A crouching Tiger on Qantas turf

The ACCC's approval of Virgin's controlling stake in Tiger Airways reduces the Australian aviation industry to a duopoly, but should ironically increase competition.

So, the Australian Competition and Consumer Commission bought the ‘failing firm’ argument and has cleared the path for Virgin Australia to take control of Tiger Airways’ Australian operations and surround arch-rival Qantas with a range of brands and products. That’s not particularly surprising, given that the argument was quite convincing.

The ACCC came to the conclusion that the acquisition by Virgin of a 60 per cent stake in Tiger wouldn’t lead to a substantial lessening of competition because, without the acquisition, Tiger was unlikely to remain in the market at its key assets, 11 Airbus aircraft, would be shifted to other markets in Asia.

Given the financial history of Tiger in Australia that was pretty much a foregone conclusion. Tiger lost about $67.5 million in its past two completed financial years and has lost $42 million or so in the first nine months of the 2012-13 year, or an annualised $56 million. After being bailed out once already by its Singaporean parent it has already chewed up nearly half the recapitalised equity base of about $320 million.

The ACCC concluded that, despite the reduction in the number of domestic carriers from three to two as a result of the acquisition, Tiger’s inability to establish itself as a viable competitor despite substantial investment and numerous changes of management and strategy meant that blocking the acquisition wouldn’t serve to protect competition.

Tiger’s entry into Australia was seen as another attempt by Singapore Airlines to establish a beachhead in the Australian domestic market (the first was an attempt to get control of Ansett in 2000, which was gazumped, with tragic consequences, by Air New Zealand).

As part of the deal with Virgin, which included Virgin taking control of Tiger’s Australian business, however, Singapore Airlines struck up an alliance with Virgin and took up a 10 per cent shareholding, giving it (alongside Etihad and Air New Zealand) a different kind of beachhead in this market, and a far larger and more robust one, to support its international operations.

The clearance means that Virgin, after the earlier acquisition of SkyWest, can now match Qantas’ tiered domestic offerings – Qantas, QantasLink and Jetstar – with three brands of its own, each lining up against a competitor brand with, Virgin claims, a higher cost base than its own.

Virgin’s John Borghetti has promised to ramp up the Tiger and SkyWest fleets aggressively to attack Qantas and, in the process, provide lower-priced offerings to protect his core Virgin brand from Jetstar as it shifts up-market to try to attract more higher-yielding passengers. In fact he has indicated, but not guaranteed, that the Tiger fleet in Australia will be expanded to 35 aircraft by 2018.

The higher-yield segments that Virgin itself is targeting are, of course, the core of the Qantas domestic franchise and Qantas has been using both its own capacity and Jetstar’s to create pressure on Virgin in both the leisure and higher-yield segments to weaken and deter Virgin and protect its heartland. That kind of pincer strategy will become more complicated if Virgin can use Tiger to attack Jetstar, although it should be said that Borghetti has a massive brand redemption task ahead of him to make the Tiger brand acceptable and Jetstar, with about 60 aircraft, also has a huge scale and reach advantage at the discount end of the market.

That prospect of more focused, intense and wider-ranging competition between an enlarged Virgin group and Qantas ultimately has (given that Qantas has consistently said it will do whatever it takes to defend its 65 per cent market share ‘line in the sand’’) the potential to create more meaningful competition and consumer benefit than has been provided by an under-sized, under-capitalised independent Tiger, even though the industry structure will now shift from a three-cornered contest to a duopoly.

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