Tiger pawn falls in place for Virgin's air battle

With some heavy hitters at its back, Virgin Australia is set to unleash its new brand against Qantas' Jetstar – that's assuming it can stabilise the business and ramp up its scale.

With the formalities of his acquisition of a 60 per cent stake and operational control of Tiger Airways Australia now completed, the next phase of John Borghetti’s attempt to chisel away at Qantas’ dominance of the domestic aviation market can get underway.

The strategy is obvious. Even as Borghetti repositions Virgin Australia to be a more direct competitor in the higher-yield market segments to the Qantas brand, he will try to use the recently-rebranded Tiger to put some pressure on Qantas’ Jetstar discount brand. He also has the Skywest business to compete with QantasLink.

While the strategy might be clear its success will be dependent on the execution. The repositioning of Virgin Australia, for instance, hasn’t gone completely according to plan.

While the product and schedules have been overhauled Borghetti’s attack on Qantas’ Perth-east coast routes ignited a capacity war, with Qantas throwing a lot of capacity at Virgin Australia – including a lot of Jetstar capacity – across the entire route network.

While bruising to both groups, the smaller and less diverse Virgin Australia has been forced to back off, slowing the rate of capacity growth and pulling back from the discounting to improve its yields.

There is a lot of curiosity in and outside the industry as to how Borghetti will deploy the Tiger brand against Qantas.

The re-branding is the first step in trying to salvage a brand discredited by poor service and the lengthy grounding of the fleet in 2011 over safety concerns. The next step would be to try to stabilise a business that has lost money since its 2007 launch and is on track to lose more than $50 million this financial year.

There will be some synergies from bringing Tiger into the Virgin fold but ultimately Borghetti will need more planes and more passengers to make the Tiger play work.

A core of the rationale for moving the local Virgin brand upmarket was that it was over-exposed to leisure routes and Queensland in particular.

It would make sense to deploy the lower-cost Tiger on those routes to compete more broadly against Jetstar and make it slightly more difficult for Qantas’ Alan Joyce to use his two brands to put a squeeze on Virgin. Borghetti has talked about focusing Tiger on those leisure routes.

Tiger’s new chief executive, Rob Sharp, has also talked about a doubling of the brand’s capacity by 2018 and Borghetti has mused openly about an even larger expansion of the Tiger fleet, to about 35 planes.

While the Virgin Australia strategy looks like a copy-cat exercise Borghetti has also made it clear that Tiger will be managed at arms-length from Virgin rather than adopting the Qantas model where Qantas and Jetstar’s operations are closely coordinated to maximise the group outcome.

That may be because Tiger’s former owner, the Singapore-based Tiger Airways, retains a 40 per cent interest but Borghetti is also known to have some reservations about the structure of the Qantas-Jetstar relationship.

In the past the rate at which Borghetti has been expanding and re-positioning would have made Virgin Australia quite vulnerable to an assault from the much larger Qantas group, with its more diversified earnings base.

Given that his register is now crowded with key Qantas competitors – Singapore Airlines, Air New Zealand and Etihad – Qantas would be aware that Borghetti would almost certainly be able to raise new capital if he really needed to.

Their commitment to this market and Virgin has been evidence by the jockeying on the register, with Air New Zealand moving to 23 per cent, Singapore to 19.9 per cent and Etihad seeking Foreign Investment Review Board approval to lift its shareholding from about 10 per cent to 19.9 per cent.

The potential of those relationships and the alliances that support them can be seen in today’s announcement of record revenues by Etihad. It experienced a 13 per cent increase in first-half revenue, to $US1.8 billion, with "partnerships" generating about 20 per cent of total passenger revenue.

Etihad has been a pioneer of the "virtual" international network strategy Borghetti has pursued, using code shares and, increasingly, equity interests to generate passenger volume and synergies across the partners’ networks. The Qantas-Emirates alliance is designed to produce similar benefits.

With two competing hub carriers on his register (Etihad and Singapore) Borghetti may have to manage some tensions between his key shareholders and allies. And he will need to perform if he is to keep them from forcing board representation on him. But their presence does buttress his business and provide some protection and insurance against an escalation of hostilities within the domestic market.

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