SIA-Virgin deal: If you can't beat them, join them

HAVING trouble making sense of the fast changing mega-global airline alliances? Ever wondered why those snappy easy-to-remember airline codes are becoming as difficult to decipher as Hungarian? Get ready, because it's going to get messier. The global alliances are growing bigger, yes. But airlines inside and outside these alliances are forming so many ties of their own that untangling them will soon require rocket scientists not marketing gurus.

The news that Singapore Airlines is buying 49 percent of British entrepreneur Richard Branson's Virgin Atlantic airlines has sent shockwaves across several continents. SIA will pay US$964 million for the stake. In London, British Airways shares fell 6.2 percent in the hours after the deal was announced. In Sydney, the shares of Australian airlines Qantas, which have been in a tailspin for three weeks in the aftermath of Branson's announcement that he would start a new no-frills airlines down under, fell another 5 percent the morning after the deal was announced. Singapore Airlines, which has been one of the best-performing airline stock in the world this year, surged 6 percent higher, even though in most cases the acquiring company's shares fall unless the acquisition looks like a steal.

Singapore Airlines is certainly one of the best airlines in Asia and is regularly rated as among the best in the world -- not just in terms of service, but also as a business. It has more than a billion in cash reserves. Though they might be able to match SIA bubbly-for-bubbly and even boast of besting their caviar, few airlines can beat SIA for its efficiency and financial soundness. Flush with so much cash, SIA has been looking to buy airlines around the world. More than a decade ago, the airline had built small stakes in Delta of the US and Swissair as part of a strategic alliance. That was wound down two years ago. Since then it has been looking to buy anything up to 49 percent stake in some large carriers.

"It's a marriage made in heaven," crowed Virgin's flamboyant Chairman Richard Branson in London. The deal gives SIA greater access to coveted transatlantic routes and greater access to London's Heathrow Airport. Together, the two airlines will have nearly 3 percent of takeoff and landing slots at Europe's busiest airport. It also allows SIA to bypass aviation regulators in London, Washington and Brussels. Singapore has been lobbying the British government for permission to take on passengers at Heathrow and fly them to the US Under the US-Britain aviation agreement, only Virgin Atlantic, British Airways, American Airlines and United have the right to fly scheduled transatlantic services from Heathrow. By buying half of Virgin and then code sharing with it, SIA can match United, British Airways and American Airlines flight-for-flight. Analysts are predicting a bloody price war. SIA with its deep pockets and its penchant for aggressive marketing is well poised for the competition on that route. In addition, the Virgin deal benefits SIA on two other lucrative markets, Australia and India.

Up to now, Singapore Airlines has had a pretty bumpy flight on the acquisition route. While Australia accounts for 15 percent of SIA's business and is among its most profitable routes, Singapore failed in its bid to acquire 25 percent of Qantas in 1993. The winner of that round: British Airways. Last year, SIA bid for a piece of South African Airlines. It lost to Swissair, which now owns the largest stake in SAA. Earlier this year, SIA abruptly withdrew its offer for part of Taiwan's flag-carrier China Airlines. And SIA and Lufthansa have been trying to mount a joint bid for Thai International -- but the Thais don't want SIA to gobble up their flag-carrier. They have indicated they might look favorably on a Lufthansa bid but not if SIA is a joint bidder. Four years ago, Singapore sealed a deal with India's Tata family to start a domestic Indian airline. But nationalist politicians saw to it that the deal, which would have driven inefficient carriers out in no time, didn't make much headway.

Two years ago, SIA forged a strategic relationship with Air New Zealand and Australia's Ansett Airlines. Ansett is half-owned by media tycoon Rupert Murdoch and half by Air New Zealand. Murdoch had been trying to sell his 50 percent for years, but never got the price he wanted for his shares. That changed earlier this year when Murdoch agreed to sell his half of Ansett to SIA for $500 million. The problem was that Air New Zealand had the right of first refusal on Murdoch's shares. Though Air New Zealand doesn't have the cash to buy out the remainder of Ansett, it is using the refusal rights as leverage to get a better deal. Analysts say Air New Zealand management has been keen on SIA buying its shares through a cash injection; then Air New Zealand could use that money to buy the half of Ansett that it doesn't own. That wasn't acceptable to SIA's bosses. They were interested only in the lucrative Australian domestic market, not in a fledgling international carrier from New Zealand. The Ansett deal was recently aborted, though fresh negotiations were begun some weeks ago.

In the meantime, Branson flew to Australia last month and announced he would set up a low-cost, no-frills airline. The Australian domestic aviation industry is a duopoly with Qantas having 52 percent share and Ansett 48 percent of the market. Routes like Sydney-to-Melbourne are among the most expensive domestic routes anywhere in the world. Branson has vowed to cut fares by 70 percent on some flights. The Australian government, which has failed to dismantle the duopoly and taken flak for high fares, has applauded and promised to help smooth the way for increased competition. Virgin is expected to launch its Australian cut-price carrier by August and it looks likely that SIA will be an investor in that affiliate as well. That means cutting all ties with Ansett and Air New Zealand. It is quite possible they may still come to the table but if they do their asking price will be far less. Whatever way you look at it, it's a win-win for SIA. Here's another plus: Virgin brings with it an Indian connection, thanks to a code-share deal with Air India flying from London to Indian cities. SIA is interested in expanding that. It could bring passengers from the US to London then connect them straight to an Indian city without having to take them all the way to Singapore first, then back to India.

But the biggest impact will be on the alliances. Flying isn't about going from one place to another anymore. It's about frequent flyer points, airline lounges and the ability to fly seamlessly around the globe without having to spend hours at a terminal in Anchorage or Dubai. There are two big alliances -- the nine-member Star Alliance that groups United Airlines, Air Canada, Lufthansa, Thai, Air New Zealand and Ansett Australia, among others. Japan's ANA and Singapore Airlines are expected to join soon. Then there is the Oneworld Alliance, whose big players include British Airways, American Airlines, Qantas, Cathay Pacific, Iberia and Canadian Airlines.

Already there are some problems. Canadian Airlines and Air Canada are to merge soon (well, as soon as the regulators and shareholders give their approval). So, will the combined airline be a member of Star or OneWorld or both? The issue is unresolved, though press speculation holds that it would stick with Star, which means OneWorld would be left without a Canadian carrier. SIA had until now resisted joining any alliances but gave in just two months ago when it agreed to join Star alliance. Branson is a big opponent of the large alliances and had admired SIA not just for its service but for its willingness to stay independent of the packs. Now analysts are saying SIA will have a rethink on Star. After all, an SIA-Virgin partnership will be a mini-alliance in itself. Will other airlines rush to break away from Star or Oneworld and team up with SIA-Virgin? Will other new alliances pop up? Tell you what: Even though I am a frequent flyer I sometimes have difficulty remembering those long, complicated codes that result from three or four airlines' code-sharing on the same route. Maybe I am a bit old-fashioned but when I buy an SIA ticket I don't expect to be flying on a Lufthansa plane code-sharing with Swissair. The last thing a passenger wants to do is wake up halfway through a flight and wonder: where am I and why are the stewardesses speaking with a German accent when I was supposed to be on SIA?

• Posted in the ASIAWEEK  site December 22, 1999.