The trick to catch a Tiger
The competition regulator has signalled it could go either way in deciding whether to approve Virgin's $35 million bid for a 60 per cent stake in Tiger.
The regulator has raised reservations about the deal because it will effectively return the country to an airline duopoly by removing a third independent player in Tiger.
But the Australian Competition and Consumer Commission is conscious that a rejection could lead Tiger's Singaporean parent to close the operations in Australia. Since it launched here in 2007, Tiger Australia has notched up losses of more than $216 million.
The regulator put the ball back in Virgin's court after releasing on Thursday a "statement of issues" outlining pros and cons of the deal.
Those points amount to an "amber light", which is less worrying for Virgin than the "red light" imposed on Heinz's plans to buy baby-food maker Rafferty's Garden.
But it will still require Virgin to strengthen its argument, which has centred on the benefits of the deal, including plans to expand Tiger's fleet from 11 single-aisle A320 planes to 35 planes by 2018.
ACCC chairman Rod Sims said a third independent airline was "very valuable" because, while Tiger was only 3 per cent of the domestic market, it had a 10 per cent share on some major air routes. "But [Tiger] are really losing a lot of money . . . so we have to decide whether, absent the merger, they would be here anyway," he told BusinessDay.
"On the one hand the second-biggest carrier is taking out the third-biggest - that is bad. On the other hand, if they could bulk Tiger up, it might be a more effective competitor against Jetstar."
The ACCC has made clear a guarantee from Virgin to significantly boost Tiger's fleet will go a long way to gaining approval. The regulator will make a decision on March 14.
Macquarie Equities analysts said Virgin should be able to increase capacity and convince the regulator of the perils of rejecting the deal.
The Tiger bid is one of three deals Virgin unveiled last year aimed at producing a dual-brand strategy to counter Qantas and its budget offshoot, Jetstar.
The two others comprised a $100 million takeover of West Australian airline Skywest - approved last week by the ACCC - and Singapore Airlines buying a 10 per cent stake in Virgin.
Frequently Asked Questions about this Article…
Virgin Australia has offered $35 million for a 60% stake in Tiger Australia. Investors should care because the deal would reshape the domestic airline market by removing a third independent carrier, forming a stronger dual-brand strategy for Virgin to compete with Qantas and Jetstar, and could materially affect competition and capacity on major routes.
The ACCC has raised concerns because the takeover would effectively return Australia to an airline duopoly by removing Tiger as an independent competitor. Although Tiger is only about 3% of the domestic market overall, it holds around 10% on some major routes, so the regulator is weighing the loss of a third independent player against the risk that Tiger might exit the market without the deal.
The ACCC indicated that a firm guarantee from Virgin to significantly boost Tiger's fleet would go a long way toward gaining approval. Virgin has proposed expanding Tiger's fleet from 11 A320 planes to 35 planes by 2018, and that capacity increase is a key part of its argument that the merger could produce a stronger competitor to Jetstar.
Since launching in Australia in 2007, Tiger Australia has recorded cumulative losses of more than $216 million. The ACCC is considering whether, absent the merger, Tiger's Singaporean parent might close Australian operations — a factor that weighs in the regulator's assessment of the takeover.
According to the article, the ACCC will make a decision on the Virgin–Tiger deal on March 14.
Macquarie Equities analysts said Virgin should be able to increase capacity and make the case to the regulator about the risks of rejecting the deal, implying that convincing arguments about fleet expansion and competitive outcomes could sway the ACCC.
The Tiger bid is one of three moves Virgin unveiled to create a dual-brand approach to better compete with Qantas and its budget arm Jetstar. The other elements mentioned in the article are a $100 million takeover of Western Australian airline Skywest (which the ACCC approved) and Singapore Airlines taking a 10% stake in Virgin.
Approval could have two effects: it would remove the third independent carrier, which is a negative for competition, but if Virgin successfully bulks up Tiger's fleet and capacity, Tiger could become a more effective competitor to Jetstar on major routes — a point the ACCC is weighing in its assessment.
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