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Virgin navigates through balance sheet turbulence

Investment involved in Virgin’s big push into the business market leaves its balance sheet in something of a weakened space.

Singapore Airlines has the financial firepower to make a bid for the remainder of Virgin Australia, but it may not do so unless a Chinese rival makes an offer for Air New Zealand’s 25.9 per cent stake, according to aviation experts.

Maybank Investment Bank analyst Moshin Aziz said based on his estimates, Singapore Airlines had a net cash balance of $S3 billion ($2.95 billion) at the end of March, giving it one of the strongest airline balance sheets globally.

An acquisition of the remainder of Virgin would cost around $1.5 billion, including an expected recapitalisation of the carrier.

Singapore Airlines is the third largest shareholder in Virgin Australia.

Singapore Airlines is the third largest shareholder in Virgin Australia.

“[Singapore Airlines] clearly have the financial muscle, the money required to buy this airline,” said Mr Aziz, who is based in Kuala Lumpur. “But to put so much money in, you want clarity of the management of the airline and the [Australian] government would need to give its blessing.”

Singapore Airlines, as of January, had Foreign Investment Review Board approval to own up to 25.9 per cent of Virgin. After increasing its stake slightly last week, it now holds 23.11 per cent. Etihad Airways, a competitor to Singapore Airlines on the Kangaroo route, owns a 25.1 per cent stake.

Most market speculation about the possible buyer for the Air NZ stake has centred on Singapore Airlines, Delta Air Lines and Chinese carriers.

Strategic Aviation Solutions chairman Neil Hansford said United Airlines, an alliance partner of Singapore Airlines and Air New Zealand, could also be a potential buyer.

Singapore hub

“If somebody like United or Delta came in, Singapore would rest comfortably with them,” he said. “If it was somebody like China Southern or China Eastern that could be something that is not in Singapore’s interest. If the Chinese came in and started to drag more hubbing over Beijing or Guangzhou or somewhere similar, that would drag even more people away from the Singapore hub.”

Mr Hansford said under that scenario, Singapore Airlines might feel it had no choice but to bid for the remainder of Virgin.

The domestic portion of Virgin can be 100 per cent foreign owned, but the international arm must remain 51 per cent Australian-owned to ensure it can keep its traffic rights. Virgin in 2012 separated its international arm into a company with a separate board, in a structure Qantas chief executive Alan Joyce has previously referred to as a “sham”.

But Mr Hansford said he did not expect Singapore Airlines would have any problems keeping Virgin’s international traffic rights given that when Ansett was owned by Air New Zealand, it had a similar structure with 51 per cent of the international arm controlled by AMP.

Pacific Aviation Consulting director Oliver Lamb said the prospect of Singapore Airlines buying Virgin probably wouldn’t be too concerning for the Australian government, given Singaporean companies have invested in telecoms and other strategic sectors for a long time.

Mr Aziz and Mr Lamb both said they expected Singapore Airlines would take a different approach to Virgin’s loss-making international business if it owned the Australian carrier.

Singapore Airlines has a large order book of 787s and A350s and could transfer some of them to Virgin for flying on the trans-Pacific route and to north Asia or even give some to low-cost arm Tigerair Australia.

“Virgin Australia has got a relationship with Tiger and Tiger has a relationship with Scoot and it is a very neat tie up in many ways,” Mr Lamb said. “You could see Tiger going long haul like a Scoot-light.”