VIRGIN Australia will take a 10 per cent stake in regional airline Skywest as part of efforts to take advantage of surging demand for regional travel spurred by the mining boom.
In its first investment in a listed company, Virgin has spent $8 million on gaining "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 attempts to improve its profitability under the leadership of John Borghetti. It has also been reshaping itself as an upmarket competitor to Qantas to gain a bigger slice of the lucrative corporate travel market.
Virgin 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 over the 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 over 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 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 Skywest investment was positive but . . . was "not going to move the needle".
Virgin shares were unchanged at 42? yesterday in a weak market. Skywest rose 4 per cent to 37?.
Qantas has also been increasing its exposure to the regional travel market and so-called "fly-in, fly-out" charter operations to mines. 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 acquired a 10% equity stake in regional carrier Skywest, spending about $8 million. It was Virgin's first investment in a listed company.
Why did Virgin Australia invest in Skywest and what is the strategic goal?
Virgin said the 10% stake was meant to cement its alliance with Skywest and expand its presence in the regional travel market, which has been boosted by mining-related demand. The move fits Virgin's wider plan under John Borghetti to improve profitability and grow its regional and corporate travel business.
How will the Virgin–Skywest deal affect their regional fleet and types of aircraft used?
As part of their partnership, Virgin and Skywest are operating ATR 72 turboprops under the Virgin brand. Virgin sold its Embraer jet fleet in January and is shifting to more fuel-efficient turboprops for regional routes. They currently operate four ATR 72s and plan to expand the fleet to about 12 aircraft over the next 18 months.
Did the competition regulator approve the alliance between Virgin and Skywest?
Yes. The article notes the competition regulator approved the alliance between the two airlines prior to Virgin taking its 10% stake, which helped pave the way for closer cooperation.
Could Virgin Australia buy more than a 10% stake in Skywest?
According to Virgin CFO Sankar Narayan, the company had not discussed increasing its stake beyond 10% at the time of the announcement.
How did the market react to Virgin's investment in Skywest?
On the day reported, Virgin shares were essentially unchanged in a weak market, while Skywest shares rose about 4%. CBA Equities transport analyst Matt Crowe called the investment positive but said it was unlikely to significantly "move the needle."
How does this investment position Virgin relative to Qantas and other regional rivals?
The deal brings Virgin closer to regional competitors such as QantasLink and Regional Express. Qantas has also been increasing its regional exposure — for example, it bought Network Aviation for about $30 million in late 2010 — and both major carriers are investing in fly-in, fly-out and regional services.
What should everyday investors take away from Virgin's Skywest investment?
For everyday investors, the key points are that Virgin made a strategic, but relatively small, 10% investment to strengthen regional ties and fleet alignment with Skywest. The move supports expansion into higher-yield regional flying using fuel-efficient turboprops, but analysts say the stake alone is unlikely to dramatically change Virgin's overall performance. Investors should watch fleet growth, regional yields and competitive moves from Qantas and other rivals.
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