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Virgin Australia Sells 10% Stake to Singapore Airlines

Virgin Australia Holdings Ltd. (VAH) sold a 10 percent stake to Singapore Airlines Ltd. (SIA) and sought control of two local rivals, creating the biggest challenge to Qantas Airways Ltd. (QAN)’s market leadership in more than a decade.

Singapore Air will spend A$105 million ($109 million) on new Virgin shares, according to a statement today. Brisbane- based Virgin will pay at least A$35 million for 60 percent of budget carrier Tiger Airways Holdings Ltd. (TGR)’s Australian unit and it will bid for all of regional operator Skywest Airlines Ltd. (SXR), according to filings.

Virgin jumped the most in almost two months on the deals, as Chief Executive Officer John Borghetti builds on a strategy of alliances that already includes investments from Etihad Airways PJSC and Air New Zealand Ltd. (AIR) The move adds to pressure on Qantas, which last month announced a tie-up with Emirates in a bid to end losses on international routes.

“They’re going to give Qantas a run for their money,” Simon Fitzgerald, an analyst at Moelis & Co. in Sydney, said by phone. 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 Singapore Air, won back a full operating license 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 told a media conference in Sydney.

Scoot Focus

For Singapore Air, handing over control of Tiger Australia will let it bolster its focus on new long-haul budget carrier Scoot, Neil Hansford, chairman of consultants Strategic Aviation Solutions Pty., said by phone from Salamander Bay, Australia.

“It’s a bit of saving face by Singapore Air,” he said. They are “exiting something that is going through the motions but is never going to deliver what they wanted,” he said. Tiger Australia accounts for 25 percent of Tiger’s group revenue.

Virgin Australia, which also cooperates on U.S. routes with Delta Air Lines Inc., rose 5.4 percent to 48.5 Australian cents at the close of trading in Sydney, the most since Sept. 4. Skywest, which flies workers for the mining industry, surged 57 percent to 44 cents, its biggest increase since the company first sold shares to the market in 2009, according to data compiled by Bloomberg.

Virgin will offer 45 cents a share in cash and stock for Skywest, it said today. The takeover, which values the regional carrier at A$94 million, is subject to shareholder approval.

Virgin Transformation

Qantas was unchanged at A$1.34 in Sydney and Singapore Air rose 0.7 percent to S$10.61 as of 3:05 p.m. in Singapore. Tiger Air, which also today reported a second-quarter loss of S$18.3 million ($15 million) driven by S$20 million of operating losses at its Australian unit, climbed 0.7 percent to 74 Singaporean cents.

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 while adding business-class facilities to lure executive travelers from Qantas.

Virgin has also altered its corporate structure since February to get around a cap limiting its ability to add more foreign investors. Richard Branson’s Virgin Group already owns 26 percent stake and Air NZ has an 18 percent share, according to data compiled by Bloomberg.

The investment by Singapore Air and Etihad’s purchase of a 10 percent stake this year would have been impossible under the previous structure, which mandated that the company be majority Australian owned.

Bigger Fleet

The heads of Virgin Australia’s major alliance partners Etihad, Air NZ and Delta have all backed the enhanced tie-up with Singapore Air and none are in talks to seek a board seat at Virgin Australia, Borghetti said.

Virgin Australia will increase its fleet to 139 aircraft and more than 9,000 employees following the deals, according to a statement. The Singapore Air investment has already been approved by Australia’s foreign investment regulator, Virgin said.

For Singapore Air, the deal expands its presence in Australia as it faces rising competition from Middle East carriers on flights connecting the country to Europe. The airline also owns a stake in Virgin Atlantic, Richard Branson’s U.K. carrier.

The deal marks a return to Australia for Singapore Air, which previously had a foothold through a stake in Air NZ. The New Zealand carrier owned Ansett Holdings Ltd., which was Australia’s No. 2 carrier until its collapse following the Sept. 11 2001 attacks. Singapore Air subsequently wrote down and sold off its Air NZ stake following Ansett’s failure.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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