Virgin Australia Goes on a Buying Spree, Singapore Joins the Fun

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?

Virgin Australia

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.

Skywest
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.

36 Responses to Virgin Australia Goes on a Buying Spree, Singapore Joins the Fun

  1. Nick says:

    There is also ego in this deal. The head if Virgin was passed over the top spot at Qantas by Alan Joyce. So he wants to eliminate Qantas.

    Additionally, Virgin has more than a marketing agreement with Skywest. Skywest flies some turbo props under the Virgin brand and already had some ownership by Virgin.

    • Sanjeev M says:

      Yes, Borghetti had a plan at Qantas which didn’t pan out, so he left to VA.

      • CF says:

        Very true, Nick. I’m sure there is still some personal grudge here. But I don’t think it’s as you say, Sanjeev. I don’t think Borghetti’s plan didn’t work out at Qantas. I think it never got a chance since they chose Alan Joyce instead. Now Borghetti wants to prove his plan can work. It’s not necessarily a bad idea, but I feel like the plan would have been easier to implement starting at Qantas with its broad base already. Turning Virgin Australia like this is riskier for sure.

  2. If they are just going to own Tiger and Skywest and line things up a bit, that is different then starting an airline within an airline using your same employees just at a lower pay scale, repainting some planes and trying to say it’s not really us.

    Done slowly and correctly, it could work out very well for them.

    • CF says:

      True, David. It is different in that they aren’t starting it up themselves. But it’s still a distraction. Even if you run the companies separately, there is still going to be a lot of decision-making at the top level of the group.

      To me, it seems like Virgin Australia wants to focus on the business traveler. The Skywest acquisition fits with that to some extent. The Tiger one doesn’t – it’s just expanding the plan to be all things to all people.

  3. chinger says:

    Virgin Australia is really going all in. Done correctly, this could potentially be a knockout blow against Qantas. Mess up, and Virgin loses much of what they have worked so hard to gain over the last few years.

    • davywavy says:

      I really don’t see how it could be a knockout blow against Qantas. It simply reverts Australia to the old two-airline policy, the duopoly.

      And the biggest problem Virgin faces may be the competition watchdog, the ACCC, which has already expressed reservations about Australian airlines becoming a duopoly again.

      • chinger says:

        It could be more because it comes in tandem with Qantas not doing so well. I think Qantas will survive but they’re going to feel even more pressure then they already have.

        • davywavy says:

          Mayhap. But there will be pressures on Virgin Australia, too, even assuming it gets past the ACCC.

          There are a few examples of tandem mainline/LCC airlines that have worked, and Qantas/Jetstar may be one of them, but the jury is still out on Singapore/Scoot. Many more have proven a burden or outright failure, such as United/Ted, Delta/Song, Air Canada/Tango or British/Go.

          I’m not saying ti can’t be done, and Mr, Borghetti may well be the man to do it, but I think he has his work cut out for him.

    • CF says:

      I don’t see how either one of them gets knocked out. It just means it’s back to the old duopoly. That being said, Virgin Australia can put some real hurt into Qantas along the way. And Qantas has been suffering or years, so it’s just more of the same pain. But Qantas won’t go anywhere.

      But davywavy, there aren’t even a few examples of mainline/LCC working. The only one I know of is Qantas/Jetstar, and that’s what makes it so unbelievable. I’ve heard plenty of rumors about accounting tricks that make the thing profitable, but I have no idea what the truth is.

      But there’s also the benefit that Qantas had such a huge presence on many of these routes and it just walked away and gave it to Jetstar, at least inside Australia. When that happens, there’s such a strong loyalty base for Qantas already that Jetstar would seem to have to succeed just out of sheer luck.

      • davywavy says:

        Essentially, I agree. As I tried to indicate there are very few examples of the tandem mainline/LCC, but I’m always wary of discounting it because airline bosses seem to have such faith it, and there is always the issue of Singapore/Silk. Silk isn’t an LCC as we know it, it is a short haul regional, but it is “an airline within an airline.”

        Qantas tried it half-heartedly with Australian, which was abandoned in favour of the full-on Jetstar. I’ve heard all the stories of “creative accounting” to make Jetstar look good and while not entirely dismissing them, there can be little doubt of Jetstar’s success, as here, yesterday:

        http://www.smh.com.au/business/passenger-numbers-point-to-jetstar-as-parent-begins-descent-20121102-28pqw.html

        “Qantas is on course to become Jetstar’s tail.”

        There is enormous resistance to the concept among many Australian airline commentators, who seem to want Qantas to be what it once was, regardless of the changed times.

        The public, as usual, doesn’t really give a toss and is voting with its collective wallet, as Mr. Borghetti seems to be admitting with the purchase of Tiger.

        I have to assume that if Tiger is successful, Virgin will have to reduce some of its domestic flying, at least on the common routes, else it won’t be competing with Jetstar, it will be competing with itself.

