Bloomberg News

Virgin Australia Deals Spark Air-Travel Duopoly Concerns

October 31, 2012

Virgin (VAH) Australia Holdings Ltd.’s plan to buy two domestic airlines faces a “very complicated” review because of concerns the country’s aviation market will be reduced to a duopoly, the nation’s antitrust regulator said.

The proposed acquisition of a controlling stake in Tiger Airways Holdings Ltd. (TGR)’s local unit and of a regional carrier will need to be examined “extremely carefully” in a process that will probably take months, Rod Sims, chairman of the Australian Competition and Consumer Commission, said yesterday by phone. The antitrust issues will be “very complicated,” he said, declining to comment on whether approval was likely.

A Tiger deal would combine Australia’s second and third- biggest airlines as Virgin Chief Executive Officer John Borghetti pursues acquisitions and international tie-ups to lure passengers from Qantas Airways Ltd. (QAN) Brisbane-based Virgin also agreed to sell a 10 percent stake to Singapore Airlines Ltd. for A$105 million ($109 million) to help fund its plans.

“Having a third player in there like Tiger does discipline the other two players,” Sims said, referring to Virgin and Qantas. “If you have that taken out you do lose that discipline.”

Virgin Purchases

Virgin plans to buy 60 percent of Tiger Australia for A$35 million. It intends to pay about A$94 million in shares and stock for all of Skywest Airlines Ltd. (SXR), pending approval from the smaller carrier’s shareholders. The stake sale to Singapore Air, which has already been approved by Australia’s foreign investment regulator, is unlikely to raise significant competition issues, Sims said.

Virgin has about 30 percent of Australia’s domestic travel market, while Tiger has around 4 percent and Skywest has less than 1 percent, Matthew Spence, an analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in an Oct. 30 note to clients. Qantas has about 65 percent of the market, a level which it considers optimal and has pledged to defend.

Borghetti yesterday said the Tiger and Skywest acquisitions will bolster competition as Qantas would face a larger rival. He also said that Tiger isn’t a direct competitor as, unlike Qantas, Virgin doesn’t have a budget arm.

“Since we’ve started, any entry that we’ve had in just about any market improved competition,” he said. “That won’t change.”

The carrier’s entrance into the business-class market has helped drive domestic premium ticket prices to 20-year lows. The airline began adding business-class seats in the past couple of years after abandoning a budget-carrier strategy.

Overlapping Markets

Sims rejected the suggestion that low-cost and full-service carriers aren’t in competition with each other.

“You can’t segment it to say there is an absolutely separate premium and low-cost carrier market,” he said. “They do cross over.”

Virgin may also argue that its joint venture may be the best way to stop Tiger’s management quitting the Australian market to focus on more profitable routes, Russell Shaw, an analyst at Macquarie Group Ltd. in Sydney, wrote in a note to clients Oct. 30.

Still, this exception is only allowed when the target company is “in imminent danger of failure,” according to the regulator’s guidelines. Tiger Air is based in Singapore.

No Concessions

Virgin may be unwilling to make significant concessions to win regulatory approval for the two takeovers as it seeks to pare costs and boost sales by aligning operations.

Coordinating Virgin and Tiger’s schedules is “absolutely fundamental” to the deal, Borghetti said in an interview. If the regulator blocks this, the deal won’t happen, he said.

Virgin rose 1 percent to close at 49 Australian cents in Sydney. The stock surged 5.4 percent, the most in almost two months, yesterday. Qantas declined 0.8 percent to A$1.33 today.

The takeovers and the Singapore Air equity tie-up may add to pressure on Qantas, which has already cut international services, delayed new planes and sought a tie-up with Emirates on Europe routes to pare overseas losses.

The takeovers would give Virgin a budget brand to compete with Qantas’ Jetstar and a regional arm to challenge QantasLink, Tony Webber, managing director of Webber Quantitative Consulting, said by phone. These are markets Virgin has overlooked in its push to win premium traffic, he said.

“They’ve aggressively pursued the corporate and business market but they lacked depth and exposure to the leisure segment, regional and charter segments,” he said.

Etihad Stake

Virgin, which is part-owned by Richard Branson’s Virgin Group, has previously sold stakes to Etihad Airways PJSC and Air New Zealand Ltd. (AIR) The airline also cooperates with the two carriers, Singapore Air and Delta Air Lines Inc. on international routes.

Qantas “remained focused on its strategy” of maintaining market share on domestic routes and forming the alliance with Emirates, spokesman Andrew McGinnes said in an e-mailed statement.

Qantas has defended this mark by increasing Jetstar’s capacity about 20 percent over the past year, mainly because of expansion by Tiger, Macquarie’s Shaw wrote in an earlier note to clients Oct. 22.

Growth in domestic capacity “remains well above long-term demand growth,” which will pressure fares and margins, he said.

Tiger, which flies to nine destinations in Australia including all of the country’s state capitals, said last week it was looking at adding new flights after restrictions imposed by Australia’s air-safety regulator were lifted. The carrier had its local flights grounded for about six weeks last year because of safety violations.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Neil Denslow in Hong Kong at ndenslow@bloomberg.net


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