Air NZ loses passion for Virgin Australia
It was only a week ago that Virgin Australia’s four major shareholders threw A$425 million ($470 million) into the hat – a loan to the airline to repair its balance sheet.
This week the largest of its shareholders, Air New Zealand, has executed a double backflip and announced plans to potentially sell its 26 per cent stake – signalling the fracturing of the board and the delicate alliance between Air New Zealand and fellow investors, Singapore Airlines, Etihad and Richard Branson’s Virgin group.
It could potentially lead to a takeover of Virgin Australia from either Singapore, Etihad or both.
The fact that Air New Zealand boss Christopher Luxon has been unhappy with the progress of Virgin’s profit turnaround is a bit of an open secret.
Reading between the lines it would seem that Luxon pushed his case with the Virgin board – and lost. Luxon quit the Virgin board on Wednesday – effective immediately.
The depth of his disquiet and his frustration with the progress made by Virgin Australia chief executive John Borghetti is said to the biggest factor in Air New Zealand’s announcement on Wednesday.
It has been said that various Air New Zealand executives have been in Australia this week meeting with Virgin management – in what might have been a last ditch attempt to settle their differences.
A year ago Luxon is believed to have angered the Virgin hierarchy when he said publicly that it was “time for it to get profitable”.
Shareholders were not particularly enamoured with the outcome of Virgin’s decision to get into a domestic market share/fare turf war with Qantas a few years back and it cost the profits of both dearly.
However, it did boost Virgin’s share of the business market – which was the primary aim of the exercise. Indeed over the past few years Borghetti has completely re-engineered the airline and created a virtual international network though overseas alliance partnerships.
Since the supply war finished the Australian domestic operators have moved back into profit and Virgin’s international business is also on the cusp of getting into the black.
Despite a return to profit Virgin’s cash flow position has been weaker – due in part to being unable to participate fully in the falling oil price and the Australian dollar.
The Air New Zealand split raises questions about the ownership of Virgin and the operational alliance that the two airlines have across the Tasman.
In terms of ownership Virgin’s structure is particularly unusual. Air New Zealand has 26 per cent, Etihad holds 25 per cent, Singapore Airlines 23 per cent and Branson 10 per cent. This leaves a free float of only 20 per cent – making it difficult for large funds to invest as the stock is so illiquid.
Air New Zealand could attempt to place the stock in the market but even with an additional 26 per cent in the free float many large investors would still consider the stock too illiquid.
The more obvious solution would be to sell the stake to either Etihad or Singapore Airlines. Given the already delicate ownership balance, neither would be happy with the other taking the lot.
Thus a joint bid for for Air New Zealand’s stake (possibly including the 20 per cent minorities) is a possibility.
If Etihad and Singapore chose to increase their holdings, both would need approval from the Foreign Investment Review Board and the minority shareholders plus Branson.
(Assuming Branson is in favour it would be a done deal.)
Etihad boss James Hogan is currently in Australia.
Virgin could set about finding a new airline partner to fill the void – possibilities could include a Chinese or Japanese airline.
The other issue that will be exercising the boards of both Air New Zealand and Virgin is what will become of their alliance across the Tasman, which comes up for renewal in August.
In a statement to the ASX Luxon said “We look forward to continuing our partnership on the Tasman alliance providing customers with the most comprehensive trans-Tasman network”.
How this plays out is not known. However, it is noteworthy that Virgin can codeshare with Singapore across the Tasman – and has already been doing this with flights from Canberra.
But it seems clear enough that Air New Zealand thinks that the A$350m it has tied up in Virgin shares could be earning a better return somewhere else.