Air wars: The battle for Virgin

Speculation is rising that Air New Zealand (ASX: AIZ) could move to take control of Virgin Australia (ASX: VAH) within the next 12 months.

Air New Zealand currently holds 23% of Virgin, but it’s likely to be a three-way tussle for Australia’s second largest domestic airline, with Etihad and Singapore Airlines both holding 19.9%. Sir Richard Branson’s Virgin Group still holds 10% of the airline, but could sell out to the highest bidder.

Air New Zealand is reportedly keen to gain more exposure to Australia’s $10 billion Australian domestic market, which is more than 5 times the size of the New Zealand market, and also has higher growth rates according to some analysts. The airline has approval to increase its stake in Virgin to 25.9%, but has publicly denied it was interested in taking over full control of Virgin.

At the same time Etihad and Singapore Airlines could lift their stakes to 26% over the next twelve months without triggering a formal takeover under creep provisions, or if they receive Foreign Investment Review Board approval.

There are suggestions that the mostly likely scenario is for Air New Zealand and Singapore to team up to take the airline private, after acquiring Branson’s stake. Air New Zealand and Singapore are allies, with few competing operations, and both are keen to keep a foot in the Australian domestic market.

Etihad on the other hand is a fierce competitor to Singapore Airlines, making a tie-up between all three major shareholders in Virgin an unlikely proposition.

Sitting on the sidelines is Qantas Airways (ASX: QAN), with any change of control over Virgin having major implications for the airline. Qantas has long complained to both sides of government that it is competing in an unfair environment, with Virgin’s ease of access to capital, thanks to its foreign investors.

Foolish takeaway

Whatever happens over the next 12 months, minority shareholders in Qantas and Virgin are likely to be the losers. Both airlines are adding extra capacity into the domestic market, Virgin to steal market share away from its dominant rival, and Qantas to protect its 65% market share. That is likely to see both suffer when it comes to revenues and generating a return on shareholder’s capital, and could see their share prices slide.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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