Why Qantas’ Surprise Stake in Alliance Worries Virgin

The Qantas Group on Friday confirmed that it had taken a 19.9 percent stake in Brisbane-based charter operator Alliance Airlines.

The purchase appears to have taken the successful charter operator by surprise, with Alliance telling the Australian Stock Exchange that “the Board has not received any approach from Qantas.”

Qantas spent $44 million (A$60 million) to purchase a fifth of Alliance, saying the shares were acquired for an average price of $2.40 per share.

Qantas expects to ultimately seek regulatory approval from the Australian Competition and Consumer Commission to build on its current stake, with a longer-term view of taking a majority position in Alliance, to better serve the charter market by unlocking synergies.

Qantas has its eye on Alliance under the leadership of CEO Lee Schofield because of its significant contracts in the resources sector, particularly in Western Australia and Queensland.

Possible ramifications for Virgin

The Qantas buy-in could have significant ramifications for Qantas’s rival, Virgin Australia. While Alliance is a long-term provider to the Qantas Group and flies regional services on behalf of the national carrier, it also has close ties with Virgin.

Since early last year, Alliance has been operating several services as wet lease operations under a Virgin codeshare, taking advantage of Virgin’s direct and global distribution system participation, its lounges, and frequent flyer program.

This move followed Virgin’s withdrawal from several regional services when it ditched eight of its 14 ATR 72-500/600s and halted turboprop operations in Queensland as part of its fleet simplification and cost reduction efforts.

The Virgin deal was not a major contributor to last year’s record Alliance profits of $19 million (A$26 million). Wet lease represented $27 million (A$37 million) of Alliance’s 2018 fiscal year total revenue of $180 million (A$248 million). So the relationship is more important to Virgin than to Alliance.

Virgin would certainly not want to lose marketshare in its home state to Qantas, which would be a likely outcome if the national carrier increased its stake in the charter company. It’s hard to imagine that Qantas would continue to service its rival if it gained control of Alliance.

Announcing its stake, Qantas described Alliance as “a profitable, well-managed business with high levels of operational maturity. It is also a long-term provider to the Qantas Group and flies regional services on behalf of the national carrier.”

It said it is supportive of a ‘business as usual’ approach of Alliance Airlines management and not seeking board representation.