Share deal may boost Aussie tourists

Air New Zealand is betting its $189 million purchase of 14.9% of Virgin Blue will cement its alliance with Australia's number two airline and encourage more Aussie tourists to cross the Tasman.

Air NZ today completed a deal to buy the stake off-market at 44Ac a share, funded from existing cash resources.

Air NZ says it has no intention of taking over Virgin Blue, and the level of foreign ownership of the airline remains below the 49% permitted in Australia.

Sir Richard Branson's Virgin Group owns 26% of Virgin Blue and has said it is a committed long term shareholder.

"This is simply an investment in Virgin Blue that reinforces Air NZ's strategy to grow its business in Australasia, which is continually evolving a single aviation market," Air NZ chief executive Rob Fyfe said.

Moody's Investors Service said Air NZ's rating was unaffected by the move and the impact on its financial profile was relatively small.

"From an overall strategic perspective, the move is moderately positive, as it gives the company greater economic exposure to Australia," said Ian Lewis, a senior credit officer.

Air NZ formed a strategic alliance with Virgin Blue last year and today talked up the benefits of the relationship, now cemented with the cornerstone shareholding.

Passengers can buy "seamless" tickets to fly from anywhere in Australia on Virgin Blue to a connecting Air NZ flight to New Zealand and New Zealanders can fly on to any Australian airport Virgin services.

Mr Fyfe said Air NZ did not want to enter the Australian domestic market in its own right but it was important to have access to it.

"It's incredibly important. From a perspective of inbound tourism, I think New Zealand performs relatively poorly out of Australia."

Mr Fyfe said it was as easy to fly to New Zealand from Australia as it was to fly to several states.

"Yet if we look at the percentage of Australians we are able to attract over here, I think it is relatively disappointing."

Part of the reason was that for passengers wanting to fly from anywhere other than the eastern seaboard ports and Perth, from which Air NZ operated, only Qantas was able to offer a seamless deal.

"I think we can attract a lot more tourists from Australia to New Zealand, so that is very exciting for us," Mr Fyfe said, adding that Air NZ would "not at this stage" seek a board seat.

He said Virgin pulled out of New Zealand because it was losing about $20 million a year but there was a "significant performance upside" for Virgin in Australia.

That could be worth "many tens of millions of dollars of potential upside value to the bottom line of Virgin Blue and we don't believe that is reflected in their current share price performance."

Air NZ would make its return in several ways - an increase in the share price, new partner opportunities that would improve margins, and a dividend when Virgin's performance improved.

There would be no direct impact on air fares in the immediate term, Mr Fyfe said.