Virgin has Tiger by the tail as ACCC dawdles

Every day that the Australian Competition and Consumer Commission delays a decision on a proposed merger between Virgin Australia and Tiger Airways, the worse it is for the Tiger carcass, which is already badly decayed.

Every day that the Australian Competition and Consumer Commission delays a decision on a proposed merger between Virgin Australia and Tiger Airways, the worse it is for the Tiger carcass, which is already badly decayed.

The more the loss-making Tiger business deteriorates, the greater the pressure on Virgin to either renegotiate the original merger deal or pull the plug and walk away.

It has been five months since Virgin boss John Borghetti announced he wanted to buy 60 per cent of Tiger Australia, which is owned by the Singapore-listed Tiger Airways Holdings, of which Singapore Airlines is a major shareholder.

The game plan for Virgin was to reconfigure the Australian aviation landscape by using the Virgin brand to go head-to-head with Qantas and take on Jetstar, which would mean a more competitive market. It recently bought West Australian airline Skywest to take on Qantas' regional airline, QantasLink.

But with the ACCC dragging its heels, with a decision now expected in May, questions are being asked about whether the deal will fall apart and Tiger will collapse, leaving 400 staff without a job.

It comes as the ACCC has given the green light to the complex Emirates and Qantas tie-up and the co-ordination between the four Jetstar joint ventures in the region - Jetstar Asia in Singapore, Jetstar Pacific in Vietnam, Jetstar Japan and Jetstar Hong Kong - which will change the dynamics of the Australian aviation industry.

The ACCC's delay prompted some in the market, including the aviation analyst at CBA, Matt Crowe, to write a note warning that there was a "significant" risk the ACCC would block the deal.

"The ACCC is entitled to ask 'if Virgin Australia is convinced Tiger will leave the domestic market, why did it pay $72 million to buy Tiger rather than wait for it to leave then take its place ?' " the note says.

Crowe raises a valid question but the solution isn't as straightforward as it looks. For starters, it would take up to two years to start a new airline, including sourcing aircraft, putting systems in place, applying for a new air operator's certificate from the Civil Aviation Safety Authority and negotiating new enterprise bargaining agreements. Virgin's cost base is 15 per cent higher than Jetstar's, which would make

it difficult to compete, particularly if

Jetstar started throwing extra capacity onto the market.

Qantas did this recently in what was one of the most vicious airline price wars since 2004, when it launched Jetstar. It cost Qantas more than $100 million in forgone profits and Virgin more than $20 million as both airlines increased capacity, chased and protected corporate accounts and offered cut-price airfares.

Qantas' justification for pushing 11 per cent extra capacity into the market was that it was protecting its 65 per cent line-in-the-sand market share as Virgin went upmarket and tried to take corporate and government clients as well as lift its game on routes including Sydney to Perth.

It explains why Virgin is interested in adding Tiger to its arsenal. By buying a 60 per cent stake in Tiger, Virgin gets immediate access to 11 aircraft and preserves Tiger's existing enterprise bargaining agreements. This would give Virgin a standing start to take Jetstar head-on, which has 60 aircraft in its fleet.

Virgin's original deal included a $35 million share-purchase agreement for a 60 per cent stake and a commitment by Virgin and Tiger Airways to spend up to $62.5 million to fund growth in the low-cost carrier. At the time of the announcement, Borghetti said Virgin could increase Tiger's fleet from 11 to 35 by 2018.

Given the deterioration in Tiger's business in the past few months and the price war that Qantas has waged on Virgin in the past nine months, the original deal is now looking pricey, which raises the question of whether Borghetti will need to renegotiate it or walk away. If he walks away or the ACCC rejects the proposal, Singapore Airlines has made it clear it will pull out of the Australian market.

Whether the Singapore-based airline is bluffing and has another party lined up to buy Tiger is anybody's guess, but it is unlikely.

The brutal reality is Australia has a dismal record when it comes to a third airline. Over the past couple of decades there have been several tries, including Compass one and Compass two, OzJet and Tiger, which has accumulated losses of $216 million since its debut in 2007.

After being stung by more than one collapsed airline in the past it, is customers who are becoming increasingly wary that their tickets might not be safe if the deal falls apart.

The ACCC seems to be looking at the preservation of Tiger as a separate entity from Virgin as the best way to keep the domestic aviation market flipping back into a duopoly.

By seeing the market this way, it is ignoring the fact that Virgin is trying to create more competition by taking its airline upmarket to compete with Qantas, and Tiger downmarket to compete with Jetstar. If the ACCC calls it wrong and Tiger withdraws, Qantas and Jetstar will be the clear winners - again.

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