Singapore Air faces a $3.2b dilemma

SIA has a decision to make: throw more cash at Virgin Australia, which has burned up shareholder wealth in four of the past five years, or risk an unwelcome rival muscling in. A power-sharing agreement at Australia’s second-largest airline -- owned almost equally by Air New Zealand, Etihad Airways and Singapore Air -- unexpectedly fractured last month when the New Zealand carrier said it was considering putting its stake up for sale. Singapore Air and Etihad may have to increase their holdings or jointly buy the stake so neither gains an edge. Air New Zealand’s 25.9% stake in Virgin Australia is worth about $249m, a fraction of Singapore Air’s $3.2b in cash. “Arguably Virgin Australia hasn’t been a good investment for everyone,” said Brendan Sobie, a Singapore-based analyst at CAPA Centre for Aviation. “But strategically for Singapore Air, a case can be made that they would need to increase their stake.” The bigger question is whether the stock is worth buying after years of meager returns. While a purchase could lock out a foreign competitor, injecting more funds would drain cash from Singapore Air’s faster-growing markets like India and China. Virgin Australia, dominated at home by Qantas, last month had to borrow money from its major investors to see it through a balance sheet review. <br/>