13 Jun 2013

Air NZ plan to increase stake in Virgin 'good use of capital'

9:02 am on 13 June 2013

An analyst says Air New Zealand's decision to raise its stake in Virgin Australia was a good use of capital.

The airline announced last week it had paid about $72 million for a further 3% of Virgin, taking its stake to nearly 23%. Air New Zealand has also said it wants to buy another 3% of Virgin.

Forsyth Barr analyst Rob Mercer says Air New Zealand needs the presence in Australia which Virgin gives it.

He says Virgin Australia has turned out to be an ideal partner for Air New Zealand because both airlines can benefit from the strength of their domestic positions and bring that benefit into the Tasman.

Mr Mercer says Virgin has moved from being a discount carrier towards becoming a full service carrier.

"And I think with all the issues that Qantas face, Virgin has really taken a march on them in terms of market share in the domestic market and that's of significant benefit for Air New Zealand."

Mr Mercer says Air New Zealand is using the existing competitive environment and putting its capital into a partner it sees a long term future with.

He says the downside risk of that is small compared with the risk of being weakened over the next five to 10 years.

The purchases need approval from the Australia's Foreign Investment Review Board and the Competition and Consumer Commission (ACCC) which will hold public inquiries before deciding.