When a deal is billed as a match made in heaven, and the companies involved are touted as "meant for each other," marital strife must be just around the corner. Singapore Airlines' boss was asking for trouble when he expressed an "unseemly desire" for Virgin Atlantic in 1999. He got 49 per cent of it. Now the Asian carrier has confirmed that it is in talks to sell its stake. Good luck.
To give Singapore Airlines its due, the industry looked very different 13 years ago. The global alliances and joint ventures that now dominate were in their infancy. The Virgin deal plus a code-share agreement allowed Singapore Airlines to offer its customers access to Heathrow, a crucial hub for then-lucrative transatlantic routes. Now it is stuck with a big stake in a smallish player in a very competitive market.
Singapore Airlines investors are entitled to ask what they have got for their S$1.65-billion ($1.35-billion) investment. The answer is, not much, in cash terms. Sales at Virgin have grown by an average of 6 per cent a year since the tie-up, against Singapore's 4 per cent. But over that time Virgin has managed a net margin of just 0.3 per cent, versus Singapore's 10 per cent. Singapore does not break out its contribution from Virgin, which is still private. Still, taking 49 per cent of the U.K. group's pre-tax operating profits since the deal was signed produces a cumulative S$215-million. That does not include the benefits of code-sharing. But the net contribution of all of Singapore's associate groups – Virgin was the first of many – is S$1.2-billion since the Virgin stake was bought, well short of its cash outlay.
Singapore Airlines' probable exit from Virgin is the latest reminder that there are few industries where sustained profits are as elusive as in air travel. Singapore Airlines can only hope that bidders such as Delta see the sort of strategic – not financial – attractions that it claimed to see in 1999.