A Tiger by the tail

“The transactions are in line with Virgin Australia’s strategy to become the airline of choice in all markets, in order to diversify our earnings and drive growth opportuni-ties for the business,” Virgin Australia chief executive John Borghetti explained.

“The acquisition of Tiger Australia and Skywest provides Virgin Australia with a strong presence in the budget, fly-in/fly-out (FIFO) and regional markets, enabling us to fast-track our expansion in these areas and become a stronger competitor. ” The key deal was the 60 per cent stake in Tiger Airways Australia for $35 million, which may increase to $5 million if Tiger Australia achieves certain financial perfor-mance targets within five years.

As part of the deal Tiger Airways and Virgin Australia also committed to invest up $62. 5 million collectively into the busi-ness to cover Tiger Australia’s losses and fund growth, which could see the airline’s fleet more than triple from its current 11 A320s to up to 35 by 2018.

“This transaction enables Virgin Aus-tralia to access the budget market and enables Tiger Australia to expedite its growth, providing greater competition to this important market segment,” Borghetti said on the Tiger deal.

“By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s competitive cost base and build a sustainable budget carrier. We are com-mitted to maintaining the Tiger Australia business model and brand, and we look for-ward to collaborating with Tiger Airways as the business grows. ” The final announcement was the 100 per cent stake in Perth-based Skywest Airlines for $47 million subject to shareholder, regulator and government approvals.

Borghetti said the deal if approved will enable the airline to fast-track its ad-vancement in the high growth FIFO and regional markets.

“We launched a regional network partnership with Skywest in October 2011 and now we will be able to realise the full potential of the operation through develop-ing a more integrated network, service and frequent flyer program,” said Borghetti, who told Australian Aviation that under the deal, Skywest would become part of the Virgin Australia brand but will continue to operate under its current Air Operator’s Certificate (AOC) with its own CEO and management team, based in Perth.

“Importantly, we will invest to support the growth of Skywest, which will benefit jobs, business and tourism, particularly in Western Australia and throughout regional Australia. ” Virgin launched a regional network partnership with Skywest in October last year but this purchase enables the airlines to make greater savings through develop-ing a more integrated network, service and frequent flyer program.

The transactions breathe new life into Tiger Australia while giving Skywest the stability that it needs.

Tiger has been unprofitable since it was established in 2007, and particularly since CASA grounded it for five weeks in mid-2011.

According to a comprehensive report from CAPA – Centre for Aviation, “the moves by Virgin Australia also mark the half-way point in the airline group’s five-year ‘game change strategy’ and reinforces the carrier’s strategy of picking its partners according to its own needs. ” CAPA recounts that the group has “already expanded its international network through partnerships with Etihad, Sin-gapore Airlines, Delta Air Lines and Air New Zealand. The new joint venture with Tiger allows it to re-enter and compete again in the budget sector of the market, which it exited as Virgin Australia (previ-ously LCC Virgin Blue) hybridised and moved upmarket in attempts to compete more effectively against archrival Qantas in the corporate sector. The acquisition of Skywest, meanwhile, significantly improves Virgin Australia’s position in Australia’s important regional and lucrative mining charter markets. ” “In just a couple of years, Virgin Aus-tralia has come full circle and completed the puzzle. Now it faces the equally chal-lenging task of leveraging the synergies created from all the transactions and de-livering sustainable profits, a goal it aims to meet by the completion of its five-year ‘game change strategy’. ” “Virgin Australia – completing its goal of becoming a competitor across all market segments,” said CAPA.

According to CAPA, Virgin Australia now in control Tiger Australia will have the aircraft it needs over the next five years to add more domestic bases and possibly launch regional international services.

“Tiger Airways Group executives told analysts it has been assured by Virgin Australia that Tiger Australia will be able to launch international services under the new structure. Tiger has lobbied over the years for a change in Australian owner-ship regulations to allow for foreign-owned airlines to operate international routes, a restriction which put it at a disadvantage to rival Jetstar. ”

While international routes are on the horizon the clear and present mission is to expand domestically from its bases of Mel-bourne and Sydney and open new bases.

The fleet expansion will be sourced from the existing group order book for eight aircraft while Tiger Airways Australia will use other sources for the other 16 aircraft.

