Threat of disappearing act was just the ticket

The Australian competition regulator had only one real judgment call to make in order to decide whether Virgin Australia could buy a majority stake in the ailing budget airline Tiger Australia - what would happen to Tiger if the deal was blocked?

The Australian competition regulator had only one real judgment call to make in order to decide whether Virgin Australia could buy a majority stake in the ailing budget airline Tiger Australia - what would happen to Tiger if the deal was blocked?

It took six months for the Australian Competition and Consumer Commission to satisfy itself that Tiger's current owners would have pulled up stumps and left the Australian domestic aviation market if Virgin had not thrown a lifeline.

Tiger Australia's losses had been mounting. It was fighting reputational issues on safety - having been grounded for six weeks in 2011 - and it was operating at sub-economic scale. The ACCC was persuaded that the new chief executive of Tiger Australia's parent, Tiger Airways Holdings, was a commercial businessman with no stomach for sustaining the mounting losses that have been running at about $60 million per year.

Once the ACCC was convinced it was a "deal or depart" choice, it could throw away the handbook, the competition act and shred the submissions from those arguing against the deal.

It doesn't really matter that the super cheap fares may become rare (or disappear), or that excess capacity might be reined in, or even that Tiger may no longer contest some of the capital city markets and be redeployed to leisure routes.

Whether Virgin and Tiger operate in the same market (that is, the leisure end) became academic.

Instead, it's binary. Tiger will exist in future only under the new Virgin ownership structure. Otherwise it disappears.

The fact that the Australian domestic market shrinks from three to two operators is an outcome that generally sits pretty poorly with any competition regulator.

Thus the deal got the green light only once the ACCC was satisfied that there were no other potential buyers in the market - at least, none that were offering a sufficiently attractive deal.

Tiger Airways Holdings (majority controlled by Singapore Airlines) had the option of closing the Australian subsidiary and redeploying its 11 aircraft to profitable Asian routes.

The remaining question is not about Virgin's talent for deals. It now comes down to execution.

Virgin Australia chief executive John Borghetti now has clearance to put in place one of the final building blocks in his grand strategy to create a multi-brand airline that can service the more lucrative business market through Virgin Australia and migrate the lower-margin, price-conscious customers to his low-cost brand - Tiger.

Sound familiar? This is the strategy employed by Qantas when it set up Jetstar domestic.

Borghetti has a history of getting deals done. On the international front, he has stitched up alliances with Delta in the US (one that was initially rejected by US authorities), Singapore Airlines, Air New Zealand and Etihad - creating a virtual global airline for a fraction of the resources needed to operate.

It is an industry template that others - including Qantas International - has used.

More recently, Virgin acquired West Australian regional airline SkyWest for $100 million in order to get a bigger slice of the fly-in fly-out mining industry market.

But arguably the biggest test for Borghetti will be integrating the Tiger domestic business, stemming the flow of red ink from an airline that has had few positive distinguishing features.

Tiger has the lowest cost base in the market but that is where its lead ends. It needs to re-base its fares while keeping them the lowest in the market. Service levels needs to improve and the brand needs to be marketed as one that is cheap, cheerful and safe.

There are no ACCC conditions attached to the Virgin deal and no requirement under the new ownership for the fleet to expand. But there is a general plan for Tiger Australia's owners to invest $62.5 million over an unspecified period to expand the fleet from 11 aircraft to as many as 35 planes.

An enlarged and revitalised Tiger may represent a threat to Jetstar Australia but ultimately could produce more rational pricing at this end of the market.

Tiger's cost base will also enable it to fly routes that have been uneconomic for Virgin.

If it works, it will be a deal changer for the domestic market.

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