The ACCC decision not to oppose Virgin Australia taking 60% and thus control of Tiger Australia is more about swamping the Qantas group 65% domestic market share line in the sand.

Qantas like Virgin has been wounded by the fare and capacity war that has waged since late last year on domestic routes, and those routes were considered absolutely essential to the viability of the Qantas Group given the claimed magnitude of long haul international route losses.

But the combination of Virgin Australia plus Tiger, and also plus Skywest, puts the market shares and domestic yields of both airline groups under renewed pressure, although it is too soon to know with certainty where the figures will go over coming months.

The deal won’t take away anything from the current Qantas Group market share, but it will consolidate its major competitor into a larger force, including a brand that will directly address the cheap fare sector, and put its Jetstar component at increased risk.

The ACCC’s conclusion that Tiger would quit the air fare jungle in this country unless Virgin Australia acquired a 60% controlling interest was not surprising, but the detail in the deal suggests that Tiger and Virgin will stick to the ‘pure’ low cost carrier model that Qantas originally intended for Jetstar when it began flights in 2004.

Tiger Australia isn’t going to be like what Jetstar has become.  It won’t have wide body international services like Jetstar today, and which have met with variable success, and it won’t be co-hosted on the Virgin Australia web site to confuse and annoy its customers the way Jetstar irritates Qantas customers.

Instead it looks very likely, given prior advice from sources in Virgin Australia, that Tiger will do something Jetstar has largely stopped doing, which is offer really cheap fares aimed at getting more people to fly more often.

The sweaty, tight packed, knee pain inducing Jetstar format in an 180 seat Airbus A320 will be exactly the same in a Tiger A320, but the fare will be lower, and you will have to buy it only from the Tiger website.

This is also the format that Ryanair (189 seats in a 737-800) and easyJet (150 seats in an A319) use to great effect abroad, because they make far more money doing it than the established but now almost as intolerably uncomfortable legacy carriers of Europe.

By picking up 60% of the Tiger Australia head count in its group market share, Virgin Australia will have a much better shot at overwhelming the Qantas group 65% market share line in the sand as well.

If the BITRE becomes persuaded that Virgin Australia can claim all of Tiger’s Australian passengers on the basis of control, Qantas may have to start pretending that 65% market share really wasn’t all that important after all, because defending it with massive giveaways will cut the heart out of its financial performance in a way that may make its alleged international losses look the lesser part of the overall picture.

It is critical to note that Virgin Australia’s CEO John Borghetti, was intimately familiar with the Qantas set up of Jetstar in his former career in senior Qantas management. He knows where the mistakes were made, and can be assumed to know how not to repeat them.

In the detail of the deal Virgin Australia is the larger part of a commitment of $62.5 million with its Singapore listed Tiger Airways Holding partner to improve and grow the business in the shorter term, and grow the existing fleet of 11 A320s to 23 by early 2018, with a potential to expand to as many as 35 jets.

This is a more nuanced commitment than first stated in late October last year, but nor does it reflect Borghetti’s earlier statement that Virgin Australia would not unequivocally undertake to guarantee fleet size in a business subject to so much volatility in passenger demand and fuel costs.

The deal obliges Virgin Australia to pay an annual brand licensing fee based on a fixed percentage of Tiger Australia’s total gross revenue for the next 20 years to the Tiger Airways holding company that also owns 100% of the Tiger Airways Singapore franchise, and a payment of $5 million upon certain financial performance targets markers being met within five years.

While the ACCC statement refers to its concern that Virgin plus Tiger would lessen competition in Australia, and some commentators have seen it as a return to a duopoly similar to that of Qantas and Ansett before Virgin Blue came along, the development could also be argued to be highly disruptive to the notion of a return to orderly (that is, rigged) marketing on domestic routes.

The first half year Qantas group results to 31 December showed a decline in the Jetstar performance and a weakening in domestic Qantas services. Today’s developments make it unlikely that any of the competing brands will be able to push yields higher when their market share is at risk.

Strategically, Qantas now has a share register with strong representation by fund managers, where Virgin Australia is substantially owned by the other airline interests of Air New Zealand, Singapore Airlines, Etihad and the family company of Richard Branson.

This may prove a critical difference between how the Qantas and Virgin camps conduct hostilities in the near future.

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