“Tiger Airways Group executives told analysts that it is confident larger econo-mies of scale will reduce Tiger Australia’s costs and help turn around the unprofitable carrier. Tiger Australia struggled to achieve profitability before it was grounded and has continued to face challenges since resuming operations in August 2011,” said CAPA.

Today Tiger Airways has less than five per cent of the Australian domestic market according to Innovata data.

“If the new fleet plan is implemented, Tiger Airways Australia, under Virgin Australia ownership, could see its domestic marketshare increase up to 15 per cent,” says CAPA.

However, CAPA says there is little chance of any overtaking going on as Jetstar currently accounts for 19 per cent of capacity in Australia’s domestic market and continues to expand as Australia’s largest LCC.

However, the capacity boost will be more significantly a boost of overall marketshare for Virgin Australia as a group.

CAPA says that Virgin Australia cur-rently accounts for just under 30 per cent of domestic seat capacity in Australia and the addition of Tiger Airways and Skywest will see its share increase by about six points to almost 36 per cent compared to about 60 per cent for the Qantas Group.

However a note of caution is introduced by CAPA which says it is “difficult to see how the proposed capacity increase at Ti-ger Australia will be absorbed in a market where cheap fares are no longer able to stimulate significant additional demand. ” “Tiger executives have already been complaining in recent quarters that intense competition in Australia’s domestic market has put pressure on yields and made it dif-ficult to achieve profitability,” CAPA adds.

Tiger Australia does not envision co-operation with Virgin Australia and will be independent and is not expected to engage in any network coordination with Virgin Australia.

And unlike the Qantas/Jetstar coopera-tion Virgin and Tiger say they do not plan to pursue interlining or codesharing.

“The pure LCC model at Tiger Australia will be retained,” says CAPA.

Virgin Australia will be in total control of the new Tiger Australia and will ap-point a new chief executive for the airline, which will continue to be headquartered in Melbourne.

Interestingly Borghetti, who has always pushed the full service story, will serve as Tiger Airways Australia chairman for an initial two-year term.

While all parties insist that no re-brand-ing will occur, clearly the Virgin brand is much stronger and the Tiger brand tainted and think tanks such as CAPA suggest that a re-branding will be on the radar.

One brand that will definitely drop off the radar though is the Skywest name which will disappear and Virgin Australia titles will find themselves on the Perth-based airline’s A320s, Fokker 100s and Fokker 50s.

However there will be no management change with Borghetti very happy with the management team, lead by chief executive Jason Bitter.

The transaction both underpins and accelerates the growth of Skywest, which just six years ago was on its knees with five Fokker 50s and two Fokker 100s.

Today it has 20 aircraft consisting of A320s, Fokker 100s and Fokker 50s, while operating a fleet of eight ATR 72s for Virgin as part of their 10-year strategic al-liance Australian Regional Airline Network (ARAN) agreement, which was signed in January 2011.

In January it will take delivery of two more A320s, and Skywest now carries about 800,000 passengers a year.

According to CAPA Virgin says the Skywest acquisition allows it to gain direct operational control of the ATR 72 fleet that already flies under Virgin colours as well as “fast track” growth in regional mar-kets in Western Australia.

There appears to be little doubt that the three deals are closely entwined with Singapore Airlines taking a more active role in trying to rebuild and restore Tiger’s reputation and profitability.

CAPA says that the rebuilding effort at Tiger has been led by chairman JY Pillay, a former SIA chairman and visionary who has played an active role at Tiger over the last year.

“The joint venture with Virgin Australia instantly improves the outlook for Tiger Australia. As Virgin Australia needed new capital to fund the acquisition, SIA was certainly more than happy to oblige,” says CAPA.

Less obliging may be the ACCC, which has to approve the deals.

“Borghetti understands that it will re-quire a strong case to win over the ACCC to allow Virgin Australia to remove two independent competitors from the market and to all intents and purposes return the Australian domestic markets to a duopoly with Qantas,” warns CAPA.

ACCC chairman Rod Sims told the Syd-ney Morning Herald that a key focus for the regulator would be whether the Tiger deal would lead to lower fares in the domestic travel market.