        • CF says:

          davywavy – Yeah, I think Qantas really just wants to keep its name but then dramatically slash labor costs. (I guess I don’t need to think that – it’s been made very clear.) So it seems like it’s in the long term process of moving as much as possible over to Jetstar and then making it take over for Qantas. I envision an Austrian/Tyrolean situation if they can get it past the government. (And I don’t know a ton about whether they can or not down there.)

          • davywavy says:

            CF – I guess much the same could be aid of Singapore Airlines, determined to protect its premium (core) brand, but at the same time developing LCC’s – Scoot and, to a lesser extent, Tiger.

            It seems to me that Qantas is making all the right moves in this changed modern world, while labouring under the restrictive provisions of the Sales Act (which don’t apply to Virgin), the liberal aviation of policies of successive governments (for everyone but Qantas), the union insistence that it should function as it was, a state owned enterprise (the national icon) and the relentless rise of the public appetite for cheaper travel – the LCC’s.

            Added to that, there is the change in Australia’s international market demographics – the Chinese are fourth among Australian foreign visitors but rising fast, and in NZ the Chinese are now second only to Australians in the number of visitors, more than the UK or the US.

            (Incidentally, I remember all too well what happened to Air New Zealand when it was thrown to the wolves of the then fashionable privatisation).

            So it amuses me that Virgin’s CEO Borghetti is seen almost as a coming man of Australia aviation, when all he is doing is aping Qantas, while at the same time covering his airline’s butt with very limited long-haul international flying.

            And it confuses me that many claim Jetstar’s finances to be sleight-of-hand because I can only wonder – why?

          • CF says:

            Good question, davywavy. Why would Qantas move things around to make Jetstar look good? The way I figure it, there are a couple good reasons.

            1) If they make the mainline finances look horrendously bad while making Jetstar look good, then they can keep up the pressure on the Australian government to reduce some of the restrictions they have to operate under. They can act like Qantas is being killed by it – just look at those horrible numbers.

            2) Also, if mainline finances look awful while Jetstar looks good, then they really can turn to labor and say, “hey, see, labor costs really are too high. You need to agree to cut them so that we can all be successful.”

            3) Lastly, investors like the idea that there is a diamond in the rough in there. If all Qantas performs poorly, then there isn’t much to hang on to. But if Jetstar looks great, then there is hope for wild success.

            Now, I’m not suggesting that I know one way or the other here, but I’m just providing a couple reasons why they’d bother.

          • Marks says:

            Qantas needs to be a little careful in dealing with the Australian Government. Part of the reason for Qantas (and Jetstar and Virgin) success domestically is that it is very hard for extra players to get into the market. Part of this is because of government regulation. For example an international carrier cannot carry domestic passengers on domestic legs in Australia unless those passengers are on-going overseas. That means that international carriers are carrying half full planes from Melbourne to Sydney, while domestic carriers are full and profitable. Nice.

            The Australian Government could end that cosy little barrier to trade at the stroke of a pen.

            That feeds into another severe problem the Australian Government has. Sydney Airport is at capacity, bursting at the seams, and local politics (the local electorate used to be that of a former Prime Minister, for example) make it impossible to add another runway, and almost impossible to find another airport site within 100km.

            However, were the Australian Government to give foreign airlines the right to take domestic passengers between Melbourne, Sydney and Brisbane, that would mean an instant increase in Sydney Airport passenger capacity.

            So, kicking Qantas and Jetstar in the teeth would have a political pay off for the Australian Government. Probably the only thing that saved Qantas this time is that the very unions that were causing Qantas’ management a problem would have been the same ones to march on Parliament demanding that foreign airlines be kept out of the domestic market. Oh, the irony!

            And it also means that the domestic business travel types who hate those same unions are denied access to international business class seats (55″-80″ pitch) and so have to make do with Qantas’ “business” seats (38″ pitch) for a much higher price. Oh, the irony!

          • davywavy says:

            CF – I suppose any (or all) of those is possible, but I guess I’m not really into conspiracy theories.

            A lot of very well-positioned watch-dogs have been trying for a long time to prove that the Jetstar accounts are dodgy and have not been able to do so. So if they are bulldust, I wish the accountants for Qantas/Jetstar were doing my tax returns.

            It is certainly true that as of June 2012, Qantas Group made a (net) loss, but the chickens (including industrial action) were coming home to roost.

            http://www.qantas.com.au/travel/airlines/media-releases/aug-2012/5439/global/en

            “The result was materially impacted by record high fuel costs ($4.3 billion, up $645 million) and industrial action culminating in the grounding of the Qantas fleet ($194 million).”

            Note that Jetstar was at $203 million profit in 2012.

            But let’s take out the special charges/restructuring costs and look at 2011, the starting point of this, when the warning bells went off, big-time.

            http://www.news.com.au/business/qantas-more-than-doubles-net-profit/story-e6frfm1i-1226121001509

            In 2011 the Group (net) profit was $250 million, up $112 million from 2010. Underlying (operational) profit was $552 million with international mainline losing $200 million. But domestic mainline made $228 million, up $67 million from the previous year.

