Singapore Airlines (SIA) is looking a likely winner in the on-going battle for Australasia's skies despite Qantas having entered the fray to acquire Brierley Investment's stake in Air New Zealand (ANZ).
Regardless of the outcome, it should wind up in partnership with ANZ and/or ANZ unit Ansett Australia (AA) and possibly Virgin Australia, Sir Richard Branson's planned no-frills airline which is poised for take-off this summer. SIA has an option to acquire a 49% stake in Virgin Australia - independent of Virgin Atlantic Airways in which SIA already has a 49% holding - though this expires at the end of this month.
Nonetheless, the Qantas move has succeeded in putting the brakes on SIA corporate activity in its vicinity for now - all important in the run-up to the Sydney Olympics in September - and could eventually force the Singapore carrier to pay top dollar for any stakes the latter may acquire. Both Qantas and SIA have robust balance sheets and strong cashflows and a bidding war could prove costly for the winner.
Qantas, in particular, will have to weigh carefully the defensive benefits of acquiring an ANZ stake against the financial costs involved. The Australian airline, which less than three years ago sold a 20% holding in ANZ, has already acknowledged such a deal would require ANZ's divestment of AA, Qantas' only sizeable competitor in Australia's domestic air travel market.
ANZ agreed in February to buy the outstanding 50% of AA it did not already own for A$670 million ($411 million) in cash and shares from News Corporation. Also an issue, Qantas and ANZ between them currently operate 90% of all flights between Australia and New Zealand.
"Clearly there would be some complications Qantas would have to deal with if it were to make a formal bid," says Peter Negline, analyst at Salomon Smith Barney.
"There are a lot of obstacles to Qantas emerging successful," adds Timothy Ross, analyst at Warburg Dillon Read.
Aside from anti-trust issues, it seems unlikely ANZ will want to partner an airline outside of the Star Alliance, particularly Qantas, its main rival from the OneWorld partnership. AA is already a Star Alliance member and SIA will climb aboard from next month.
For Brierley, currently the owner of a 47% stake in ANZ, there is likely to be some bias towards cutting a deal with SIA. SIA's majority shareholder is the Singapore government, which also owns 7% of Brierley. Brierley has recently relocated its headquarters to Singapore.
Brierley's ANZ stake includes a 17% holding in B shares and a 30% interest in A shares. Of these, only the B shares may be owned by non-New Zealanders. SIA plans to buy a 25% stake in ANZ; the maximum holding a foreign airline may own. The New Zealand government recently turned down a request from SIA that this limit be lifted to 40%.