“[Tiger] is the third player and this merger would make it harder for another third player to come along,” he said.

Borghetti argues there will be “no sig-nificant lessening of competition” because Virgin Australia does not compete against Tiger Australia in the LCC arena, nor does it have a substantial position in the charter and FIFO markets it will inherit from Skywest, and it has only a small presence on regional routes.

The Australian’s aviation editor Steve Creedy spoke with Fat Prophets analyst Greg Fraser who described the deals as a “good shake-up”, adding “it will certainly keep Qantas honest”.

However, Fraser said that Virgin would need to work on repairing public percep-tion of Tiger, which was damaged by its grounding by safety authorities just over a year ago.

“There may be some hangover from that in terms of public perception, so there may be some marketing and promotional work required to perhaps build the trust from the public so they can feel safe flying on that airline,” said Fraser.

Creedy also sought the views of Mac-quarie analysts who said: “The transactions overall represent a monumental shift for Virgin Australia which, if approved, will see a more even playing field in Australian aviation . . . They arguably create a replica of Qantas. ” City Index analyst Peter Esho said that Singapore’s decision to take an equity stake Virgin also showed that airlines in the region were jostling to compete with Qan-tas regional expansion.

“We see today’s move by Singapore Airlines as a strategic shift down south to back Qantas’s main domestic competitor,” he told Creedy.

“As Qantas closes more Asian deals and looks at ramping up its Emirates codeshare alliance, competitors will be feeling the heat. ” Qantas chief executive Alan Joyce brushed aside the deals saying the national flag carrier is well placed to compete.

According to The Australian, Joyce said Qantas’s focus is to compete as the best air-line in all segments it operates in, no matter what competitive changes took place in the airline industry.

“Qantas is in a superb position, and it’s got the best frequent flyer program,” he said.

“We are going to be very competitive no matter what happens in the competitive market here. ” Meryll Lynch analysis cited by Business Spectator said the risk for Qantas was the boost in the size of Tiger’s fleet.

“If Tiger proceeds with expanding its fleet, we expect Qantas will respond by adding capacity to defend its 65 per cent marketshare,” Meryll Lynch said.

“Strategically the acquisitions … improve Virgin’s domestic platform, providing it with a comprehensive product portfolio . . . however, turning around Tiger will be a significant task,” it added.

Back To The Future

Eleven years after the collapse of Ansett balance finally appears to be returning to the aviation market place with large well-financed airline blocks.

There will be howls from many that we are going back to the bad old days of the two airline policy, but nothing could be fur-ther from the truth as the real competitors are foreign airlines with far lower labour costs.

The competition for Cairns, Broome, Hayman Island and any other tropical leisure destination in Australia is Bali or Phuket.

Almost 500,000 Western Australians travel to Bali each year.

A tropical beach is a tropical beach. And the same applies to ski fields or forests.

The reality is that Australia has seen too many airlines fail over the past 40 years and the Virgin deals brings security and strength to the airline industry.

By The Numbers

There is no doubt that the Virgin-Tiger-Skywest deal alters the Australian aviation landscape yet again and it is fascinating to look back over the past few decades to see who the big Australian players were and their ownership.

In 1982 the combatants were Ansett owned by Murdoch and Abeles pitted against government-owned Trans Australian Airlines. Ansett was just taking delivery of the 737-200 with the first 767 to follow in 1983. TAA had placed its fourth Airbus A300 into service and Qantas was well entrenched in its all-747 fleet strategy having taking delivery of two 747 SPs, instead of DC-10s which it cancelled as an option.

Ten years on in 1992 Australian airlines were reeling from the ravages of deregulation.

Compass Mark I had failed and Compass Mk II was in the air but would collapse in 1993. As a result the Keating government set in motion a dramatic upheaval: Qantas was privatised and merged with Australian Airlines (the renamed TAA); Ansett was given access to international routes; Air New Zealand was granted rights – later rescinded – to fly domestic routes.

And ten years on in 2002 the landscape had changed again. Ansett had collapsed, Air New Zealand was rescued from bankruptcy by its government, Qantas had become a gi- ant with Virgin Blue nipping at its heels.

What will 2022 look like?