Friday 21st January 2011
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Air New Zealand's $189 million purchase of shares in the Australian-based airline Virgin Blue may see more Aussie tourists crossing the Tasman.
Under the new deal passengers would be able to buy "seamless" tickets to fly from anywhere in Australia on Virgin Blue to a connecting Air New Zealand flight to New Zealand, airline chief executive Rob Fyfe said.
It would also allow passengers to buy an Air New Zealand ticket to Australia and fly from any point in New Zealand to any Australian airport Virgin serviced.
That could improve the disappointing level of Australian tourists heading to New Zealand on the airline, he said.
The Australian domestic market was an incredibly important to Air New Zealand, but not as an airline in its own right, he said.
Air New Zealand's acquisition of 14.9% of Virgin shares gave it access to the growing Australian domestic market.
"It's incredibly important. From a perspective of inbound tourism, I think New Zealand performs relatively poorly out of Australia."
Fyfe said it was as easy to fly to New Zealand from Australia as it was to fly to several states.
"Yet if we look at the percentage of Australians we are able to attract over here, I think it is relatively disappointing."
Part of the reason was that for passengers wanting to fly from anywhere other than the eastern seaboard ports and Perth, from which Air New Zealand operated, only Qantas was able to offer a seamless deal.
"If we bring much more competition to that market I think we can attract a lot more tourists from Australia to New Zealand, so that is very exciting for us."
The airline announced it had completed a $189m deal (A$145m) overnight to acquire the shareholding at 44 cents a share. It paid for the deal from existing cash resources.
Fyfe said Air New Zealand would "not at this stage" seek a board seat on the Australian-based airline.
He said Virgin pulled out of New Zealand because it was losing about $20 million a year but there was a "significant performance upside" for Virgin in Australia.
That could be worth "many tens of millions of dollars of potential upside value to the bottom line of Virgin Blue and we don't believe that is reflected in their current share price performance".
The Air New Zealand investment was "purely on an investment basis". It was a long haul move.
When asked when Air New Zealand would begin earning a dividend from its investment, given that Virgin was not paying a dividend, he said Air New Zealand had looked at what it would have earned from the cash it paid for the purchase.
"We believe the upside potential for Virgin in the medium term is strong enough to justify that cost of funds."
Air New Zealand would make its return in several ways - an increase in the share price, new partner opportunities which would improve Air New Zealand margins, and a dividend when Virgin's performance improved.
"We know we will get value out of the trans-Tasman alliance within 12 months. Certainly within 12 to 24 months' time line we will see some value upside."
There would be no direct impact on air fares in the immediate term but the deal would give passengers better access to the Air New Zealand network.
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