UPDATE: Air New Zealand Boosts Virgin Australia Stake

-- Air New Zealand raises Virgin Australia stake to 23%

-- Says no interest in full control

-- Virgin Australia partner relationships unaffected

(Adds deal implications from first paragraph, Air New Zealand comments in fifth, Virgin Australia CEO remarks from eighth.)

By Ross Kelly

SYDNEY--Air New Zealand Ltd. (AIR.NZ) raised its stake in Virgin Australia Ltd. (VAH.AU) to 23%, becoming the domestic airline's biggest shareholder as it battles Qantas Airways Ltd. (QAN.AU) for a greater share of Australia's local travel market.

The New Zealand carrier, which previously owned 20%, said it had paid roughly 37 million Australian (US$35 million) dollars to buy 3% of Virgin Australia "on market," adding that it was seeking to boost its stake eventually to 26%. Air New Zealand is bound by Australian "creep" provisions that stop companies owning more than 20% of another from boosting their holding by more than 3% every six months unless they make a full takeover bid.

Virgin Australia has been stepping up the fight against Qantas in the country's lucrative domestic travel market. Over the past four years under the stewardship of former Qantas executive John Borghetti, the airline has joined its rival in offering business-class seats on domestic flights and struck up partnerships with a number of overseas airlines to handle overseas trips for its customers.

The strategy, designed to loosen Qantas's grip on Australia's corporate and government travel market, has already attracted a host of alliance partners, including Singapore Airlines (C6L.SG), Etihad Airways and Delta Air Lines Inc. (DAL).

"The additional interest affirms Air New Zealand's strong belief and confidence in Virgin Australia and the strategy it is pursuing," the carrier said in a statement. It added it had no intention of gaining full control of Virgin Australia and hadn't applied for a position on the board.

Virgin Australia has additionally increased flights to the city of Perth and smaller regional towns in the resource-rich states of Western Australia and Queensland, where thousands of people head each week from other parts of the country to work on mines. It also recently bought a controlling stake in budget carrier Tiger Australia to compete with Qantas's low-cost offshoot Jetstar.

Three of Virgin Australia's international alliance partners have taken large equity stakes in the company, making it difficult for any one of them to take full control.

Mr. Borghetti told reporters at an industry event in Perth on Thursday that Air New Zealand's bigger stake wouldn't affect the relationship with its other partners.

"Nothing changes for us," he said. "We work well with Air New Zealand as we do with Singapore Airlines, Etihad, Delta and others."

Singapore Airlines agreed in April to boost its interest in Virgin Australia to close to 20% after buying shares from Richard Branson's Virgin Group, whose holding went down to 12.5%. Its Chief Executive Goh Choon Phong said the deal was an example of the airline's "deep commitment to the important Australian market" and that it demonstrated the company's support for Mr. Borghetti's strategy.

Abu Dhabi-based Etihad Airways owns about 10% of the Australian airline and has previously indicated plans to increase that stake to 20% if it can get regulatory approval.

-- Lucy Cramer in Wellington and Stephen Bell in Perth contributed to this report

Write to Ross Kelly at [e-mail]

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