New Zealand Aviation NEWS: Benefits from Air NZ's stake in Virgin

A shareholding in Virgin Blue gave Air New Zealand access to a much larger population in a way that did not require a large capital outlay, New Zealand Funds Management chief investment officer Michael Lang said yesterday.

New Zealand's national carrier yesterday lifted its stake in Virgin Blue to 14.99%, with chief executive Rob Fyfe saying there was no intention to go above that holding.

Air New Zealand spent $145 million, or 44c a share, to buy into the Australian-listed airline.

The airline had no intention of entering the Australian domestic market in its own right, he said.

Mr Lang said the cornerstone shareholding in Virgin Blue by Air New Zealand cemented the airline's position as the dominant partner in the recently announced Air New Zealand-Virgin alliance.

"Airlines are a lot about brand, consumer perception and vision, and Fyfe and the broader team have this in spades. The problem is they have such a small population to capitalise on."

The result of the purchase was expected to bring changes to Virgin Blue, resulting in the new alliance taking market share from Qantas - a good thing for Air New Zealand shareholders, Mr Lang said.

Mr Fyfe had found a way to continue to expand his "Air New Zealand vision" in a way that did not require a full takeover.

That was positive for shareholders as they would not need to provide additional capital for the next stage of the airline's growth.

Air New Zealand had rejuvenated itself from a dowdy government-owned entity which bankrupted itself over the Ansett deal, turning itself into an industry leader, with shareholders having seen their shares rise 22% in the past year alone, he said.

The airline's reputation and stock price would both continue to appreciate, with NZ Funds Management valuing the company's share price at more than $2, Mr Lang said.

Mr Fyfe said the investment in Virgin Blue reinforced the airline's strategy to expand its business in Australia-New Zealand, which was continually evolving as a single aviation market.
The alliance with Virgin Blue was a key step in that strategy.

The investment provided Air New Zealand with an interest in the No 2 airline in Australia and, through that, access to the opportunities in the growing Australian domestic market, he said.

Air New Zealand would not seek representation on the Virgin Blue board for at least six months and any representation would be a decision for the Virgin board and shareholders, Mr Fyfe said.

NZ Funds Management expected Air New Zealand to announce on February 24 an "extremely strong" first-half result for the six months ended December, Mr Lang said.

"Conditions are ideal for airlines and I think you'll find Air New Zealand management are capitalising on this very well."

The global airline industry was in the early stages of a long cyclical rebound after the global financial crisis, which led to a "nuclear winter" in demand.

A recent increase in the oil price had slowed the industry's rate of growth, but there was enough customer demand - and limited new capacity - so that airline profits would continue to rise despite the oil price. Airlines would increase prices.

Qantas announced on Thursday it planned increasing prices, Mr Lang said.

Forsyth Barr broker Peter Young said the alliance with Virgin Blue was valuable for both companies, but Virgin Blue probably had the most to gain through benefits that should strengthen its Australian domestic business.

"For most strategic alliances, it makes perfect sense to also back that up by an equity investment. Realistically, the alliance is an obvious long-term partnership that should strengthen both companies."

NEHA JAIN

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