October 30, 2012
Credit: Virgin Australia
Virgin Australia expects that buying a majority stake in Tiger Airways Australia and acquiring regional carrier Skywest will give it the critical mass to compete with rival Qantas in new domestic market sectors.
Virgin Australia CEO John Borghetti says the Tiger deal represents a “re-entry” into the low-cost carrier market, which Virgin has moved away from in the past four to five years, and will enable it to go head-to-head with Qantas LCC subsidiary Jetstar. The proposed Skywest acquisition gives Virgin access to the lucrative “fly in, fly out” charter market in Australia’s mining sector, and also help it compete against the QantasLink regional network.
The two deals, which are subject to regulatory approval, were part of a surprise three-part announcement by Virgin Australia on Oct. 29. The carrier also revealed that strategic partner Singapore Airlines (SIA) is buying a 10% stake in Virgin, mirroring moves by Virgin’s other partners, such as Air New Zealand and Etihad Airways, to buy into the Australian carrier.
In the new Tiger arrangement, Virgin is purchasing a 60% share from Singapore-based Tiger Airways Holdings. Tiger Australia will be operated as a joint venture by the two companies. Virgin will pay A$35 million ($36.3 million) to Tiger Holdings, and the joint venture will pay another A$5 million if it meets certain financial targets in the next five years.
Virgin and Tiger Holdings, which together will invest up to A$62.5 million in Tiger Australia, they say this will give them the flexibility to grow Tiger’s fleet of 11 Airbus A320s to 35 aircraft by 2018. The first eight of the additional aircraft would come from the backlog of Tiger’s Singapore parent by 2015, Tiger Holdings says.
Borghetti stresses that Tiger will be operated as a completely separate entity from Virgin Australia, and it will “remain true” to its LCC model. He also is adamant there will be no code-sharing by the two carriers, in contrast to the relationship between Qantas and Jetstar.
Tiger Airways Australia operates domestic routes mainly on Australia’s East Coast. There will be some coordination of routes between Virgin and Tiger, but they also will compete with other carriers on some routes, Borghetti says.
Tiger’s Australian operation has been a significant financial drain on its Singapore parent. However, Virgin CFO Sankar Narayan expects the carrier “will see reduced losses going forward.” He believes the scale of the losses is primarily due to the slow restoration of Tiger Australia’s network and fleet following its temporary grounding by Australian regulators in July 2011.
Meanwhile, Virgin reached an agreement in principle with Skywest to purchase 100% of its stock, although the deal is subject to shareholder, as well as regulatory, approval. Virgin already has a 10% stake in Skywest, and the carriers have an alliance deal under which Skywest operates eight ATR 72s on behalf of Virgin Australia.