Turbulence for Virgin Australia as Air NZ mulls exit

Armed Indonesian Air Force soldiers secure the Virgin Australia 737-800 plane at the tarmac of Denpasar airport in the resort island of Bali.-AFP

SYDNEY: Air New Zealand Ltd, the biggest shareholder of Virgin Australia Holdings Ltd, on Wednesday said it may sell its 26% stake in a sign that backers of Australia's No. 2 carrier are growing impatient with its slow profit turnaround.

The move, nine days after Air New Zealand publicly supported Virgin's request for a A$425 million (US$324 million) cash loan from its four top shareholders, limits the Sydney-listed carrier's options for any similar favours in future.

Virgin shares fell 9% to 34 Australian cents after the announcement in afternoon trading, their biggest percentage dip in three years and their lowest intraday level in two years. That gave Air New Zealand's stake a valuation of A$310 million.

Virgin has been cutting costs to help its recovery from a price war with larger Australian rival Qantas Airways Ltd. But it has been slower to show the benefits, revealing this year that its cash reserves at Dec 31 were down by a quarter from a year earlier.

"This just suggests that Air New Zealand are saying 'that's it, we're not going to put any money in'," said an aviation analyst who asked not to be named because he had not yet published research on the development.

A Virgin Australia spokeswoman said the potential sale did not put Air New Zealand's portion of the loan, about A$110 million, in doubt.

The timing of the sale announcement is likely to unsettle investors worried about Virgin's reliance on major backers to prop up its share price. The airline is 83% controlled by Air New Zealand, Singapore Airlines Ltd, Abu Dhabi government-owned Etihad Airways and Richard Branson's Virgin Group.

"One of the things that's held the share price up is the fact that those guys have been sitting on the register, and if they all disappear it becomes a very different scenario," the analyst said.

Virgin Group was not immediately available for comment. An Etihad spokesman said the airline was committed to its quarter stake and board seat in Virgin Australia. A Singapore Airlines spokesman said the company was committed to its loan to Virgin.

In a statement, Air New Zealand said it hired investment banks First NZ Capital and Credit Suisse to advise on its options for the Virgin shareholding, including a possible sale of all or part of it. 

It added that its chief executive Christopher Luxon would resign from Virgin Australia's board, effective immediately.

"Air New Zealand does not want a large minority equity position in Virgin Australia as it focuses on its own growth opportunities," it said in the statement.

In a statement, Virgin Australia said it was aware of the potential sale and board resignation, and that it "continues with its transformation, including the review of its capital structure" which involved the cash loan. - Reuters