Virgin on the roar path

Tiger's new owner will leave it to do its own thing in the low-cost market, writes Clive Dorman.

Australia's lowest-cost airline, Tiger, has been given the green light by its new owner, Virgin Australia, to use budget airfares to grow rapidly, while also being left alone with a separate brand and separate management.

Last week's ownership moves, in which Virgin took a 60 per cent stake in Tiger with its Singaporean owners holding the other 40 per cent, was made easier because Tiger's Australian chief executive, Andrew David, used to be the chief operating officer at Virgin Blue before it was rebranded.

David hasn't said whether he will stay in the job or move back into Virgin, but Virgin chief executive John Borghetti last week stressed the importance of allowing Tiger to do its own thing in the low-cost market, which had been abandoned by Virgin.

While details are yet to be released, that means Tiger will probably take over most of Virgin's leisure-market flying - such as Melbourne and Sydney to the Gold Coast, Sunshine Coast and Cairns - within two years. Borghetti confirmed Tiger would continue to compete with Virgin services on some routes such as Sydney-Brisbane, Sydney-Melbourne and Melbourne-Adelaide, as Qantas does with its low-cost subsidiary, Jetstar.

Virgin is preparing its case for the chairman of the Australian Competition and Consumer Commission, Rod Sims, who has indicated he will drive a hard bargain for the deal's approval.

"Yes, they'll be stronger to compete with Qantas - that's the plus. But they'll take out the remaining competitors to do it - that's the negative," Sims told The Australian Financial Review.

Virgin will argue that the Tiger deal and, separately, its purchase of Western Australia regional carrier Skywest, will enable it to better compete in all market segments, which will lead to cheaper fares. Borghetti will argue that Virgin has caused fares to fall 20 per cent to 30 per cent in markets it enters for the first time, as was the case for Virgin Blue and the group's launch of services between Australia and Los Angeles.

However, Borghetti also confirmed last week what everyone already knew: Virgin was no longer the cheapest airline in town on holiday routes. "It's quite clear that Virgin Australia over the past year or two has been directly competing against the Qantas brand," he said. "And to that end, the Jetstar brand competition had diminished because we were repositioning the carrier. Tiger will allow us to compete against the Jetstar brand much stronger ... The Tiger model is a great model, because it is the lowest-cost model in the low-cost-carrier space in Australia."

Since it began flying in Australia in 2007, Tiger has been mostly alone in offering regular year-round discounts less than $60 one way, because it has operating costs substantially lower than those of its major competitor, Jetstar. Borghetti said Tiger wouldn't be doing what Jetstar has with Qantas in one vital respect, "put Virgin Australia code on Tiger or Tiger code on Virgin Australia".

"We have to make a distinct separation in the marketing, the brand and the consumer expectation of what they're booking," he said.

Since its grounding for safety violations in July and August last year, Tiger has been under new management pledging to improve reliability. With all its planes back in the air in the past few months, it has resumed its place near the bottom of the industry's reliability table, with 75 per cent of flights arriving on time in September.

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