Virgin Blue stake helps Air NZ diversify earnings

Tuesday 25th January 2011

The acquisition of a 15% stake in Virgin Blue will help Air New Zealand diversify its earnings from too much concentration at home and provide exposure to Australia's larger market, Moody's Investors Service says.

Air New Zealand announced on Friday that it had paid A$145 million (NZ$189.5m) for a 14.9% stake in Australian-based airline Virgin Blue.

Air New Zealand would probably not receive dividends in the near term as Virgin was expected to continue investing in expanding its fleet as it stepped up competition with Qantas, an item in Moody's Weekly Credit Outlook said.

"Nevertheless, the purchase will give Air New Zealand a presence in Australia, one of the world's most profitable aviation markets, while sparing the carrier the cost of doing the actual flying."

Now Air New Zealand relied on its home market, where it had an 80% market share, for virtually all its earnings.

In Australia, Virgin Blue had maintained a nearly 30% market share, positioning itself as a leisure line between Qantas' full-service offerings for business travellers and low-cost carriers such as Jetstar, wholly-owned by Qantas, and Tiger Airways, Moody's said.

In 2010, Virgin Blue announced a shift to target the profitable business market, dominated by Qantas, while at the same time maintaining a leisure market offering. To do so, Virgin Blue was increasing the frequency of flights on key trunk routes and investing in additional, wide-bodied capacity to cater to transcontinental routes to Perth, a nexus for Australia's natural-resources industry.

Virgin Blue previously announced new routes into Europe via Abu Dhabi's Etihad, into the United States via Delta Air Lines, and across the Tasman Sea via Air New Zealand.

Those routes would not deliver direct incremental earnings to Virgin Blue, but the airline would benefit from channelling Etihad and Delta's customers into its domestic network, Moody's said.

That increased competition for Qantas, as it brought Virgin Blue's range of offerings closer to that of Qantas for international travel and would require Qantas to reduce prices to keep load factors at acceptable levels.

Virgin Blue had cheaper fares than Qantas, and was well positioned to win market share, Moody's said.

In 2000, Air New Zealand had tried unsuccessfully to enter Australia by acquiring Ansett Airlines, which subsequently collapsed.

"By contrast, this latest move costs little but has a larger potential payoff. It may, however, be a tough fight. 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."

NZPA

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