As Virgin increases its market share by 10%-20% and SIA is still denied access to the profitable trans-Pacific routes, DMG sees the deal to be more beneficial for Virgin.
SIA has long sought after Virgin Australia's trans-Pacific routes from Australia to the US West Coast. But Australian government still denies them access due to strong opposition from Qantas.
Singapore Airlines and Virgin Australia have struck up a code sharing alliance to feed into each other's international and domestic routes. We see the deal as more beneficial to Virgin Australia as it will lure corporate travel passengers to the latter, which targets to increase its market share from 10% to 20%. However, the agreement excludes the trans-Pacific routes sought by SIA although we note that the latter hopes to secure one of these routes given their value to Australia. Mildly positive, but the impact will not be significant to SIA. We are making no changes in earnings and reiterate our SELL recommendation, with an unchanged FV of S$12.35 (15x FY12 EPS) in view of the challenging macro outlook for SIA.
More on the alliance. Singapore Airlines and Virgin Australia yesterday signed a code sharing alliance to feed into each other's international and domestic routes. This tie-up covers their frequent flyer programs and engagement in joint sales, marketing and distribution activities. The alliance, which is subject to approvals from the relevant authorities, will benefit customers via the new code share alliance after 1 Aug this year. The tie-up gives SIA access to 30 routes served by Virgin Australia, which would be able to tap into 70 routes from SIA's network. Passengers will benefit from route connectivity and this will allow them to earn and redeem frequent flyer points. This would also pave the way towards luring corporate travel to the Australia-Asia routes currently being dominated by Qantas. With this alliance, Virgin Atlantic aims to increase its share of corporate travel in the Australian market from 10% to 20%.
Trans-Pacific route excluded. However, the fine print in the code share agreement does not give SIA access to Virgin Australia's trans-Pacific routes (from Australia to the US West Coast). The trans-Pacific routes have been long sought by SIA, which up to now has been denied access by the Australian government due to strong opposition from Qantas. SIA's CEO is hopeful that the tie-up will boost SIA’s chances (of winning Australian Government approval) in accessing the trans-Pacific route given its value proposition in the alliance with Virgin.
More beneficial to Virgin Australia, for now. Virgin Australia has also alliances with Etihad (Middle East), Delta (US) and Air New Zealand (New Zealand). Its alliance with SIA somewhat completes the picture as SIA will give it access to the Asian region. Hence, we perceive this alliance as being more beneficial to Virgin Australia than SIA, unless the Australian government opens the door to the profitable trans-Pacific route sought by SIA.
Do you know more about this story? Contact us anonymously through this link.