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Is Virgin a buy?

Australia’s second largest domestic carrier, Virgin Australia Holdings (ASX:VAH) could be the subject of a takeover battle, with Middle-Eastern carrier Etihad reported to have lifted it stake.

The Australian reports that Etihad has been buying up shares in Virgin, taking its stake beyond 11%. Air New Zealand (ASX:AIZ) already holds 23%, but is reported to have requested Foreign Investment Review Board (FIRB) approval to lift its stake by another 3%.

Singapore Airlines also has a major shareholding in Virgin with 19.9% of the airline after doubling its stake in April, while Sir Richard Branson’s Virgin Group still retains a 13% holding. But there is speculation that Virgin Group could offload more of its shares. Singapore and Air New Zealand are unable to buy more shares until later this year due to creep provisions, which prevents majority shareholders buying more than 3% every six months, once they hold 20% of the shares or more.

For all three international airlines, Virgin is an important alliance partner, giving them access to Australia’s domestic market, while giving Virgin customers plenty of options should they want to travel to Europe. Singapore offers flights through Asia, while Etihad has its base in Abu Dhabi, in the Middle East.

Virgin rival Qantas Airways (ASX:QAN) has an alliance with Emirates, which sees Qantas’ European travellers flying through Dubai, also in the Middle East. In an effort to cut costs in its loss-making international division, Qantas signed a deal with Emirates, cutting out Asia as a stopover on the way to Europe.

With three major airlines as backers, Virgin certainly has the firepower to take on Qantas domestically, while potentially offering more options for international travellers. Virgin is attempting to steal Qantas’ dominant market share locally, while Qantas has said that it will take whatever steps necessary to protect its 65% market share.

Foolish takeaway

Having two strong domestic carriers should pay dividends for travellers, but it’s likely to not do much for the respective airlines’ bottom line. Airlines are notoriously bad businesses, and none of these recent moves are likely to change that.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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