Last October, Virgin Australia announced plans to buy a 60 per cent stake in rival Tiger Airways, as well as acquiring Skywest outright. The Australian Competition and Consumer Commission (ACCC) was happy to approve the Skywest buy, but has today confirmed that it has serious reservations about the Virgin buy. The reason? A substantial reduction in competition that could see fares go up and choices reduced.
"The ACCC's concerns relate to the risk of muted competition following the reduction in the number of airline groups within Australia from three to two (excluding regional airlines), and the loss of Tiger Australia as an independently owned discount competitor," ACCC chairman Rod Sims said in a press statement today. "This potential reduction in competition arises as a result of the increased ability on the part of Qantas/Jetstar and Virgin Australia/Tiger Australia to coordinate their activities once Tiger Australia is no longer operating as an independent low cost carrier."
That's not to say that the ACCC is entirely opposed to the idea. One big issue is that Tiger Australia is not currently a profitable operation, having lost $SGD77 million in the 2011/2012 financial year and a further $SGD53.8 million in the first nine months of the current year. "If the ACCC were to conclude that Tiger Australia would exit the market in the absence of the proposed acquisition, this would be highly relevant to our assessment," Sims said. The stated plan to expand Tiger's fleet to 35 craft is also a factor.
Whatever happens, there won't be many visible benefits for Tiger passengers (who already receive the most basic service in Australia and pay some of the highest baggage fees), since there won't be any shared flights or ability to earn points under the proposal. Virgin's argument is that it will operate on a dual-brand strategy, with Tiger attracting bargain-priced customers while Virgin aims for business travellers. The ACCC argues that this might not work across the full range of services:
Outside peak periods, demand from higher yielding leisure, government and corporate customers may be insufficient to fully utilise Virgin Australia’s capacity. At such times, the most profitable strategy for Virgin Australia may be to discount fares to entice customers away from one of the low cost carriers (Jetstar or Tiger Australia).
The ACCC has said it will issue its final decision on April 14. It is accepting submissions from market participants on the issue until February 22.
Keen to see the merger happen? Worried Virgin's standards may slip or Tiger's prices may rise? Don't care because you wouldn't fly one or both airlines? Tell us in the comments.