Air New Zealand boosts stake in Virgin Blue

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The airline said the New Zealand and Australian aviation markets were evolving into a single entity and the investment was a strategic move.

"(It) provides us with an interest in the number two airline in Australia and, through this, access to the opportunities in the growing Australian domestic market," chief executive Rob Fyfe said in a statement.

"Air New Zealand has no intention of entering the Australian domestic market in its own right."

Air New Zealand, which had a trans-Tasman alliance with Virgin Blue approved by regulators in Canberra and Wellington last month, said purchasing the stake cost Aus$145 million ($143 million) and was done with existing cash reserves.

The Auckland-based flag carrier announced late Thursday that it had taken a "substantial" shareholding in Virgin Blue and in a market update Friday revealed off-market buying overnight had lifted the stake to 14.9 per cent.

Under Australian law, the maximum stake a foreign company can take in a company without regulatory approval is 15.0 per cent.

Fyfe said Air New Zealand's holding in Virgin Blue would not go above 14.99 per cent.

"This is simply an investment in Virgin Blue that reinforces Air New Zealand’s strategy to grow its business in Australasia," he said.

He said Air New Zealand would not seek any seats on the Virgin Blue board for at least six months and any representation it did receive would be decided by the Australian airline and its shareholders.

Shares in Air New Zealand dropped 2.8 per cent to NZ$1.40 (1.06) in early trade on the benchmark NZX-50 after the announcement, which was made before the market opened.

Fyfe said the investment showed the confidence Air New Zealand had in the management of Virgin Blue, which was launched by British tycoon Richard Branson in 2000.

Branson still owns 26 per cent of the airline through his Virgin Group.

Under the alliance approved by competition regulators last month, Air New Zealand and Virgin Blue can cooperate on trans-Tasman routes, where Australian flag carrier Qantas is their main competitor.