Virgin Australia cashes up to mount Qantas challenge

Airline sells 10 per cent stake to SIA and seeks control of two rival operators in Australia

PUBLISHED : Wednesday, 31 October, 2012, 12:00am
UPDATED : Wednesday, 31 October, 2012, 3:11am

Virgin Australia sold a 10 per cent stake to Singapore Airlines and sought control of two local rivals, creating the biggest challenge to Qantas Airways' market leadership in more than a decade.

SIA will spend A$105 million (HK$844.5 million) on new Virgin shares, according to a statement yesterday. Virgin will pay at least A$35 million for 60 per cent of budget carrier Tiger Airways' Australian unit and would bid for all of regional operator Skywest Airlines.

Virgin chief executive John Borghetti is building on a strategy of alliances that already includes investments from Etihad Airways and Air New Zealand.

The move adds to pressure on Qantas, which has linked up with Emirates in a bid to end losses on international routes.

"They're going to give Qantas a run for their money," said Simon Fitzgerald, an analyst at Moelis. Borghetti "is making really well thought-through strategic moves with this company. He's not sitting back waiting for things to happen".

Buying control of Tiger Australia will give Virgin a budget brand to compete with Qantas' Jetstar and bolster its operations on Australian east coast routes where competition has driven business-class ticket prices to 20-year lows.

Tiger Australia, whose parent is part-owned by SIA, won back a full operating licence this month after fixing safety faults that had caused regulators to ground the carrier last year.

"Tiger will allow us to compete against the Jetstar brand much stronger," Borghetti said.

Giving up control of Tiger Australia would let SIA bolster its focus on new long-haul budget carrier Scoot, Strategic Aviation Solutions chairman Neil Hansford said. "It's a bit of saving face by SIA," he said. They are "exiting something that is going through the motions but is never going to deliver what they wanted".

The takeover values the regional carrier at A$94 million. It is subject to shareholder approval.

Borghetti, a former Qantas executive, has transformed Virgin since taking over in 2010, changing the company's name, and completing the abandonment of its previous budget-carrier strategy.