We’ve all been preoccupied here in the US with the weather, but meanwhile big things have been happening down in Australia. In fact, I’d call it huge news from Virgin Australia this week when it decided to buy Skywest (the Aussie-based one, not the one in the US), take a majority stake in Tiger Australia, and sell a little bit of itself to Singapore Airlines. These guys are really flexing their muscles, but will they be able to handle all this change?
Here’s the way it’s going down. Singapore is paying Virgin Australia A$105 million for the pleasure of owning 10 percent of the company. Virgin Australia is taking that money and turning it around to fund growth. Virgin Australia will pay A$35 million for 60 percent of Tiger Australia and it’s made an A$99 million offer to buy Skywest. What’s more? The airline says it’s not done. Virgin Australia boss John Borghetti says there’s “more, much more” to come.
Why the heck is the airline doing all this? Clearly there’s a plan, and it’s a big one. Virgin Australia wants to be the airline of Australia, challenging Qantas everywhere it can. So far, it has gone upmarket trying to woo business travelers. It has linked up with Air New Zealand to be more competitive in the Trans Tasman market, and it has linked with Etihad to tap into that airline’s network. It’s really making a big dent in its goal to be able to challenge Qantas around the world, but it’s not there yet.
Singapore and Tiger
First, let’s talk about the Singapore and Tiger deals, because those are intricately tied, I would assume. Singapore owns a piece of Tiger, an ultra low cost carrier that expanded a couple years back into the domestic Australian market. When Virgin Australia decided to move upmarket toward a more full service model, that left room for ultra low cost carriers, but Tiger has tanked. Last year, Tiger Australia was even shut down the authorities for being unsafe. It has not performed as planned, and you can imagine that Singapore is not happy about that.
So, Singapore got Virgin Australia to buy the majority stake. The Tiger name and business model will continue, but Virgin Australia will be in charge. This should immediately give the Tiger name a boost. Tiger and Virgin Australia have agreed to invest A$62.5 million into growing the airline from 11 airplanes today to 35 in 2018.
Here’s another way to look at it. As Virgin Australia decided to move upmarket to compete with Qantas, it realized it didn’t have a Jetstar to compete in the downmarket segment. Now, you know my feeling about airlines starting low cost carriers – I hate it. Virgin Australia didn’t do that. Instead, it decided to buy into the market.
That, by the way, doesn’t make me like the plan any more. What I do like about it is that it eliminates a low cost carrier competitor. That’s worth paying something for, but then Virgin Australia is going to pour more money into growing the airline. I fear this could become a bottomless pit. I also don’t see why Virgin Australia needs to compete in EVERY market segment.
This deal does, however, get Singapore more engaged with Virgin Australia while being less engaged with Australia itself (since it doesn’t have to worry about Tiger anymore). But with Singapore having a stronger interest in the success of Virgin Australia, it might look to tie things up more closely to help with connecting passengers into each other’s networks. This is an area that Qantas wants to focus on, but it has had some false starts, most recently with Malaysia in Kuala Lumpur.
There’s a lot going on here, so I have mixed feelings.
Then there’s the Skywest deal. There isn’t a great way to compare this airline to what we have in the US, but there are loads of these guys in Canada. This is a regional airline but the big business is flying people in and out of remote mines, something that has been booming around Australia (as it has been in Canada). It’s a lucrative business, because people need to get into these towns and it doesn’t have to be cheap.
Skywest flies almost entirely in Western Australia, an area where Virgin Australia is lacking. There is already a marketing partnership between Skywest and Virgin Australia to operate as a regional partner. This includes frequent flier mileage earning. But by buying Skywest, Virgin Australia can now go to these big mining companies and say, “What do you need Qantas or anyone else for? We can do everything you need.” It’s a very desirable market, and Virgin Australia wants to own it.
Can Virgin Australia really absorb all of these changes without falling apart? It seems like a very tough task, but the airline is on a mission. I just hate the idea of trying to do too much too quickly. I also hate trying to be all things to all people. I do, however, look forward to seeing if Virgin Australia can figure out a way to pull this off. I’m just a little skeptical.