Air NZ alliance wins Moody's approval

The Air New Zealand shareholding and alliance with Virgin Blue has received the tick of approval from brokers and Moody's Investors Service, with brokers picking more good news to follow.

Air NZ announced on Friday it had bought a 14.99% cornerstone stake in Virgin Blue Australia through a book build of 51c per share.

The average entry cost was 44c per share ($A145 million, $NZ188 million) due to price protection from an equity swap.

Craigs Investment Partners broker Chris Timms said Air NZ argued the move created a virtual network in the important Australasian market to compete against Qantas/Jetstar, cemented its relationship with Virgin and provided a low-risk method of gaining exposure to the high-growth Australian market.

"In our global airline sector report, we highlighted our expectation for further cross-border activity.

"Air NZ's move provides a seat at the table with regard to future consolidation in the region, ensuring Virgin and Air NZ's interests are aligned and Air NZ is not marginalised."

It was assumed Air NZ would seek a seat on the Virgin board following the six-month stand-down period, he said.

Coupled with the Virgin Group's 26% stake, Air NZ's cornerstone shareholding acted as a blocking stake against foreign ownership of the Australian airline.

Air NZ had paid a "reasonably full price" but clearly supported Virgin's strategy to improve its yield, exit under-performing routes and work with strategic partners.

"This doesn't change our overall view that there is further upside potential for Air NZ.

"We retain our buy recommendation," Mr Timms said.

Moody's said the 14.99% stake would help Air NZ diversify its earnings from too much concentration at home and provide exposure to Australia's larger market.

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 for 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 NZ.

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 NZ 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."

- Additional reporting NZPA

 

 

Air NZ announced on Friday it had bought a 14.99% cornerstone stake in Virgin Blue Australia through a book build of 51c per share.

The average entry cost was 44c per share ($A145 million, $NZ188 million) due to price protection from an equity swap.

Craigs Investment Partners broker Chris Timms said Air NZ argued the move created a virtual network in the important Australasian market to compete against Qantas/Jetstar, cemented its relationship with Virgin and provided a low-risk method of gaining exposure to the high-growth Australian market.

"In our global airline sector report, we highlighted our expectation for further cross-border activity.

"Air NZ's move provides a seat at the table with regard to future consolidation in the region, ensuring Virgin and Air NZ's interests are aligned and Air NZ is not marginalised."

It was assumed Air NZ would seek a seat on the Virgin board following the six-month stand-down period, he said.

Coupled with the Virgin Group's 26% stake, Air NZ's cornerstone shareholding acted as a blocking stake against foreign ownership of the Australian airline.

Air NZ had paid a "reasonably full price" but clearly supported Virgin's strategy to improve its yield, exit under-performing routes and work with strategic partners.

"This doesn't change our overall view that there is further upside potential for Air NZ.

"We retain our buy recommendation," Mr Timms said.

Moody's said the 14.99% stake would help Air NZ diversify its earnings from too much concentration at home and provide exposure to Australia's larger market.

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 for 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 NZ.

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 NZ 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."

- Additional reporting NZPA

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