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Air NZ faces 'imponderable' decision of whether to stick with Virgin

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by June 1, 2016 General
The deal will almost certainly also mean direct flights from New Zealand to China, eating into Air NZ's potential business.

JOHN ANTHONY/FAIRFAX NZ

The deal will almost certainly also mean direct flights from New Zealand to China, eating into Air NZ’s potential business.

Air NZ would have considered the risk of its stake in Virgin Australia being diluted when it announced the potential sale of its shares in March, industry expert Irene King says.

Virgin’s new partner, Chinese-owned HNA Group, has taken a 13 per cent stake at A30 cents a share, raising A$159 million (NZ$170 million).

The move dilutes Air NZ’s shareholding from 25.9 per cent to 22.5 per cent.

Air NZ's plan to dump its Virgin Australia stake has opened the door to a big new partner for its rival.

DANIEL MUNOZ/REUTERS

Air NZ’s plan to dump its Virgin Australia stake has opened the door to a big new partner for its rival.

The dilution is significant as it comes weeks after Air NZ put a “for sale sign” on its Virgin shareholding, which it bought at an average entry price of more than A40c a share.

READ MORE: Virgin Australia signs deal with HNA, wants to get more out of China 

How much further its stake will be diluted will depend on the size and timing of Virgin’s much-anticipated capital raising, which could raise up to A$1 billion.

A recent report by Credit Suisse, which is Air NZ’s adviser, speculated that Virgin could raise A$1b in fresh equity to restore its balance sheet, more than double what had initially been touted in the market.

Air NZ would not confirm yesterday whether it was selling its Virgin stake.

King said Air NZ took highly calculated decisions and its advisors would have been aware that a share dilution was an option and also may have known it was in talks with HNA.

“These things leak out. Aviation is like a village it leaks and groans all the time,” King said.

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Air NZ may not see any risk with its share being diluted and it was not in Virgin’s interest to have Air NZ disappear from the equation, she said.

Air NZ would be weighing up whether it could get a better return from exiting Virgin relative to staying put.

“That must be a big imponderable.”

Air NZ shareholders seem unphased by Virgin’s announcement with Air NZ shares increasing 14c this week.

Dilution certain

Any form of equity raising, expected in the next few weeks, will dilute Air NZ’s shareholding, along with its other shareholders including Etihad Airways, Singapore Airlines and Sir Richard Branson’s Virgin Group.

The clock is now ticking for Air NZ. If it waits until the capital raising, it faces the risk of being significantly diluted as well as further downward pressure on the share price.

The relationship between Air NZ and Virgin reached its nadir a few weeks ago when the Kiwi airline’s chief executive, Christopher Luxon, resigned suddenly from the Virgin board after failing to get support to sack the chief executive, John Borghetti.

Luxon’s sudden departure and decision to flag to the market it wanted to dump its Virgin stake, predictably caused massive uncertainty in the company.

Virgin’s shares tanked, credit ratings agency Standard & Poor’s revised its ratings outlook from “stable” to “negative” and speculation emerged that Singapore Airlines would mount a full takeover bid.

If Air NZ had handled itself differently it would have had a seat in negotiating the new strategic partner. Instead, Luxon’s resignation meant the airline lost any rights to be consulted on the HNA investment and strategic alliance.

Luxon’s exit

King said Luxon’s decision to quit the Virgin board would not have been made without support from the Air NZ board.

“Knowing the way that organisation works, he would have taken that stance with the absolute approval of the board.

“He’s a very smart character. He’s not going to put his neck on the line over this sort of issue.”

Earlier in the week reports out of Australia said Luxon was tipped to replace Theo Spierings as Fonterra’s chief executive however, both companies denied the rumours.

King said Luxon would be a good fit got Fonterra, but wondered why he would want to leave his Air NZ post other than for a salary increase.

“He’s done a good job at Air NZ. He’s obviously up for bigger better brighter things.”

HNA swoops in

The upshot is HNA has taken a 13 per cent stake in Virgin via a placement and has committed to increasing its shareholding up to 19.9 per cent. Significantly, it said in a statement it was also “committed to supporting the outcomes of the capital structure review”.

The strategic alliance will include a seat on the Virgin board, the introduction of direct flights between Australia and China, code-sharing, frequent flyer programmes, lounge access and promotion of tourism and business travel.

From the point of view of Air NZ it will undoubtedly mean introducing direct flights from New Zealand to China, which will cut the airline’s grass.

In its statement, HNA Group was described as a Fortune Global 500 multinational conglomerate and the largest private operator of airlines in China.

“HNA Group’s member airlines fly over 77 million passengers annually on nearly 700 routes to more than 200 destinations in China and around the world. HNA Group also has strategic investments in other aviation supply chain businesses, including aircraft leasing (Avalon), cargo, ground handling services (Swissport), hotels and travel agency chains,” it said.

Much-needed news

It is the first positive news for Virgin in months. It has been battling with uncertainty and this month warned it would post a loss in the second half and forecast a full-year profit of A$30m to A$60m, which was well below consensus forecasts.

Not only does it plug a hole left by Air NZ, it has introduced a company with deep pockets and big ambitions.

The tie-up, assuming it gets through regulatory hurdles in Australia and China, will give Virgin access to the fastest-growing and most-valuable inbound travellers in this market.

Visitors from China to Australia have been increasing about 18 per cent a year since 2010, and in 2015 statistics show that spending by Chinese travellers to Australia increased 45 per cent to more than $8 billion.

By 2020 Australia is forecast to receive 1.5 million inbound Chinese visits in a market expected to be worth A$13b.

Juggling so many strategic shareholders that also have a seat at the board can’t be easy. Even more challenging is managing the exit of one and orchestrating the entry of another.

This has been achieved as the company has been undergoing a massive capital review to give a much-needed strengthening to its balance sheet

Can they get a better return from exiting Virgin relative to staying put.
“That must be a big imponderable.”

 – SMH

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