Competition
All Change
The Australian domestic market is set to undergo another transformation as Virgin Australia squares off against Qantas in all sectors. Emma Kelly reports.
The last couple of years have seen a number of developments involving Australian carriers boosting their international credentials through new partnerships and equity arrangements. Qantas secured a major alliance agreement with Emirates – following Virgin Australia, which jumped into bed with Etihad – having already clinched deals with Air New Zealand and Singapore Airlines.
More recently, however, Australia’s two largest carriers have turned their attention to the domestic market, and the stage is now set for intensified competition in their own backyard.
Virgin Australia’s announcement late last year of its planned acquisition of 60 percent of the existing shares of Australian low-cost airline Tiger Airways Australia from its Singapore-based parent Tiger Airways, as well as all of West Australian regional airline Skywest, will further change the Australian landscape this year.
In the Tiger deal, Virgin will purchase the stake for A$35 million (US$36.9 million), plus an additional payment of A$5 million to Tiger Airways if the Australian operator achieves certain financial performance targets within five years. Tiger and Virgin have committed to invest a further A$62.5 million into the business to fund its growth, which could see the airline’s fleet grow from 11 to 35 aircraft by 2018.
[Subhead:] Separate management
Tiger Australia will be managed as a standalone entity, including a separate board and management team. It will continue to operate under the Tiger Airways brand as a low-cost carrier (LCC) providing domestic air travel services in Australia with Airbus A320 aircraft. The head office will remain in Melbourne, with operational bases at Melbourne Tullamarine and Sydney airports.
The deal is a major boost to Tiger Airways Australia, which is still trying to get back on its feet after an enforced grounding due to safety concerns by Australia’s Civil Aviation Safety Authority (CASA) in 2011. Restrictions on the carrier were fully lifted late last year, but it is still working to repair its damaged reputation.
For Virgin Australia, the acquisition is a way to re-enter the low-cost market, which it has moved away from under its ‘Game Change’ strategy, focusing its attention on securing more of the high-yield corporate and business end of the market. That strategy has proved highly effective, with Chief Executive Officer John Borghetti revealing at the airline’s results presentation in November that the carrier has “surpassed our target of 20 percent of domestic revenue from the corporate and government market” one year earlier than it expected to.
This follows the restructuring of the company’s domestic network, including: the expansion of its presence in regional Australia; the introduction of business class on domestic services; the introduction into service of new Airbus A330-200s, Boeing 737-800s and ATR 72 turboprops; refurbishment of the fleet; and the upgrade and opening of airport lounges.
Virgin Australia has now moved on to the next phase of its strategy – dubbed ‘Game On’ – which is aimed at driving growth opportunities and ensuring the sustainability of the business through continuing to diversify earnings.
[Subhead:] Increased competition
The Tiger stake “enables Virgin Australia to access the budget market and enables Tiger Australia to expedite its growth, providing greater competition to this important market segment,” says Borghetti. “By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s competitive cost base and build a sustainable budget carrier. We are committed to maintaining the Tiger Australia business model and brand.”
The acquisition of 100 percent of Skywest, meanwhile, is the latest move in Virgin Australia’s strategy of building its share of the booming fly-fly-in (FIFO) resources market, as well as expanding its presence in regional markets. Virgin Australia first established a partnership – the Australian Regional Airline Network agreement – with Perth, Western Australia-based Skywest in October 2011. That agreement involved codesharing on regional services and Skywest operating eight ATR 72s on behalf of Virgin on regional services, increasing to 12 aircraft by the end of 2013. Virgin followed up that deal by acquiring 10 percent of the carrier last April.
Under the latest deal, Virgin is acquiring all of Skywest and absorbing it into the Virgin brand. However, the smaller carrier will continue to operate under its own air operator’s certificate, with its own management team.
Skywest currently operates 20 A320s, Fokker 100s and Fokker 50s, alongside its ATR-72s, to 16 destinations across regional Western Australia, as well as to Darwin, Melbourne and Bali. The airline is particularly strong in the state’s high-growth FIFO sector.
