David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's a good idea, when investing, to ensure purchases make either strategic or financial sense. So why did Nanshan Group just buy 20 percent of Virgin Australia?

One answer might be, "because it was for sale." But that sort of logic sounds uncomfortably close to that of the drunkard who looked for his keys under a lamp post because that's where the light is. In investing, the opportunities you turn down often count for more than the ones you take up.

Nanshan, a closely held Chinese group, will pay A$159 million ($118 million) to purchase most of Air New Zealand's stake in the carrier at 33 Australian cents a share. Air New Zealand has been trying to exit its holding since March, and the announcement comes just 10 days after HNA Group, another closely held Chinese investor, announced plans to pick up a 13 percent interest via a placement at 30 Australian cents.

New Kids on the Block
The make-up of Virgin Australia's shareholder base is about to change dramatically
Source: Company reports, Bloomberg
Note: Not shown is the 17.22% stake currently held by other shareholders, falling to 14.97% post the two transactions.

Virgin Australia has long been a plaything of strategic investors. Until these latest transactions complete, its three biggest shareholders will be Air New Zealand, Etihad Airways and Singapore Airlines, which all compete with Qantas on long-haul routes to Asia and Europe. When they signed up to a A$350 million equity raising in 2013, Qantas Chief Executive Officer Alan Joyce e-mailed staff alleging they had an agenda "to terminally weaken Qantas" and then "take a domestic monopoly position."

That might seem the motivation in this case. Like HNA, which owns Hainan Airlines, Nanshan already has a presence in aviation through its ownership of Qingdao Airlines.

On closer inspection, though, the strategic logic doesn't hold water. Hainan Airlines is a substantial carrier already, with paying passengers last year flying a combined 66 billion kilometers -- further than Japan Airlines or Thai Airways, and almost twice Virgin Australia's 36-billion-kilometer figure .

Qingdao Airlines started flying only two years ago and is a minnow by comparison, serving just 19 destinations in mainland China that don't include Shanghai, Guangzhou or Shenzhen, let alone HNA's base in Haikou or anywhere that links up directly with Virgin's own services .

You can get a sense of how few synergies are likely to come from this combination by looking at Air New Zealand's attempt to outline a strategic rationale in its press release on the deal: 

Quote from Air New Zealand statement

What about financial motivations? Well for starters, those looking purely for investment returns might want to consider avoiding airlines altogether. Nanshan has interests in aluminum, textiles, finance, real estate, health care, tourism and education, most of which offer better prospects for making money.

Even if you'd been captivated by the romance of air travel and investment considerations are taking second place, you'd be hard pressed to pick a worse candidate than Virgin Australia.

Qantas's dominant role in Australia's domestic market --  plus a bruising, ultimately fruitless battle to break that stranglehold -- have meant Virgin's return on equity has averaged negative 18 percent over the past three years. That's the worst performance globally after AirAsia X and Thai Airways among carriers that clock up more than 10 billion passenger kilometers annually.

Better Ways to Make Money
Three-year average return on equity of select major airlines
Source: Bloomberg
Note: Shows airlines globally with at least 10 billion revenue passenger kilometers annually.

The money Nanshan is spending would be enough to get it a substantial stake in Turkey's Pegasus, Greece's Aegean, Aeromexico or Hungary's Wizz Air, all of which have averaged a return on equity of more than 10 percent over the past three years.

Even after it's bought the 20 percent stake, Nanshan could be on the hook for a further cash infusion or share dilution if Virgin Australia's ongoing capital structure review results in equity raisings or shareholder loans -- tactics previously used by the company to prop up its balance sheet.

Pumping more cash into a struggling airline is one way of getting money offshore, but there ought to be better uses of Nanshan's funds than this. Just because someone's selling, doesn't mean you have to buy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on revenue passenger kilometers.

  2. Thanks to the magic of code shares, you could fly from Australia to Beijing via Singapore, on Singapore Airlines planes badged as Virgin Australia flights. Then you could transfer to a Qingdao Airlines flight to its base in the eponymous city. That seems an unnecessarily complicated way of going about things for all but the most dedicated travelers.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at