expects that buying a majority stake in Tiger Airways Australia and acquiring regional carrier Skywest Airlines will enable it to compete with rival in new domestic market sectors.
Virgin Australia CEO John Borghetti says the Tiger deal represents a “re-entry” into the low-cost carrier market, which Virgin has moved away from in the past four to five years, and will enable it to go head-to-head with Qantas LCC subsidiary Jetstar. The proposed Skywest acquisition gives Virgin access to the lucrative “fly in, fly out” charter market in Australia’s mining sector, and also help it compete against the QantasLink regional network.
The two deals, which are subject to regulatory approval, were part of a surprise three-part announcement by Virgin Australia on Oct. 30. The carrier also revealed that strategic partner(SIA) is buying a 10% stake in Virgin, mirroring moves by Virgin’s other partners, such as and , to buy into the Australian carrier.
In the new Tiger arrangement, Virgin is purchasing a 60% share from Singapore-based Tiger Airways Holdings. Tiger Australia will be operated as a joint venture by the two companies. Virgin will pay A$35 million ($36.3 million) to Tiger Holdings, and the joint venture will pay another A$5 million if it meets certain financial targets in the next five years.
Virgin and Tiger Holdings will together invest up to A$62.5 million in Tiger Australia, and they say this will give them the flexibility to grow Tiger’s fleet of 11to 35 aircraft by 2018. The first eight of the additional aircraft would come from the backlog of Tiger’s Singapore parent by 2015, Tiger Holdings says.
Borghetti stresses that Tiger will be operated as a completely separate entity from Virgin Australia, and it will “remain true” to its LCC model. He also is adamant there will be no code-sharing by the two carriers, in contrast to the relationship between Qantas and Jetstar.
Tiger Airways Australia operates domestic routes mainly on Australia’s East Coast. There will be some coordination of routes between Virgin and Tiger, but they also will compete with each other on some routes, Borghetti says.
Tiger’s Australian operation has been a significant financial drain on its Singapore parent. However, Virgin CFO Sankar Narayan expects the carrier “will see reduced losses going forward.” He believes the scale of the losses is primarily due to the slow restoration of Tiger Australia’s network and fleet following its temporary grounding by Australian regulators in July 2011.
Virgin also reached an agreement in principle with Skywest to purchase 100% of its stock, although the deal is subject to shareholder, as well as regulatory, approval. Virgin already has a 10% stake in Skywest, and the carriers have an alliance deal under which Skywest operates eighton behalf of Virgin Australia.
In addition to the ATRs, Skywest has a fleet of 20 aircraft, predominantly Fokker F50s and F100s and one Airbus A320. It operates some scheduled services mostly on Western Australian regional routes, and has a large charter business. Borghetti says the Skywest operations will be retained and will be rebranded as Virgin Australia. It will keep its own air operator’s certificate and management team.
The SIA investment in Virgin Australia is valued at $A105 million. Virgin and SIA already code-share on routes from Australia to Asia. SIA has a 33% ownership stake in Tiger Holdings, but Borghetti stresses that the Tiger and SIA deals are independent.
The Tiger deal is expected to be finalized–assuming it is approved by regulators–in the March-April timeframe, and the Skywest deal likely will be completed at about the same time.
Meanwhile, Singapore-based Tiger Airways Holdings is hoping that its decision to sell down its stake in Tiger Australia will help the group return to profitability.
The group posted a loss of S$18 million ($15 million) for the three months ending Sept. 30, its second fiscal quarter, compared to a loss of S$50 million for the same period last year. The Tiger Australia unit posted an operating loss of S$20 million in the second fiscal quarter.
The decision to sell a 60% stake in Tiger Australia to Virgin Australia enables Tiger Airways Holdings “to dispose of a substantial portion of a loss-making entity, while allowing the company to retain a significant strategic interest in Tiger Australia and maintain a presence in Australia,” Tiger says. The company anticipates the deal will be completed by the end of this financial year.
Tiger Airways Holdings group CEO Koay Peng Yen declines to give a time-frame for when the group will return to profitability, but adds “it is a priority of the management team.”
He also says the group will be handing over management control of Tiger Australia to Virgin Australia, because Virgin will have three of the six seats on the Tiger Australia board and will choose the CEO. Tiger Airways Holdings will select the chief financial officer and will have two seats on the board. The other remaining seat will go to an independent director. Borghetti will be the first chairman of the board under a two-year rotating chairmanship.
Tiger says that its Australian unit leases eight of its 11 Airbus A320s directly from leasing companies, and three are sub-leased from Tiger Airways Holdings. Because only eight additional aircraft will be coming from Tiger Airways Holdings’ backlog of aircraft on order, Tiger Australia will have to make its own arrangements to get the other aircraft, says Koay.
Tiger Airways Holdings has 25 A320-family aircraft on order and plans to expand its airline in Singapore as well as affiliates in Indonesia and the Philippines. The Singapore carrier will be adding one more A320 this fiscal year and its Indonesian affiliate, Mandala Airlines, will be adding three more, increasing Mandala’s total to seven aircraft. Tiger’s Philippine carrier has five A320-family aircraft and has no plans to add more this fiscal year, but next fiscal year it will be adding aircraft, Koay says.