What price for SIA in its pursuit of a Virgin bride?

Will history repeat itself as Singapore Airlines (SIA) mulls over the prospect of acquiring a higher stake in Virgin Australia now that the latter’s largest shareholder, Air New Zealand (Air NZ), has decided to exit the partnership?

SIA, which has approval from Australia’s Foreign Investment Review Board to increase its stake to 25.9 per cent, announced that it has increased its stake from 22.91 per cent to 23.11 per cent at a cost of A$3.18 million (S$3.31 million). If SIA takes up its full allotment, it will be a larger partner than Etihad Airways, which owns about 24 per cent of the Australian carrier. Air NZ owns 25.89 per cent and Richard Branson’s Virgin Group only about 10 per cent. Speculation is rife that SIA may seek the Australian authorities’ approval to go even higher.

SIA’s relationship with the Virgin name goes back to 1999, when it made headlines by buying 49 per cent of Virgin Atlantic at a cost of £600 million (S$1.2 billion). Although SIA had by then become established as one of the world’s best and most profitable airlines, it was a big deal for a carrier from a small country to be acquiring such a big stake in a renowned brand, yet again reaffirming the courage of a David in the aviation world of Goliaths.

Unfortunately the triumph was short-lived; after years of lacklustre performance, SIA sold the stake to Delta Air Lines at a hefty loss in 2014 for £224 million.

The circumstances in both cases are quite different. The Atlantic deal was expansionary in nature, at a time when SIA was aggressively seeking transatlantic rights from London to New York. Denied that channel, SIA saw Virgin as a vehicle to attain that dream, which became less imperative when SIA was granted access from Frankfurt and Amsterdam instead.

While Virgin Australia offers the attraction of trans-Pacific accessibility from Sydney or Melbourne to the United States west coast — another dream of SIA to circumnavigate the world — this deal is more about protecting SIA’s Australian market. That clearly was the intent at the onset of the Virgin tie-up, and overzealous analysts seem to point to a Hobson’s Choice for SIA — the threat that if it did not step into the void left by Air NZ, it might open the door to a competitor.

Such conjecture raises a couple of questions. First, how real is this threat to thrust SIA into buying, willingly or reluctantly? Second, who are the likely competitors that SIA should be concerned about?

No doubt the Australian market is important to SIA, whose popularity on the Kangaroo Route has enhanced Changi Airport’s hub status. However, Singapore was hard hit in 2013 when the Australian carrier Qantas partnered Dubai’s Emirates to shift the hub for the traditional traffic from Changi to Dubai International.

And as the competition between SIA and these carriers intensifies, it becomes imperative for both SIA and Changi to work together to maintain their leads respectively as the preferred airline and stopover destination.

It is here that Virgin’s role as a domestic feeder airline becomes important. But if the poor performance of the erstwhile Tigerair Australia is any indication, the magic of the association is sadly lacking as Qantas tightens its grip on 80 per cent of the market.

Since on hindsight SIA did not need Virgin Atlantic as it thought it would to expand its transatlantic market, it might ask itself the same question about whether it needs to own more of Virgin Australia to secure its Australian market. No doubt a strong partner helps, one that Virgin has promised to be, but shoring up a struggling airline to maintain the status quo in fear of a less friendly replacement may invoke the ghost of a dismal past if it does not come with active participation.

The pain of SIA’s failed investment in Air NZ’s assimilation of the now-defunct Ansett Airlines, which incurred heavy losses in the hundreds of millions at the turn of the century, is not easily forgotten. Uncanny, the seeming deja vu.

Who then should SIA be wary of? Etihad may become Virgin’s largest investor, and observers think this will add to the competition that SIA already faces from Middle East carriers in the region.

The assumption is somewhat flawed if you consider the number of cross relationships within the industry despite the broad alliances. So long as SIA maintains the partnership in some way, any change is unlikely to be significant. Etihad, which has a string of minority interests in several airlines across the globe, has not indicated a possible tussle with SIA for the pie.

Airlines buying into and selling out of each other is as common as a fling on the rim, almost whimsical. Besides, the partnership may act to counter the aggression of the other Middle East carriers.

Then there are the Chinese carriers that are deemed most likely to be interested in owning Virgin Australia as direct traffic between China and Australia sees a steady increase over the years.

That move has more or less been pre-dated by Qantas as it expands its relationship with Chinese carriers that include competing operators such as China Eastern Airlines and China Southern Airlines. Together, SIA and Virgin Australia have a three-way tie-up with Air China, clearly benefitting Changi as the gateway to the region. But that does not necessarily make Air China an interested party.

In the big picture, the Australian government presumably will want to ensure a domestic alternative to Qantas in the name of competition. So there is some comfort there.

The lure of the Virgin name is almost irresistible, and the price does not come cheap.

Interestingly, Virgin America has just been sold to Alaska Airlines, and Virgin chief Richard Branson quipped: “They paid a high price for a great brand.” But that is a different game altogether, as the acquisition will directly expand Alaska’s network in the United States. The Australian poser for SIA is not whether a competitor will take its seat in Virgin Australia, but whether it is a sound investment that will reap good dividends. Partnership benefits are to be expected.

ABOUT THE AUTHOR:

David Leo is an aviation veteran, having worked in airline operations and customer service. He is also a published author.