“The acquisition of Tiger Australia and Skywest provides Virgin Australia with a strong presence in the budget, FIFO and regional markets, enabling us to fast-track our expansion in these areas and become a stronger competitor,” Borghetti says.
Provided the acquisitions come through the regulatory process unscathed, they will create an airline force to be reckoned with. The group would operate 139 aircraft (with more on order – for example, Virgin ordered 23 737 MAX aircraft last year to join the existing 68 Next Generation 737s), have 9,000 employees and be active in all market areas.
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The Australian Competition and Consumer Commission (ACCC) has been scrutinising the deals since they first came to light, with the body particularly concerned that they could return the market to a duopoly situation – effectively blocking out other operators, particularly in the low-cost and regional sectors – and pose barriers to new operators.
The ACCC was expected to release its findings at the end of January, as Asian Aviation went to press.
The competition concerns may be justified, with Virgin Australia’s acquisition of Tiger Australia removing a third player from the market. The Virgin deals will set it up for headlong competition with Qantas in the low-cost, regional and FIFO markets.
As analysts noted when the deals were first announced, they could even the playing field by creating a much stronger competitive force against Qantas. Macquarie analysts point out that the moves effectively create “a replica of Qantas”.
Qantas has Jetstar as its low-cost arm and has been steadily building up its regional operation through QantasLink, while simultaneously improving its mainline product. Meanwhile, the purchase of Perth-based Network Aviation in 2010 gave the company a foothold in the Western Australian FIFO market.
[Subhead:] Ready to fight
Qantas is by no means giving up its share of the domestic market – 65% – without a fight and has added frequencies, upgraded its aircraft and its product in an effort to retain and increase its share of the market.
Qantas’s and Jetstar’s combined domestic businesses delivered a profit of more than A$600 million to the group in the last financial year and CEO Alan Joyce is keen to maintain and grow this.
“Our domestic position is pre-eminent and our domestic earnings outperformed the previous year. We have the two most profitable airlines in Australia,” Joyce says. “We have a very successful two-airline strategy in Australia, with a premium and low-fares model that spans most aviation customers and mitigates risk over economic cycles. It is widely recognised as a winning formula.”
From May this year, for example, Qantas will deploy A330s on all weekday services on the Sydney-Perth and Melbourne-Perth routes, aimed squarely at capturing more business and premium traffic. Qantas operates 30 widebodies – A330s and Boeing 767s – on domestic routes, which allows it to serve the business market better, the airline says.
The aircraft feature Panasonic on-demand in-flight entertainment (IFE), laptop power at every seat and a meal and checked-in baggage is included in the fare.
In addition, Qantas has taken delivery of 24 next-generation Boeing 737-800s, featuring individual IFE, with a further eight to join the fleet in the next 18 months. Meanwhile, the 767 fleet has been refurbished with new interiors and IFE streamed to iPads at each seat.
Furthermore, Qantas Club facilities have been added and upgraded, with more planned for this year.
[Subhead:] QantasLink expansion
QantasLink has also expanded, with its fleet of Bombardier Q200, Q300s and Q400 turboprops, and Boeing 717 jets growing to 60 aircraft, while its network approaches 60 destinations.
To attract more business from the resources sector, the airline purchased Network Aviation at the end of 2010, at which point the smaller company operated a fleet of two Fokker 100s and six Embraer Brasilias.
“This is an important market and a growth market, and Qantas will now become a key player in meeting the needs of the resources sector. This will significantly enhance the scope of what Qantas can offer the mining sector, bringing new competition to the marketplace,” Joyce said at the time.
Qantas has subsequently boosted Network’s fleet with a further ten Fokker 100s. Qantas also operates 717s on routes within Western Australia and Queensland, primarily serving the mining and resources sector.
As Qantas and Virgin Australia continue to build their domestic market presence and take their rivalry to the next level, the amount of the pie left for other players is dwindling fast.
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