Virgin's proposal?
TRANS TASMAN MERGER SPECULATED
Need to know:
- Press speculating Virgin in merger talks with Air NZ and Rex
- Air NZ has denied such talks
- ACCC might not approve
- QAN would not be worried, in our view
Investment implications
Press speculation today suggests Virgin Australia’s private equity owners, Bain Capital, is in three-way merger talks with Air New Zealand (AIR) and Rex Airlines (REX). AIR has quickly denied being in talks with any parties on such matters.
Kiwis would say no. The NZ Government owns 52% of the kiwi airline and would be a difficult hurdle for Bain to persuade a merger has merit for AIR. The NZ Government has provided substantial and on-going capital and regulatory support for AIR, and we would expect strong opposition from the NZ public. The NZ institutions have under-owned AIR for a very long time, so the register may be quite open. AIR has a slightly larger fleet than Virgin Australia but flies multiple international routes and has a dominant share of the NZ domestic market.
Rex might be tempted. The cultural fit would be starting from polar opposites between Virgin Australia and Rex, which has shown a stubborn attitude towards domestic competition. Rex has embarked on a strategy of attempting to take market share on the core main city routes with an enlarged fleet. Combining this with Virgin might have more appeal for Rex than for AIR.
Qantas would be unfazed. If anything, QAN might welcome such a merger as it would not increase the amount of domestic competition in Australia. It might also ease the ACCC’s opposition to its takeover of Alliance Airlines (AQZ).
Virgin Australia IPO 2023? Press coverage is spruiking an IPO of Virgin Australia by 2023, citing a much improved business. As a private equity owner, Bain will already be planning its exit strategy and an IPO makes sense, but given past history, investors will be wary.
Our view. We retain our Buy recommendation on QAN for the post-COVID recovery. We see a higher domestic market share, a robust balance sheet and a fleet renewal program that can sustain longer term growth.
This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.
Stock overview
Share Price
Company overview
A dual-branded airline (Qantas, Jetstar) with ~65% domestic market share and a strong Asian presence. Loyalty program is one of the largest in Australia. Owns 19.99% of Alliance Aviation Services (AQZ) and has bid to acquire the balance.
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