Tiger must change its stripes
Virgin Australia will move swiftly to try to stem large losses at Tiger Australia by installing a new chief executive for the budget airline and redeploying planes to more profitable routes.
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.