Tiger must change its stripes
The competition regulator has finally cleared the way for Virgin to take control of Tiger after deciding the ultra-budget airline would be "highly likely" to pull operations out of Australia without the deal.
Australian Competition and Consumer Commission chairman Rod Sims said Tiger's large losses during the past six years supported the argument that it was a "failing firm".
"Blocking the acquisition would not serve to protect competition," he said.
Virgin will name an external candidate with domestic aviation experience as Tiger's new boss within the next week. Tiger has been rudderless since Andrew David departed early last month for Jetstar.
The new controlling shareholder is also expected to shift Tiger planes from key routes - such as between Sydney and Melbourne - to those focused on flying leisure passengers to holiday destinations. The Tiger brand will be retained despite damage to its reputation from its forced grounding in 2011.
In a big win for Virgin, the regulator has not imposed conditions on it to expand Tiger's fleet from 11 to 35 over the next five years. Virgin chief executive John Borghetti had threatened to walk away from the deal if the regulator had forced it to grow the loss-making airline at a certain rate.
However, Virgin and Tiger's Singaporean parent, whose stake will soon fall to 40 per cent, have committed to increasing the airline's fleet to 23 planes by 2018.
The green light will return Australia to an effective duopoly between two airline groups - Virgin and Qantas - by removing an independent third player in Tiger.
Shares in Virgin and Qantas rose almost 5 per cent and 2 per cent respectively as the return to an effective duopoly promises to remove irrational behaviour by the airlines, and temper expansion.
The $72 million bid for control of Tiger is central to the plans of Mr Borghetti to set up a dual-branded airline group, which has the advantage of a lower cost base than Qantas and Jetstar.
Mr Borghetti said in a statement on Monday that clearance from the regulator gave it a "real opportunity to provide strong competition in the budget travel segment and bring further benefits to consumers". "We can use our local expertise to build a sustainable budget carrier," he said.
However, Macquarie Equity analysts said Virgin would have its work cut out turning around Tiger, which is chalking up annual losses of about $60 million.
"The key outcomes for a turnaround in Tiger's profitability will be a focus on safety, on-time performance and a renewed effort in marketing," they said.
"However, management will need to move quickly to establish the new carrier in the market and stem the current losses."
The deal still needs approval from the Foreign Investment Review Board.
Frequently Asked Questions about this Article…
The Australian Competition and Consumer Commission (ACCC) cleared Virgin's takeover of Tiger, concluding Tiger was a "failing firm" after years of large losses and was highly likely to pull out of Australia without the deal. The ACCC said blocking the acquisition would not protect competition.
Virgin plans to move quickly: it will appoint an external chief executive with domestic aviation experience within a week, redeploy Tiger planes from key business routes (like Sydney–Melbourne) to leisure and holiday routes, and focus on improving performance while retaining the Tiger brand.
The ACCC did not impose conditions requiring Tiger to grow at a set rate. While Virgin had talked about expanding Tiger from 11 to 35 planes over five years, Virgin and Tiger's Singaporean parent have committed to grow the fleet to 23 aircraft by 2018. The regulator did not force the larger expansion plan.
Virgin's bid for control of Tiger was reported at $72 million. CEO John Borghetti wants to create a dual‑branded airline group — using a lower cost base than Qantas and Jetstar — to provide stronger competition in the budget travel segment and deliver benefits to consumers.
Tiger has recorded large losses over six years and is chalking up about $60 million in annual losses. Analysts (Macquarie Equity) say turning Tiger around will require rapid improvements in safety, on‑time performance and marketing, and management will need to act quickly to stem the losses.
The market responded positively: Virgin shares rose almost 5% and Qantas shares rose about 2% as investors expected the move to return Australia to an effective duopoly and to temper aggressive expansion and "irrational" pricing behaviour among carriers.
Yes. Virgin has said it will retain the Tiger brand despite damage to its reputation from Tiger's forced grounding in 2011, while working to rebuild safety and on‑time performance.
Yes. Although the ACCC cleared the acquisition, the deal still requires approval from the Foreign Investment Review Board (FIRB) before it is fully completed.
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