A tamed Tiger better than none

The competition watchdog has obviously some reservations about Virgin's deal with Tiger which would reduce the number of airline competitors in Australia to two. But it would be brave to block it.

It will have come as no shock to John Borghetti that the Australian Competition and Consumer Commission has some "issues" with Virgin Australia’s proposed acquisition of a majority stake in Tiger Airways’ Australian business.

Apart from the fact that the ACCC has been dropping broad hints that it has reservations, any proposal that envisages reducing the number of competitors in a large, important and quite sensitive market is going to give the commission pause for thought.

The arithmetic is very simple. If Virgin is allowed to acquire 60 per cent of Tiger the number of domestic carriers will shrink from three to two, even though there would still be four airline brands.

The ACCC worries that the loss of Tiger as an independent discount competitor could increase the ability of Qantas/Jetstar and Virgin/Tiger to "coordinate" (presumably in a legal manner, through a meeting of minds and pricing and capacity strategies rather than actual coordination) their activities.

That doesn’t mean, however, that the proposal is destined to be rejected.

The reality of Tiger’s position is that it is losing money in Australia. The Australian business lost $10 million in the December quarter and $32 million for the nine months to December, wiping out the $28 million of profits its Singaporean parent generated from its other operations.

If the status quo prevails, and Tiger remains caught in the midst of a capacity-driven contest between the Qantas group and Virgin, there has to be a significant question mark about its continued presence in this market.

The ACCC referred to Tiger’s financial position and the potential for it to exit the market today. That would, of course, also reduce the number of competitors from three to two.

Borghetti wants to acquire control of Tiger, not just because there would be some synergies from bringing it within the Virgin fold, but because it would support his attempt to attack Qantas’ dominance of higher-yield passenger segments by moving the Virgin brand and product upmarket.

At the moment Virgin is caught between Qantas in the full-fare business travel segments and Qantas’ Jetstar brand in the discount segments. Tiger, while it does have some leverage over discount fares on leisure routes, isn’t a major player.

Adding Tiger and expanding its capacity would allow Borghetti to use it and its market-leading lower cost base to attack Jetstar while focusing Virgin on Qantas, in effect replicating the original twin-brand strategy Qantas developed to corral Virgin as it grew into the space in the market once occupied by Ansett.

The commission noted that Virgin and Tiger Airways had publicly announced they planned to expand the Tiger fleet in Australia from 11 aircraft to 35 by 2018. If that did happen, it would put paid to any suggestion of coordination or collusion between Qantas and Virgin and, if it maintained its low cost base, would make Tiger very influential in setting prices at the discount end of the market.

There is nothing in what Borghetti has done since he became chief executive of Virgin (after missing out on that role at Qantas) to suggest that he would have any intention of doing anything other than trying to attack Qantas from every conceivable direction. The proposed Tiger deal fits that attack strategy.

Given the Qantas group’s dominance of the domestic market one suspects that the commission will, after contemplating the potential departure of Tiger from the market if it blocks the deal, be more influenced by the potential upside for competitive intensity in the domestic market from the proposal than the downside.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles