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Delta Air Lines coy on intentions toward Virgin Australia

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by April 12, 2016 General

Delta Air Lines, the trans-Pacific alliance partner of Virgin Australia, says it is not currently considering the purchase of a stake in the Australian carrier but it has not ruled out buying shares in the future.

Analysts have pointed to US-based Delta as a potential buyer of Air New Zealand’s 25.9 per cent stake in Virgin Australia, although it could only buy 19.9 per cent of the Australian carrier on the initial purchase to comply with takeover provisions.

Delta Air Lines has a trans-Pacific joint venture with Virgin Australia. Delta Air Lines has a trans-Pacific joint venture with Virgin Australia. 

Singapore Airlines is viewed as the most likely player to make a full takeover bid for Virgin Australia, particularly if Chinese rivals take a close look at the Air New Zealand stake.

Singapore Airlines last week raised its stake in Virgin to 23.11 per cent but as of January it had Foreign Investment Review Board for a 25.9 per cent stake, which when combined with the Air New Zealand holding would give it majority control.

Delta, which has equity stakes in other partner airlines globally including Virgin Atlantic, Aeromexico, China Eastern and Brazil’s Gol, said it considered Virgin Australia to be a “valued and long-term partner”.

“However, we are not considering the purchase of a stake now and we don’t rule anything out for the future,” a Delta spokeswoman said in response to questions from The Australian Financial Review. “Delta is honoured to have Virgin Australia as a partner and our partnership remains stronger today than it has ever been.”

Delta and Virgin have been partners on the trans-Pacific route since 2009, competing against a rival alliance between Qantas and American Airlines as well as United Airlines. Air New Zealand, an alliance partner of United Airlines, has competed against Virgin for traffic on the trans-Pacific route. 

ACCC approval

It is understood Air New Zealand did not object to the Virgin alliance with Delta in the past in part because it believed the Australian Competition and Consumer Commission would block a three-way trans-Pacific alliance between United, Virgin Australia and Air New Zealand as it might be viewed as a reason for Delta to halt its Sydney-Los Angeles flights, lowering competition.

However, Strategic Aviation Solutions chairman Neil Hansford said the entry of American Airlines on the Sydney-Los Angeles route last year made it more likely that the ACCC would approve a Virgin-United-Air New Zealand trans-Pacific alliance in the future. 

He said it was possible Delta could buy the Virgin stake to cement its alliance or United could seek to do so. United’s board, however, is in the middle of a proxy battle against activist investors.

Meanwhile, Singapore Business Review reported broker OCBC did not rule out Singapore Airlines making a takeover offer for Virgin to allow the Singaporean carrier to compete more effectively against Qantas and lift its competitiveness in the Australasian market.

Deutsche Bank analyst Cameron McDonald noted the separate board of Virgin’s international arm, which is majority Australian owned, would need to approve any changes to joint venture agreements in the event of a Singapore Airlines takeover.

He said Singapore Airlines would probably be most interested in buying Virgin in the event it could also obtain the service agreement to operate the international operations, particularly on the trans-Pacific routes.

Mr McDonald said Virgin, which has obtained a $425 million debt facility from its major shareholders, needed to reduce debt to place it on a more sustainable financial footing and its hedging policy should be reviewed.

CAPA Centre for Aviation said Etihad, which owns a 25.1 per cent stake in Virgin, was an unlikely buyer of the Air New Zealand stake because it was concentrating on bedding down growth elsewhere and the Abu Dhabi government was reducing spending due to the lower oil price.

China’s HNA Group has been actively investing in airlines both within China and outside China and could be among the carriers interested in examining a stake in Virgin.

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