Air NZ looks to jettison Virgin stake

UPDATED with broker comment. Air NZ's CEO abruptly quits Virgin's board. 

See also: What will Air NZ do with its extra cash?

Air New Zealand [NZX: AIR] is looking at selling its stake in Virgin Australia, as it does not want to stay a large minority shareholder.

Air NZ holds a 25.9% stake in Virgin worth about $A344 million ($NZ384 million), which it has increased in recent years despite the Australian airline making a loss. According to its annual report, Air NZ has invested a total of $422 million in Virgin, excluding a recent commitment to lend a further $145 million to the Australian-based airline.

That will leave Air New Zealand facing a loss having spent $A373 million building up and maintaining the Virgin stake since 2011, a period when the kiwi dollar was relatively weak against its Australian counterpart.

New Zealand’s national carrier announced to the NZX this afternoon it has hired First NZ Capital and Credit Suisse to advise it on options, which includes a possible sale of all or part of its shareholding.

Air NZ chief executive Christopher Luxon has also quit the Virgin board, effective immediately.

Virgin's ASX-listed shares, which recently traded at 38Ac, went into a trading halt pending the announcement.

Air NZ chairman Tony Carter says the airline is reviewing its financial investment in order to find alternate uses for the capital currently deployed in Virgin.

Mr Carter says Air New Zealand “does not want a large minority equity position in Virgin Australia” and would rather focus on its own growth opportunities.

The announcement comes less than a fortnight after Air NZ committed to a one-year $A131.2 million loan to Virgin, as part of a $A425 million shareholder loan to let the airline review its mix of debt and equity, plus consider how to boost cashflow and profitability. 

An Air NZ spokeswoman says this loan is "quite separate from today's announcement" and lending arrangements will remain in place whether Air NZ sells its stake or not.

Grant Williamson, a director at Hamilton Hindin Greene in Christchurch, says it is good to see Air New Zealand run the ruler over its Virgin investment, particularly when airline stocks were performing well in a period of cheap oil.

"It's probably not a bad time to be reviewing that holding," Mr Williamson says. "I would much prefer them to focus on their own opportunities."

Virgin, Australia’s second-largest airline, has undertaken a transformation programme over the past five years.

The airline had suffered in a price war with Jetstar and Qantas, but signalled a return to profitability this year after reporting an underlying pre-tax loss of $A49 million to the end of June 2015.

Mr Luxon says through the NZX release he hopes Air NZ can continue its Tasman alliance partnership with Virgin, with further details on the review to come.

Air NZ and Virgin formalised an alliance in 2010 with codesharing agreements on trans-Tasman and connecting flights and reciprocal frequent flyer and lounge access deals. The tie-up was first mooted in response to Qantas Airways' two-airline strategy where its low-fare Jetstar unit operates domestically in New Zealand and links to longer-haul flights on its parent.

Air NZ, along with Etihad Airways, Singapore Airlines and Virgin Group, own 85% of Virgin's shares on issue.

Air NZ shares are at $2.91 and have moved up 2% on the announcement and 13% in the past year.

The airline's management took the unusual step of not commenting further on the announcement, declining interview requests.

Additional reporting from BusinessDesk

Follow NBR on Facebook, Twitter, LinkedIn and Instagram for the latest news and free on-demand audio from NBR Radio.

Login in or Register to view & post comments