Singapore Air says may sell Virgin stake; Delta said to seek it

Singapore Airlines said it is in talks about selling its 49% stake in Virgin Atlantic after people familiar with the matter said that Delta Air Lines Inc. is discussing buying shares.

The U.K. carrier, founded by billionaire Richard Branson, has failed to break British Airways’ dominance at London’s Heathrow, undermining Singapore Air’s strategy of using the partnership to offer trans-Atlantic routes. Since taking office in 2011, Singapore Air Chief Executive Officer Goh Choon Phong has also reoriented the carrier more toward Asia routes by ordering smaller planes to compete with low-cost airlines.

“They’ve had this stake for 13 years and it’s just been a drain,” Peter Harbison, executive chairman of CAPA Centre for Aviation, said by phone from Sydney. “It’s one of the bigger mistakes that they’ve made.”

Singapore Air, which has written off much of its Virgin stake, is holding negotiations with “interested parties,” it said in a statement today. Delta is discussing buying part or all of the shareholding, said the people who asked not to be identified as the matter is private. Delta’s partner Air-France KLM might also invest, they said.

For Atlanta-based Delta, the second-biggest U.S. airline, a deal would increase access to Europe’s busiest airport and boost its ability to capture trans-Atlantic business traffic.

VALUABLE SLOTS
“What’s most valuable about Virgin Atlantic is the slots it’s got at Heathrow,” said Paul Yong, director of research at Singapore-based DBS Vickers Securities. “Any airline that’s got significant operations into Europe would be interested.”

Deutsche Lufthansa AG, other U.S. airlines, and Gulf carriers such as Etihad Airways PJSC and Emirates could look at Virgin, especially if Branson offers some of his stake, Yong said.

Representatives for Delta, Virgin and Air France-KLM all declined to comment. The Delta talks were reported yesterday by the London-based Sunday Times. Singapore Air fell 0.5% to $10.66 at 3:57 p.m. in local trading.

Singapore Air bought the Virgin stake in 1999 for 600.3 million pounds, or about US$960 million ($1.17 million) at the time. The carrier has written off the goodwill, Chan Hon Chew, its senior vice president for finance, said last year. That means the majority of any sale price could be booked as profit, said Timothy Ross, a Singapore-based Credit Suisse Group AG analyst.

The carrier is “a lame duck” minority shareholder in Virgin, he said. “The relationship has contributed little in terms of cash flow or synergies.”

The airline also doesn’t need the extra access at Heathrow because it flies Airbus SAS A380 superjumbos to the airport, said Arnaud Bouchet, a Singapore-based analyst for BNP Paribas SA. The European economic slowdown is damping travel demand as well, he said.

TRANS-ATLANTIC
Buying into Virgin could help Delta on U.S.-Europe routes after British Airways and American Airlines began closer cooperation. Delta and Air France’s SkyTeam alliance doesn’t include a U.K. carrier. Branson lobbied antitrust regulators for more than a decade in an unsuccessful bid to prevent Oneworld members BA and American from forming stronger ties.

Delta, the world’s second-largest carrier, is already working to increase its share of international business travel with moves including a US$1.2 billion overhaul of facilities at John F. Kennedy International Airport in New York, catching up to improvements made by rivals.

A deal could value Virgin’s debt and equity at as much as US$1.3 billion, based on the median sale price of 0.3 times revenue in 43 airline transactions compiled by Bloomberg over the past five years. Profit-based comparisons aren’t possible as Virgin lost money in its most recent financial year.

REVIEWING OPTIONS
Singapore Air has been reviewing its stake in Virgin since at least 2007. The U.K. carrier has also been seeking new partners and in 2010 it hired Deutsche Bank AG to assess options. Virgin, which isn’t a member of one of the three global airline alliances, posted a pretax loss of 80.2 million pounds for the year ended February. It flies to 31 destinations worldwide from its base in London, according to its route map.

Virgin is facing greater competition at Heathrow after British Airways parent International Consolidated Airlines Group SA bought BMI earlier this year. The deal bolstered IAG’s share of slots at the airport to more than 50%. Heathrow is operating at near-capacity and the operator is struggling to get government backing for building a third runway.

MANCHESTER FLIGHTS
Virgin is adding short-haul routes to Heathrow from U.K. cities including Manchester to feed services to Asia and the U.S. It’s also seeking a replacement for Chief Executive Officer Steve Ridgway, 61, who retires early next year after 11 years in the post. During his tenure the airline emphasized perks such as spa treatments and high-design lounges to win business travelers.

Then-record mogul Branson set up Virgin Atlantic in 1984 “to the horror of his directors,” according to the company’s website, to challenge the transatlantic dominance of British Airways.

Singapore Air is boosting its focus on the Asia-Pacific region to tap faster growing markets. Last month, it purchased 10% of Branson-backed Virgin Australia Holdings Ltd., the nation’s second-biggest airline, for A$105 million ($133 million). Regional unit SilkAir in August signed a provisional deal for 54 Boeing Co. 737 planes to double its fleet. The carrier failed in an attempt to buy a stake in China Eastern Airlines Corp. in 2008.

Selling Virgin could fund further deals, said Bouchet, even though Singapore Air already has US$3.4 billion of net cash, or cash on hand minus debt.

“If cash comes from Virgin and they are contemplating a new acquisition in the region it could be quite beneficial,” Bouchet said. “They are very opportunistic and their cash position is really fantastic.”