Within the space of an hour long news conference Virgin Australia’s John Borghetti signalled a major shake-up of the Australian domestic and regional markets that will have profound implications for the local airline environment.
By acquiring control of Tiger Airways, Virgin Australia has gained an immediate entry into the low cost market against Qantas’s Jetstar, but without the associated start-up costs and pains. Although the Tiger brand was bruised badly by its CASA-enforced grounding, the airline’s “remarkable resilience” (as Borghetti described it) has seen it recover its position in the market, if not financially, yet.
The $62.5 million earmarked for injection into Tiger is essentially to cover the projected operating losses the airline will sustain during the acquisition phase. The funds will also facilitate the tripling of the A320 fleet, from its current 11 aircraft to up to 35 within five years.
Although it will still be smaller than Jetstar (with a current fleet of 53 A320-family aircraft), the new Tiger Airways will be a potent competitor domestically. And potentially in time Tiger could be developed by Virgin and counterpart shareholder Singapore Airlines in the same way Qantas has developed Jetstar to operate limited international services to, say, New Zealand and nearer Pacific neighbours and Bali, now that it is to be majority Australian owned.
With Virgin Australia’s gradual but emphatic move away from its low cost origins, to better address the budget market its only other option was to create a low cost airline of its own, something that Virgin Blue under Brett Godfrey in fact had once considered as the mainline product developed into a hybrid carrier. Virgin Australia now stands to re-enter this market with a deft sleight of hand that will further its ambitions to claim a higher percentage of the mainline domestic and now low cost sectors.
Skywest, meanwhile, adds true heft for Virgin Australia in the regional market segment. Thanks to its existing alliance with Skywest Virgin’s entry into the regional market with its ATR 72s has proven to be a boon on routes that it could not sustain with Embraers and Boeings. But now Virgin Australia gains complete access to the booming WA FIFO and intrastate regional aviation markets, suggesting there is the potential to deploy more of Virgin’s Embraers in WA to ultimately replace Skywest’s ageing Fokker 100s.
In a wisely calculated move, both Tiger and Skywest give Virgin Australia true competitive venom against the 65 per cent of the market the Qantas Group has across its regional, low-cost and mainline networks.
Interestingly, though, the parallels between Virgin Australia and Qantas grow as one considers the history behind these announcements from Virgin, and in a peculiar and slightly uncomfortable irony, these parallels are equally applicable to the relationship between Ansett, Air New Zealand and Singapore Airlines.
Virgin Australia’s share registry now includes Singapore Airlines and Air New Zealand, as was the case with Ansett, plus now, of course, Etihad. Virgin Australia is now becoming a true competitor to Qantas in the same way Ansett was in the days of duopoly. And now both airlines have interests in mainline domestic, regional, low cost and international businesses.
It’s almost a case of what goes around comes around
But in this newly competitive environment, the interdependence between Qantas and Virgin and their respective strategic partners becomes more significant.
It is fair to say the true benefit of Emirates’ forthcoming relationship with Qantas is the access it gains to the Australian domestic market. While Virgin Australia’s strategic partners have had access to the Australian market via codeshare arrangements for a considerable period, the airline’s shareholders and partners will now gain added benefit from the expanded regional network which stands to deliver high yields in the resource-rich Western Australia market.
Although Borghetti was rightly at pains to explain that the Skywest and Tiger Airways deals were subject to various regulatory approvals, his conviction in the proposed equity arrangements was resounding.
The deals stand to create jobs, boost tourism potential in markets that are heavily reliant on inbound visitation and bring the likelihood of fare reductions. Borghetti claimed in regional, domestic and international markets where Virgin Australia has entered as competition to Qantas, fares have reduced by up to 30 per cent.
These are all convincing arguments for the ACCC, which will be opining on the consumer benefits during the next few months. While it could be argued that in the case of Tiger there would be diminished competition by virtue of Virgin Australia’s ownership of the low-cost carrier, its retention as a separate brand under separate governance arrangements should be sufficient to assuage the regulator’s concerns.