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Singapore Air May Seek Asia Deals After Virgin Stake Sale

Singapore Airlines' Service Counter at Changi Airport
Singapore Airlines Ltd. could revisit plans for China or India investments after adding to aviation’s biggest cash pile through the possible sale of a stake in Virgin Atlantic.Photographer: Munshi Ahmed/Bloomberg

Singapore Airlines Ltd. could revisit plans for China or India investments after adding to aviation’s biggest cash pile through the possible sale of a stake in Virgin Atlantic.

The carrier has $3.4 billion of net cash, according to data compiled by Bloomberg, enough to buy eight Airbus SAS A380s at list prices. That means it could use funds from a Virgin stake sale for investments in the world’s two most populous nations or to pay a special dividend, said Paul Yong, director of research at Singapore-based DBS Vickers Securities.

“They’d be looking at mergers and acquisitions with or without this deal,” he said. “But if it does go through, their war chest will be beefed up significantly.”

Singapore Air said this week it’s in talks to sell its 49 percent share of Virgin Atlantic as competition from Middle East carriers and slower growth in Europe and the U.S. hit long-haul travel. The carrier is instead focusing on growth in the Asia-Pacific region, buying a stake in Virgin Australia Holdings Ltd. and adding new planes for regional routes.

The Virgin sale “seems to point to some further corporate activity,” said Andrew Orchard, an analyst with CIMB Securities Hong Kong Ltd. “They don’t need the cash.”

China Eastern

The airline could look to raise its stake in Virgin Australia or try to revive plans for an investment in China Eastern Airlines Cop., he said. Singapore Air tried to buy a stake in the carrier with parent Temasek Holdings Pte. about five years ago. The offer was ultimately vetoed by the Shanghai-based airline’s minority shareholders.

Singapore Air, the world’s second-biggest by market value, can’t comment on potential investments while the Virgin stake sale is being discussed, said Germaine Shen, a spokeswoman. The airline is “very open” to investment opportunities in growth areas, including India, China and Southeast Asia, Chief Executive Officer Goh Choon Phong told investors last month.

Delta Air Lines Inc. is interested in buying the Virgin Atlantic stake, possibly with partner Air France-KLM Group, two people familiar with the matter said this week. The U.K. carrier’s billionaire founder Richard Branson will probably retain a majority share, Virgin Atlantic Chief Executive Officer Steve Ridgway said Dec. 3.

Singapore Air may look again at China Eastern or possibly China Southern Airlines Co. because of the country’s travel growth, DBS Vickers’s Yong said. The carrier already has a stake in China Eastern-controlled China Cargo Airlines. China Eastern Chairman Liu Shaoyong has repeatedly said that the carrier is still open to selling a stake to a strategic investor.

India Investments

Singapore Air could also look for a deal in India following a recent loosening of foreign-investment rules, Yong said. The country’s passenger numbers could triple to 452 million a year by 2020, according to a March study by CAPA Centre for Aviation and SITA.

Still, Indian carriers have struggled to turn rising demand into profit because of price wars, high fuel taxes and competition from state-owned Air India. Kingfisher Airlines Ltd., which has said it’s seeking overseas investors, halted flights in October because of a cash shortage.

“You wouldn’t need much cash to be buying your way into India, but you’d probably be buying more trouble than it was worth,” said Peter Harbison, executive chairman of CAPA Centre for Aviation, which advises airlines.

Jet Airways (India) Ltd., the nation’s biggest carrier, is close to selling a 24 percent stake to Abu Dhabi-based Etihad, raising about 16 billion rupees ($290 million), an Indian government official said this week. He declined to be identified, citing rules. Etihad is assessing possible investments in one or two Indian carriers as well as looking at China, CEO James Hogan said in a Dec. 3 interview.

Singapore Air in 2000 made a joint bid with Tata Group for a 40 percent stake in Air India. It abandoned the effort about 10 months later, partly because of political opposition.

Virgin Australia

The Singaporean carrier is more likely to boost its stake in Virgin Australia than investing in India, Harbison said. The airline bought 10 percent of Virgin Australia, the nation’s second-biggest carrier, for A$105 million ($110 million) last month to help provide traffic for its hub.

“I’d be surprised if they didn’t go to 20 percent,” Harbison said. Branson’s Virgin Group holds 24 percent of Brisbane-based Virgin Australia, Air New Zealand Ltd. owns 19 percent and Etihad holds 9 percent, according to data compiled by Bloomberg.

Overseas Failures

Singapore Air’s previous overseas investments have failed to pay off. The airline bought the Virgin stake for 600 million pounds in 1999, or about $970 million at the time. It subsequently wrote off goodwill amounting to about 96 percent of the purchase price, according to spokeswoman Shen.

The carrier bought a 25 percent of Air NZ in 2000. That investment was written down after the New Zealand carrier sought a government bailout following the collapse of Australian unit Ansett Holdings Ltd. The stake was later sold.

Singapore Air has traditionally maintained a net cash position, with more cash in hand than debt. It’s only failed to achieve this in its year-end accounts three times since 1990, according to data compiled by Bloomberg. The last time was in the year ended March 2004. Japan Airlines Co. has the second-biggest net cash position among carriers worldwide with $775 million, about a quarter of Singapore Air’s tally, the data show.

The size of the cash holding has depressed Singapore Air’s return on equity, a measure of profitability. It had the fourth-lowest among the 27 carriers worth more than $1 billion that made a profit last year, according to data compiled by Bloomberg.

Special Dividend

The airline may use some of its cash for a special dividend. It gave shareholders an 80 Singaporean cents extra payout last year, and one of 54 cents in 2007, according to data compiled by Bloomberg. It also span off its ground-handling unit by giving stock to investors in 2009.

“If they have excess cash flow it should go back to the shareholders,” said Kelvin Lau, an analyst at Daiwa Capital Markets HK Ltd. “They are not really running out.”

Singapore Air may also decide to use its money to help fund existing growth plans rather than for overseas deals, said CIMB’s Orchard. It provisionally ordered five A380s and 20 A350-900s, worth $7.5 billion at list prices in October. Regional arm SilkAir agreed to order 54 Boeing Co. 737 planes in August to more than double the size of its fleet.

Long-haul budget arm Scoot Pte., which began flights this year, is also holding orders for 20 Boeing 787s. The unit joined regional low-cost affiliate Tiger Airways Holdings Ltd., SilkAir and the main Singapore Air business in the company’s portfolio.

“They’ve got four carriers as it is, so their hands are pretty full,” Orchard said. “Do they really want another transaction at this time?”

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