Deals: Virgin Links With Singapore To Encircle Qantas

Virgin Australia continues to construct a strategy to take on Qantas with the news that it has entered into a partnership with the powerful Singapore Airlines.

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The news hit Qantas shares hard: the fell to a new two year low of $1.91, a drop of 2.3% before finishing at $1.93, while Virgin shares were up 1c to 29.5c.

News of the Singapore link-up came a day after some analysts suggested that Qantas' linking with Malaysian could be bad for Virgin's attempts to find an Asian partner.

That speculation was made to look silly with Virgin's announcement yesterday to the ASX.

The tie-up, which requires regulatory approval, will give Virgin access to more than 70 global destinations.

Analysts said it is one of the final parts of chief executive John Borghetti's plans to build an international network capable of challenging Qantas (his former employer).

Virgin has already linked with Abu Dhabi-headquartered Etihad Airways, which offers up about 60 destinations across Europe, the Middle East, North Africa and elsewhere, and done a deal with Air New Zealand (which has grabbed around 14.9% of Virgin's shares) across the Tasman.

And an alliance with US carrier Delta Air Lines on trans-Pacific services has been given preliminary approval from the US government and the final decision is expected shortly.

There is an irony here.

Not only are Air New Zealand and SIA both members of the Star Alliance group of airlines, but Air New Zealand was once the owners of Ansett (now defunct) and Singapore was long mooted as a possible buyer of Ansett from the NZ carrier.

In fact a deal was in the air but fell over when internal machinations in Air New Zealand between the company and some of its shareholders resulted in the sale collapsing. Air NZ eventually bought news Corp out of Ansett, only to see it collapse after September 11, 2001.

That left the then Virgin Blue, which had started in 1999, as the only competitor to Qantas.

Now Virgin Australia (its new name) is becoming a more potent rival to Qantas.

For that reason the Singapore stake shouldn't come as too much of a surprise.

Nor should a move by Singapore to buy Virgin Group out of Virgin Australia.

Singapore owns 49% of Virgin Airlines, 51% owned by Virgin Group, which has a 25.94% stake in Virgin Australia.

Analysts at Goldman Sachs liked the link up. In a note yesterday to clients they said:

"If approved, the alliance with Singapore Airlines will provide Virgin Australia with an effective network throughout Asia via Singapore.

"In our view, this is a key requirement for VBA to have a more complete product offering to the Australian corporate travel market.

"We would not be surprised to see VBA attempt to further develop its alliance network throughout Asia in an attempt to improve its direct service network into Asia (particularly Hong Kong and China).

"Given the intention for the airlines to co-ordinate schedules between Australia and Singapore, V Australia may commence operating its own services on the route (however, we await further detail on this from the company).

"In our view, the Singapore Airlines alliance represents another key pillar to its attempts to create a more robust product for domestic corporate travellers.

"However, until we see evidence of the success of its attempts to improve corporate market share, the stock is likely to continue to be driven by the performance of its underlying domestic business which continues to be burdened by subdued domestic consumption and high oil prices (albeit more rational system capacity growth in the domestic market may provide VBA with a better chance of passing through higher fuel costs to customers."

For Singapore's part it gets access to about 30 destinations on Virgin's network. This includes the Australian domestic market, as both carriers would codeshare on each other's international and domestic flights, the pair said today.

From August 1, SIA customers would be able to book travel on Virgin and SIA on one ticket, known as interlining, the airlines said.

SIA and Virgin's top tier frequent flyers (gold level) would also have reciprocal access to each airline's airport lounges.

Members of Singapore Airlines' KrisFlyer frequent flyer program will be able to earn and redeem miles on Virgin Australia flights, while Virgin Australia's Velocity members will be able to earn and redeem miles on Singapore Airlines-operated flights.