Having rocked the Australian airline sector this morning by buying control of Tiger Australia and planning to take over Skywest and pay for both with a sale to Singapore Airlines of 10% equity sale in Virgin Australia, its CEO and former Qantas executive GM, John Borghetti, said there was ‘more, much more’ to come.
“This is simply another step, with more steps to come,” Borghetti said, “but it is a step that gives us scale.”
In fact it was several steps, and very big step ups in scale, in what Borghetti described as the mid point of his five year plan for Virgin Australia.
When all the approvals are in place between mid November and early March, Virgin Australia will not just have a second brand low cost carrier in Tiger to take on Qantas’s Jetstar brand, but have taken over and Virginised all of the operations of Perth based Skywest, radically lifting its participation in mining industry fly in/fly out charters, and regional aviation and gaining a mixed fleet of A320s and Fokker F100 jets as well as assorted turbo-props.
Borghetti said “We will be sustainably competitive in scale in all sectors of the market from full service to low cost, and we will have the support of strong shareholders.”
The ‘strong’ shareholder that will exercise analytical minds in the finance sector is Singapore Airlines. It has been a long running article of faith among some market observers that Qantas and Singapore Airlines are destined, in some way, to merge or rationalise their operations.
It certainly mesmerised former Qantas CEO Geoff Dixon in May 2001, shortly after he bought out Impulse Airlines’ most determined owner and stake holder Gerry McGowan and flew to Singapore to try and talk up a plan under which Qantas would buy Singapore Airlines’ then minority equity in Air New Zealand, which was the 100% owner of Ansett Airlines, which would be on sold to Singapore Airlines in its entirely.
Although that ‘plan’ went down like a block of granite, the ultimate Qantas/Singapore Air merger has lived on, until this morning, in various analyst dreamings. It is now dead. There will be no Qantas/Singapore tie up in the Asia Pacific, and this morning’s developments will give even more urgency to the Qantas approvals pending relationship with Emirates, which is seen not unreasonably by Singapore Airlines as a force it needs to counter to the best of its ability.
The deals for control of Tiger, which will continue as a strictly separate low cost brand, and Skywest, are funded from the $105 million sale of 10% of equity in Virgin Australia Holdings to Singapore Airlines which was also announced this morning. Tiger will cost $35 million upfront, and the cash component of the proposed Skywest purchase is $47 million, leaving $23 million, and setting up the service brands and segments as summarised in the financial briefing presentation graphic below.
For Virgin Australia the Singapore Changi airport hub which Qantas has dropped for Europe flights under the proposed Emirates partnership is possibly looking like a lolly shop. It will cover with Tiger all of the bases from budget to full service airline flights in conjunction with Singapore Airlines, its Silkair premium subsidiary, and no doubt on Scoot, it’s version of Jetstar International, which is getting 20 Dreamliner 787-9s to take on the 15 less capable 787-8s that Qantas might take for itself after all to try and out bling the Virgins on domestic routes it currently serves with very nice but very old and increasingly costly to run 767s.
This is not to presume for a moment that Qantas doesn’t have a strategy to deal with what the Virgins did to it this morning. But it better be good, and convincing, and enacted without delay, as the Virgin deals can hurt it in places where Emirates can’t really help, which is in the regional, resources and domestic markets, and in greater Asia.