SIA ups pressure on Qantas with Virgin Australia deal

Wednesday, 31 October 2012 00:54 - - {{hitsCtrl.values.hits}}

MELBOURNE (Reuters): Singapore Airlines Ltd. will buy a 10 per cent stake in Virgin Australia Holdings Ltd. for A$ 105 million ($ 108 million), stepping up its competition with rival Qantas Airways Ltd. in the lucrative Australian market.

The move by Singapore Airlines, the world’s second-largest carrier by market value, marks both a step to preserve its dominant position in the Asia-Pacific premium air travel market and an effort to deal with its troubled budget associate, Tiger Airways Holdings Ltd.

As part of a series of deals revealed on Tuesday, Virgin, Australia’s No.2 carrier, will buy 60 per cent of Tiger Australia for A$ 35 million and invest a further A$ 62.5 million to increase the fleet size to 35 aircraft from 11 by 2018.

City Index analyst Peter Esho said Qantas’s ambition to become a premium player in the Asia-Pacific aviation market was meeting stiff resistance from Singapore Airlines.

“We see today’s move by Singapore Airlines as a strategic shift down south to back Qantas’s main domestic competitor,” he said.

Virgin is also buying regional and charter carrier Skywest , which services fly-in fly-out mining camps, in a deal worth A$ 93 million. Virgin shares rose as much as 6.5 per cent to A$ 0.49 and shares in Skywest surged 53 per cent to A$ 0.43. Qantas shares were flat, while Singapore Airlines rose 0.4 per cent.

Shares in Tiger Airways, 33 per cent owned by Singapore Airlines, were suspended after the carrier reported a S$ 18 million second-quarter net loss.

Virgin’s efforts to shore up its position follow Qantas’s proposed 10-year alliance with Dubai’s Emirates, revealed last month. Qantas ditched its 17-year alliance with British Airways, owned by IAG, in favour of a 10-year alliance with Emirates, a key step in the carrier’s efforts to shore up its loss-making international business.

Qantas, which has been propped up by earnings from its domestic operations, will operate through Dubai rather than Singapore as part of that deal. Singapore will join unlisted Etihad Airways, Abu Dhabi’s flag carrier, in taking a minority equity stake in Virgin. Etihad also has a 10 per cent stake.

“Singapore and Tiger recognise how difficult it would be to continue to operate in the Australian market and this is a good resolution for them,” said White Funds Management portfolio manager Angus Gluskie, who holds Virgin shares.

The three deals would make Virgin a stronger competitor in all segments, including budget, domestic and international, Virgin Chief Executive John Borghetti said in a conference call with analysts and media.

“I think we are a formidable group now,” Borghetti said.

He said Tiger’s financial performance would impact Virgin’s earnings from the three months to June 2013, and both the Tiger and Skywest deals should be completed around March. Borghetti said after the deals, Virgin would expand to 139 aircraft and more than 9,000 employees.