Virgin Blue stake offers challenge to rival

Photo / Sarah Ivey

Qantas Airways, Australia's national carrier, is unlikely to take Air New Zealand's investment in rival Virgin Blue Holdings sitting down, having successfully fended off local competition.

Rating agency Moody's Investors Service says the Air NZ stake is a "further sign of Virgin's growing competitive challenge to Qantas in the airline's home turf" and will put pressure on the Australian airline's margins.

The New Zealand airline's 15 per cent stake in Virgin gives Air NZ exposure to Australia's domestic market without the cost of doing the actual flying.

"This development increases competition for Qantas, as it brings Virgin Blue's range of offerings closer to that of Qantas for international travel and will require Qantas to reduce prices to keep load factors at acceptable levels," associate analyst Ben Goodwin and VP senior credit officer Ian Lewis said in their note.

"It may, however, be a tough fight," they said.

"Qantas, with its dual-brand strategy and entrenched, leading position in Australia, has shown in the past that it knows how to counter competitive challenges."

Last week, Air NZ paid 44 Australian cents a share, or A$145 million, for its Virgin investment.

That followed December's approval for a trans-Tasman alliance between the airlines by Australian and New Zealand regulators.

Moody's said the stake will weaken Air NZ's credit profile slightly, with the airline using cash reserves to fund the purchase.

Still, Virgin probably won't pay dividends in the near term as it invests in its fleet as it takes the competition to Qantas.

Virgin has maintained a 30 per cent share of Australia's domestic market, positioning itself between Qantas' full-service offering and low-cost carriers, such as Tiger Airways and Qantas' subsidiary Jetstar.