Monday, October 29, 2012

Singapore Airlines Buys Virgin Australia stake

SYDNEY--Singapore Airlines Ltd. bought 10% of Virgin Australia Ltd. for 105 million Australian dollars (US$108.5 million) in one of three separate deals announced Tuesday, as Australia's second-biggest carrier intensifies competition with its main rival Qantas Airways Ltd.

Virgin Australia said it also agreed to buy 60% of budget carrier Tiger Australia from Tiger Airways Holdings Ltd. for A$35 million and acquire regional carrier Skywest Airlines Ltd. in a cash and shares offer worth about A$95 million.

"Singapore Airlines fully supports the ongoing transformation at Virgin Australia, which has already resulted in a more competitive aviation market in Australia," Singapore Airlines Chief Executive Goh Choon Phong said in a statement.

The deal is a further sign of a strategic shift by Singapore Airlines as it adapts its business to cope better with the growth of low-cost carriers across Asia and competition from state-backed Middle East rivals. Singapore has also gained a direct stake in Australia's lucrative domestic travel market that has benefited in recent years from the boom in the nation's mining and energy sectors.

"We see today's move by Singapore Airlines as a strategic shift down south to back Qantas' main domestic competitor," said Peter Esho, market analyst at broker CityIndex.

The low-cost travel boom is altering Asia's aviation-industry, with national carriers mulling radical changes to their businesses to compete more effectively. Budget airlines now account for one-quarter of Asia-Pacific traffic.

Virgin Australia said it will issue shares to Singapore Airlines at 42.88 Australian cents each, a 6.8% discount to their last traded price of 46 cents, and equal to their 30-day volume-weighted average price. The two airlines already have an alliance partnership and it was expected that Singapore Airlines may want some shares, given Virgin Australia has sold similar-sized stakes in the company to other alliance partners including Etihad Airways and Air New Zealand Ltd.

Subject to regulatory approval, Virgin Australia will take control of Tiger Australia as the budget airline continues to recover from the grounding of its entire fleet last year following safety breaches. Singapore Airlines currently owns about 32% of Tiger Airways, which competes directly with Qantas's Jetstar unit. Virgin Australia said it will offer Skywest shareholders 45 Australian cents per share via 22.5 Australian cents cash and 0.53 of a Virgin Australia share for each Skywest share.

If all three deals are completed, they will boost Virgin Australia's fleet to 139 aircraft from 108 and add ten new destinations in Western Australia state.

"The transactions overall represent a monumental shift for Virgin Australia which, if approved, will see a more even playing field in Australian aviation," Macquarie analysts said in a note. "They arguably create a replica of Qantas."

Qantas recently set up a low cost joint-venture in Singapore through its Jetstar unit and is awaiting approval for a strategic tie-up with Dubai-based Emirates. It has also set up a low-cost joint ventures in Japan, Hong Kong and Vietnam through Jetstar.

"As Qantas closes more Asian deals and looks at ramping up its Emirates code share alliance, competitors will be feeling the heat," Mr. Esho said.

Virgin Australia shares were up 2.2% at A$0.47 in early trading in Sydney.

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