SIA finally gets the VA monkey off its back

SIA finally gets the VA monkey off its back
PHOTO: SIA finally gets the VA monkey off its back
Above photo is With Virgin no more a subsidiary of SIA, it now has an open door to enter the lucrative Asia-Pacific market.

SINGAPORE - Singapore Airlines (SIA) offloaded an underperforming asset, booked a tidy gain and is moving towards refocusing on the high-growth markets in the Asia-Pacific region.

Following weeks of speculation, the airline yesterday announced the sale of its 49 per cent stake in Richard Branson-controlled Virgin Atlantic to US-based Delta Air for US$360 million.

SIA will book a gain of S$117 million for the year ended March 2013 as the carrying value of the investment had been completely written off to retained earnings and reserves.

SIA bought its Virgin stake in March 2000 for £600 million (S$1.6 billion then) expecting the deal to give it a foothold on the trans-Atlantic route via route-restricted Heathrow Airport.

But the investment never paid off as expected and the alliance never got far beyond a code share arrangement and frequent flyer miles.

"We have said for many years that the investment has underperformed, and that we would consider offers for the stake," said SIA spokesman Nicholas Ionides.

"The synergies that we had hoped for have also not materialised." "

We found a willing buyer in Delta and it was determined that now is an appropriate time to divest our stake."

"There are various commercial arrangements in place and these are expected to remain in place after the divestment. We have not received dividends from our ordinary share capital since investment."

Another sore point for SIA was the fact that Mr Branson and his team never allowed it to have a voice in Virgin's management. 

And the UK-based airline itself has struggled, posting a pre-tax loss of £80.2 million (S$157.75) for the year ended in February.

The value proposition in holding on to Virgin was also diminished somewhat by 2007, when Singapore and the United Kingdom inked a Fifth Freedom agreement allowing SIA to fly the trans-Atlantic route from Britain.

But because of the dearth of new slots at London's overcrowded Heathrow, the Virgin connection remained useful.

In fact, some analysts cite the access to Virgin's slots at Heathrow as the most important asset in the deal.

As Bloomberg noted, Delta, Air France-KLM and their 17 SkyTeam partners are the smallest alliance group at Heathrow, with about 5 per cent of take-off and landing slots.

Oneworld, led by British Airways and AMR Corp's American Airlines, dominates with almost half of all service, followed by United Continental Holdings Inc and its Star Alliance partners with about a quarter of slots.

British newspapers now speculate that Delta's European partner Air France-KLM could offer to buy out Mr Branson's entire 51 per cent majority stake in Virgin Atlantic.

European Union rules require majority European ownership of a European carrier.

The price secured by SIA is higher than the previously estimated figure of around US$200 million by many analysts.

But did Delta pay too much for Virgin?

Barclays, in a Dec 7 report, noted that the Delta-Virgin tie-up would have the obvious strategic rationale - bolstering NYC-London and London exposure in general for Delta and SkyTeam.

"Virgin Atlantic's (admittedly lagged) financials and a rough slot valuation puts a reasonable price tag for a 49 per cent stake in our eyes at around US$200-300 million. Beyond that range, we believe there needs to be more substantial revenue benefits or cost synergies to Virgin to justify the risk."

But with Virgin no more a subsidiary of SIA, it now has an open door to enter the lucrative Asia-Pacific market - something it was prevented from doing by SIA.

And industry insiders believe Changi Airport could be in Virgin's sights.

Meanwhile, JP Morgan reckons the cash from the sale could find its way to shareholders' pockets.

"SIA could potentially distribute part or all of the sales proceeds to shareholders via a special dividend, possibly as early as May 2013 when it announces full-year results," noted analyst Corrine Png.

But SIA said it had not determined what it will do with the funds.

"We review our capital structure regularly, taking into consideration the longer-term outlook, capital expenditure commitments, funding needs and future investment opportunities," Mr Ionides said.

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