VIRGIN AUSTRALIA may be forced to live up to its promise to treble Tiger Australia's fleet within five years in order to win regulatory clearance for its bid to take control of the budget airline.
The competition regulator has signalled it could go either way in deciding whether to approve Virgin's $35 million bid for a 60 per cent stake in Tiger.
The regulator has raised reservations about the deal because it will effectively return the country to an airline duopoly by removing a third independent player in Tiger.
But the Australian Competition and Consumer Commission is conscious a rejection could lead to Tiger's Singaporean parent deciding to close the operations in Australia. Since it was launched 2007, Tiger Australia has notched up losses of more than $216 million.
The regulator has put the ball back in Virgin's court after releasing on Thursday a "statement of issues" outlining the pros and cons of the deal. The points raised amount to an "amber light".
But it will still require Virgin to strengthen its argument, which has centred on the benefits of the deal including plans to expand Tiger's fleet from 11 single-aisle A320 aircraft to 35 by 2018.
The ACCC chairman, Rod Sims, said a third independent airline was "very valuable" because, while Tiger was only 3 per cent of the domestic market, it had a 10 per cent share on some main routes.
"But [Tiger] are really losing a lot of money ... so we have to decide whether, absent the merger, they would be here anyway. That is a serious thing we have to weigh up," he said. "On the one hand the second-biggest carrier is taking out the third-biggest - that is bad. On the other hand, if they could bulk Tiger up, it might be a more effective competitor against Jetstar."
The ACCC has made clear a guarantee from Virgin that it will commit to significantly boosting Tiger's fleet will go a long way to help convince it to approve the deal. The regulator will make a final decision on March 14.
Macquarie Equities analysts said they believed Virgin should be able to commit to increases in capacity and convince the regulator of the perils of not approving the deal.
The Tiger bid is one of three deals Virgin unveiled last year aimed at giving Australia's second-largest airline its own dual-brand strategy to counter Qantas and its budget offshoot, Jetstar. The others comprised a $100 million takeover of West Australian airline Skywest - which the ACCC approved last week - and Singapore Airlines buying a 10 per cent stake in Virgin.