Air NZ admits it has eye on Virgin stake

By ELLEN READ

Air New Zealand has confirmed its interest in buying into discount airline Virgin Blue despite admitting there are no active negotiations.

The company is taking a medium-to-long-term view of the potential investment, as a complement to its Freedom Air brand.

"We've flagged that we're going through difficult times but that doesn't mean to say that you pass by investments which you believe will strengthen the airline," Air New Zealand spokesman Mark Champion said yesterday.

Air NZ is refusing to discuss the price or say how it will finance the investment.

"We have had discussions with Virgin Blue over the course of this year but those discussions are what you might call inactive at the moment," Mr Champion said.

He also declined to speculate on the future of the talks - and why they have halted.

Virgin Blue's New Zealand manager, Mark Siladi, said he could not really comment until he had spoken to the company's Australian executives.

"As of last Friday when I left Australia, it was very much the case that, yes, in the past we've had some discussions, but that there certainly aren't any discussions at present or announcements pending that I know of," he said.

Virgin Blue, which is part of Sir Richard Branson's Virgin Group, has applied to the New Zealand and Australian Governments to operate across the Tasman but, although the countries have an open skies agreement, has met hurdles because it is British-owned.

Mr Siladi said the licensing process was proceeding but he was waiting for the announcement on future ownership of Air NZ to ascertain who Virgin's competition was likely to be.

"We are continuing with the process of our application but we are certainly slowing it down.

"We are waiting to see what the Air New Zealand decision is because we would like to see what the competitive environment would be like," he said.

His airline hoped to launch in New Zealand before Christmas but if this was not possible they would hold off for the next season peak.

Air NZ's interest in buying into Virgin Blue is independent to current talks about Air NZ's share structure, which it and its major shareholder, Singapore Airlines, are trying to change in order to raise more capital.

The manager of consulting services at Sydney's Centre for Asia Pacific Aviation, Ian Thomas, said there would be a lot of obstacles to Air NZ taking a stake in Virgin Blue.

"I think it would be perceived, and this is an issue for both sides I suppose, as an attempt to reduce competition and that's really the major problem for any deal even though there is some logic to it," he said.

Such a deal would mean a further consolidation of the Australian airline industry, which has already gone from four to three carriers, so regulatory resistance would be likely, Mr Thomas said.

Air NZ's ability to afford buying into Virgin Blue was an issue as the Branson-owned company had an aggressive fleet expansion programme.

"Over the next couple of years it has quite a large expansion planned which has to be funded.

"There's a question obviously as to how that cash flow comes about and whether cash flow itself can take care of it.

"Given that there are some funding costs involved there are obviously implications as far as Air New Zealand's concerned," Mr Thomas said.

Virgin Blue has held talks with giant US low-fare carrier Southwest Airlines, as well as European discounters Ryanair Holdings (Ireland) and EasyJet (Britain), about selling a minority stake in its business but no deals have been forthcoming so far.

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