Thursday, Jun 07, 2012

(This story was originally published Wednesday.)

--Etihad wants to double 4.99% stake in Virgin Australia

--Need Australian regulatory approval to lift holding to 5% or above

--Talks continue about commercial tie-up with Air France-KLM

--Virgin Australia joins Aer Lingus, Air Berlin, Alitalia among Etihad's partners

By Alex Delmar-Morgan

DOHA--Continuing with its aggressive international expansion push, Etihad Airways would like to double its recently acquired 4.99% stake in Virgin Australia Ltd. (VAH.AU) as talks about cooperating more closely with Franco-Dutch carrier Air France-KLM continue. But it may take some time for Etihad to create anything more than a loose patchwork of alliances because of regulatory and other hurdles.

"The company remains interested in building a larger stake [in Virgin Australia] over time but will only do so after receiving the necessary regulatory approvals," Etihad said Wednesday. The Abu Dhabi-based airline accumulated its stake in Virgin over recent weeks by buying shares on the open market, it said.

Foreigners investing in Australia need approval from the regulator, the Foreign Investment Review Board, or FIRB, if they plan to take 5% or more of a company. Etihad has signaled its intention to increase its holding in Virgin to 10% to the FIRB and is awaiting a decision.

Etihad's investment in the Australian carrier, with which it already has a code-sharing agreement, is the latest of a series of moves by the state-owned airline to a create a network of international partners to feed traffic to and from its hub in Abu Dhabi as high fuel costs, Europe's financial crisis, and political turmoil in the Middle East have undermined the profitability of airlines in Europe and Asia.

The state-owned airline, with over 100 aircraft on order, is currently the smallest of the three big Middle Eastern carriers, with an aircraft fleet of 66, compared to Emirates' fleet of more than 170 jets and Qatar Airways' 109 aircraft.

Air France-KLM officials said the group remains in talks with Etihad about some form of commercial partnership which would fall short of the airlines investing in each other. The officials referred to Air France-KLM Chief Executive Jean-Cyril Spinetta's comment in March that "no shareholding is envisaged." An Etihad spokesman said the airline isn't in talks about investing in Air France-KLM. The French government has a 15.9% stake in the airline.

However, Etihad's investment in Virgin Australia underscores its willingness to put its own cash behind its commercial partnerships where it can as it tries to tie in international partners.

The airline, the national carrier of the United Arab Emirates, increased its holding in Germany's Air Berlin PLC to 29% in a 73 million euro ($96.6 million) deal late last year.

Last month, Etihad said it has bought close to a 3% stake in Irish airline Aer Lingus Group PLC, whose shareholders include the Irish government, whose 25% stake is up for sale, and Ryanair Holdings PLC (RYA.DB), Europe's biggest budget carrier by passenger numbers.

Etihad signed a code-sharing agreement with Italian flag carrier Alitalia, 25%-owned by Air France, in 2009. It has around 35 codeshare agreements in place worldwide include TAP, the Portuguese airline which the government is the process of privatizing.

Andrew Charlton, an analyst at Switzerland-based consultancy Aviation Advocacy, said its questionable how much benefit Etihad derives from taking small stake in rival airlines but it is way of turning a commercial agreement, such as coding sharing, into a more formal relationship with its partners.

"Etihad's aim is that Virgin will never to a deal with anyone other then them or will do a deal with them first and will feed customers onto their service whenever they can," Mr. Charlton said.

In the EU, Etihad's ambitions are constrained by rules prohibiting foreign companies taking control of European carriers.

It may also take some time for Etihad to forge a closer agreement with Aer Lingus.

"The government has earmarked its stake in Aer Lingus for sale at some stage but staff are members of a joint-employer defined contribution pension scheme with a deficit last reported at around 700 million euros," said Eamonn Hughes, an analyst at Goodbody Stockbrokers. "Discussions on closing the deficit are complex and are likely to be protracted," Mr. Hughes said. "Resolution of this process, which could run until year end, may clear the path for the government to clarify its intentions," he added.

Many of Europe's national airlines are facing increasing competition from Etihad and Middle East rivals Qatar Airways and Emirates Airline on long-haul routes just as Ryanair and other budget carriers continue to take market share on domestic and regional routes.

Air France-KLM, Deutsche Lufthansa AG (LHA.XE), and Iberia, the Spanish flag carrier owned by British Airways parent International Consolidated Airlines Group (IAG.LN), have all embarked on wide ranging restructuring efforts to lower costs. Hungary's Malev went out of business earlier this year as have a number of smaller European airlines.

-Write to Alex Delmar-Morgan at alex.delmar-morgan@dowjones.com

Marietta Cauchi, Bart Koster, and David Pearson contributed to this article.

(END) Dow Jones Newswires

07-06-12 0341GMT