Bigger Virgin stake seen as smart Air NZ play

Analysts were not worried by the financial position of Virgin Australia, which posted a net loss of A$98.1 million for its last financial year. Photo / Richard Robinson

Air New Zealand's plan to boost its stake in Virgin Australia is a smart, strategic move that will protect and strengthen its transtasman alliance with the Aussie airline, say analysts.

This country's flag carrier, which is 73 per cent owned by the Government, yesterday announced it had received regulatory approvals to acquire an additional 3 per cent of Virgin Australia, taking its shareholding to 22.9 per cent.

Air New Zealand said the approval allowed it to increase its stake by a further 3 per cent to 25.9 per cent, provided it complied with "creep" provisions under the Australian Corporations Act. Those provisions allow a shareholder to build its stake beyond 20 per cent provided it does not increase it by more than 3 per cent in any six-month period.

"In the airline industry, equity stakes have become an increasingly important part of cementing partnerships," said Craigs Investment Partners analyst Chris Byrne. "Air New Zealand wants to be one of the stronger partners for Virgin."

Virgin Australia's other major shareholders are Singapore Airlines (19.9 per cent), Sir Richard Branson's Virgin Group (12.47 per cent) and Abu Dhabi-based Etihad Airways, which last month boosted its stake to 13.4 per cent from 12.34 and is targeting a 19.9 per cent shareholding.

Salt Funds Management managing director Paul Harrison said increasing the shareholding was a good strategic move for Air New Zealand and protected its revenue gains from the transtasman alliance.

The partnership connects Air New Zealand's 26 domestic destinations in this country with Virgin Australia's more than 35 domestic Australian destinations and strengthens the Kiwi carrier's position against Qantas and Emirates in the highly competitive transtasman market.

"Air New Zealand has seen Etihad start to increase its stake [in Virgin Australia] a little bit, so they'll be trying to make sure they don't lose influence," Harrison said.

Forsyth Barr head of private wealth research Rob Mercer said Virgin Australia was a key part of the New Zealand carrier's Australasian strategy and the plan to increase the stake showed the investment was seen as a long-term one.

"To be strong in the Pacific Rim does require Air New Zealand to have a good network into Australia."

Analysts were not worried by the financial position of Virgin Australia, which posted a net loss of A$98.1 million for its last financial year.

Air New Zealand chief executive Christopher Luxon said the opportunity to increase the shareholding and the recent extension of the transtasman alliance meant the airline could work "confidently" with Virgin Australia to provide a competitive Australasian and international network.

Shares in Air New Zealand closed up 0.5c yesterday at $1.50.