The Virgin ownership game

A report by Mark Pilling in Flight Global says that Richard Branson’s Virgin Group could be at the centre of a series of ownership changes following the revelation that Singapore Airlines is thinking of selling its 49% stake in Virgin Atlantic Airways.

Although SIA is tight-lipped about reports that it is looking to sell, the timing makes sense. The market for airlines in terms of asset value, buoyed by private equity interest, is strong.

In addition, SIA is more interested in strengthening its position in its home region and could use the proceeds from its Virgin stake sale to fund new acquisitions. It is, for example, in discussions with China Eastern Airlines about taking an equity stake of around 25% in the Shanghai-based carrier.

SIA paid £600 million ($975 million) in late 1999 at the top of the market for its stake in Virgin Atlantic as part of its ambitions to become a global carrier and to eventually operate on the lucrative transatlantic market.

Shortly before it took the Virgin stake, SIA announced it was to join the Star Alliance and at the time, the Virgin move caused considerable tension at some Star members, in particular United Airlines, which were concerned about competitive tensions on key routes from London Heathrow to the USA.

Despite some codeshares between the two carriers, SIA’s commercial integration and its strategic influence on its partner has been minimal, say analysts, with SIA more or less a sleeping partner.

Virgin, however, is loyal to its suitor, “They have helped to create substantial value in the airline since they bought their stake in 1999.”

According to Virgin, “If they do plan to sell, then Richard says he would be interested in talking to Singapore Airlines about buying it back.”  “It is one of several possible options, which could also include another buyer for the minority shareholding or possible flotation, or Singapore holding on to their shareholding.”  “There seems little upside for Branson to buy more of a carrier he already controls, leaving SIA’s stake most attractive to private equity firms or another airline.”

If SIA does sell its Virgin stake it will have other repercussions.  For instance, Australia’s Virgin Blue would benefit from SIA’s exit, because when SIA bought its Virgin stake, the Virgin Group agreed that it would not use the Virgin name on any other international airline without SIA’s consent.

This forced Virgin Blue to adopt the Pacific Blue brand for flights from Australia to New Zealand and the Pacific islands.

If SIA sells its Virgin Atlantic stake quickly enough Virgin Blue will be able to use its own brand on US routes it plans to launch next year.

Elsewhere in the Asia-Pacific, the Virgin Group is pondering a minority stake in Fly Asian Express, a Malaysian carrier which will be used later this year by AirAsia founder Tony Fernandes to launch a new long-haul, low-cost operation.

Analysts say Virgin will give the new long-haul player credibility and a critical distribution channel in Europe.

Branson also has long eyed the takeover of UK carrier bmi, which holds some 11% of the slots at Heathrow, with SAS in June announcing plans to sell its 20% stake in bmi, which is undergoing a major transition as it reduces its traditional reliance on short-haul flights and focuses more on medium-haul and long-haul routes.  bmi’s purchase of British Airways franchise British Mediterranean earlier this year gives it a medium-haul operation and new US-Europe Open Skies will finally give it opportunities to expand over the Atlantic. bmi now operates limited long-haul services with three Airbus A330s but in July it agreed to lease five more A330s to support new Heathrow-US routes that will be launched next spring.

Report by The Mole