, Matt Crowe, said Virgin's decision to invest in Skywest was positive but, given its size, was "not going to move the needle".
Shares in Virgin were unchanged at 42? yesterday in a weak market, while Skywest rose 4 per cent to 37?.
Qantas has also been ramping up its exposure to the regional travel market and so-called "fly-in fly-out" charter operations to mines in states such as Western Australia and Queensland. It bought West Australian charter airline Network Aviation for about $30 million in late 2010.
"There are specific fly-in fly-out operators but Qantas and Virgin are both investing quite heavily in that market now," Mr Crowe said.
Frequently Asked Questions about this Article…
What stake did Virgin Australia take in Skywest and how much did it pay?
Virgin Australia bought a 10% stake in regional airline Skywest, paying about $8 million. It was Virgin’s first investment in a listed company and came weeks after the competition regulator approved an alliance between the two carriers.
Why did Virgin invest in Skywest and what is the strategic goal?
Virgin invested to strengthen its relationship with Skywest and expand its presence in the regional travel market, which it had been under‑represented in. Management says the move aligns interests as Virgin pursues regional growth driven by mining‑related demand and seeks to improve profitability under John Borghetti’s leadership.
How will the Virgin–Skywest arrangement change regional flight operations?
Under the deal Virgin and Skywest already operate four ATR 72 turboprops under the Virgin brand and plan to expand that fleet to 12 ATR 72s over the next 18 months. Virgin has sold its Embraer jets and says regional routes will be better served by more fuel‑efficient turboprops.
Did Virgin say it plans to increase its stake in Skywest beyond 10%?
No. Virgin’s chief financial officer, Sankar Narayan, said the company had not discussed increasing its stake in Skywest beyond the 10% holding.
How did the market react to the news of Virgin’s Skywest investment?
According to the article, Virgin’s shares were essentially unchanged on the day, while Skywest’s shares rose about 4% following the investment news.
Who are Virgin and Skywest’s main competitors in the regional travel market?
The main rivals in regional travel mentioned are Qantas’s regional arm QantasLink and Regional Express. Qantas has also increased its regional exposure and bought West Australian charter airline Network Aviation for about $30 million in late 2010.
What role do fly‑in fly‑out (FIFO) and mining demand play in this strategy?
Growing demand for regional travel driven by the mining boom, including fly‑in fly‑out charter operations to mines in places like Western Australia and Queensland, is a key reason both Virgin and Qantas are investing more heavily in the regional and charter market.
Will this 10% investment materially change Virgin Australia’s business?
Analysts viewed the investment as a positive step to cement the relationship, but CBA Equities transport analyst Matt Crowe said that given the size of the stake it was unlikely to "move the needle" significantly on Virgin’s overall business.
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