            Jetstar was at $159 million profit, so if Qantas wanted to show that mainline costs were too high (as a bargaining tool with unions), then at least domestically, they did a lousy job of it.

            What those results say to me is what we have long known, that long haul is under serious assault and that Qantas is an end-of-line carrier. It surely no coincidence that only ME/Asian carriers did well, geographically in the middle of things, not at either end. How many European carriers still fly the very long way to Australia – why would they, especially with oil at these prices?

            It was known then, in 2011, that international mainline was in trouble – big-time – with that $200 million loss as the starting point. If people don’t want to believe it, I doubt I’ll ever convince them.

            #3? Qantas been saying for a long time (and the results show) that Jetstar is a diamond in the rough. It’s just that nobody wants to hear it.

  4. Alex Hill says:

    Your graphic misses Virgin’s joint venture partnership with Delta. As an American now living for a few years in Australia, the partnership works great for me and has me flying DJ/VA almost exclusively, at the expense of Qantas. They’re a very pleasant hybrid of a no frills and full service carrier.

    What I don’t understand is how flying every 15 minutes SYD-MEL at peak hours with $80 one way fares often available at short notice and offering lounge access to all Gold elites (including Delta Golds, who don’t get that when flying Delta domestically even though Delta’s lounges don’t hold a candle to Virgin’s, albeit no complimentary upgrades for anyone in Oz) is a profitable business model. Even full fare is only $250, and business $400. I’ll take it for now, though!

    My understanding is that the domestic market has long been the profitable bit of Qantas’ business. Do you know if that’s still true?

    • CF says:

      Alex – You’re absolutely right. I should have put Delta in there for sure. I also left out Virgin Atlantic, but that’s because that partnership doesn’t really add any huge value like the others. But Delta certainly does. Thanks for pointing that out.

      • Dan says:

        If your graphic is about Virgin Australia’s ownership links, Singapore will now own 10%, Etihad owns about 10%, and Air NZ owns just under 20%. Richard Branson owns about 25% and the rest is traded on the stock exchange. Virgin Australia itself will now own 100% of Skywest, 60% of Tiger, and (I think) just under 50% of Virgin Samoa.

        It’s other airline partners are Delta (no ownership stake), Virgin Atlantic (which Richard Branson owns half of), Virgin America (which Richard Branson owns about 15% of I think), Hawaiian and Airlines PNG.

        • CF says:

          Dan – It was more about important strategic partners than a straight ownership graphic, but thanks for giving the numbers in detail here. I consider Delta to be an important strategic partner that I left out. I don’t consider Branson/Virgin Group to be that important. Same goes for Virgin Samoa or any of the other codeshare/interline partners out there. Would you disagree?

  5. Marks says:

    Some commentary about John Borghetti at PPRuNe:

    http://www.pprune.org/dg-p-reporting-points/407383-borghetti-off-virgin-3.html

    Given that Borghetti was an insider at Qantas, he would have a very good idea of how to successfully run a Jetstar clone, PLUS knowing how the Australian aviation market works, plus knowing his competitor inside out. I suppose there is always a risk in a budget airline, but if you have someone running it who knows how it is done successfully, and has worked for an organisation that has done it successfully, your risk is lower than most in business these days.

    Qantas is hoping to get a boost when it gets delivery of 15 B787 going directly to Jetstar for international work. Guess, who is getting 30 B787 in competition with Qantas relevant to all this? Scoot, owned by Singapore airlines, and Air New Zealand that’s who.

    Next, if you were wanting to target the very lucrative business market in Australia, would you partner with Singapore Airlines with its 55″ pitch 34″wide seats on offer like Virgin, or with Emirates 48″ and 18.5″ equivalents like Qantas did?

    So we have Qantas and Jetstar and partners with a mix of:

    A380, B747, A330/340, to Europe, and A320/321 and B787 to Asia and New Zealand.

    Squared up against Virgin, Tiger and partners with a mix of;

    A380, B777, A330/340 to Europe and A319320 and B787 in Asia and New Zealand – with a much better quality business offering long haul, and very competitive pricewise short haul. (My brain started hurting when I considered the combinations to the US, so I gave up at this point).

    Seems to me, that the risk is on Qantas’ side.

    • davywavy says:

      Why am I not at all surprised that was posted on a pilot forum?

      Mr. Borghetti was not the biggest fan Jetstar when he was at Qantas, that’s one reason why he didn’t get the top job. Alan Joyce had been the Jetstar CEO.

      While it may be a battle, but I don’t think the risk is all on the Qantas side. I was a great fan of Virgin Blue – I’m not so keen on Virgin Australia, which has lost its sense of Australian cheerfulness, at least when I’ve flown ‘em. That trendy bland may be fine up the front, not so much fun down the back.

      • Marks says:

        Oh, I agree with what you say to a large extent. However, I was trying to make the point that the CEO of Virgin Australia has some insider advantages due to his long long time at Qantas. He also has some serious advantages on the alliance side as far as premium product is concerned. All of those are risks for Qantas surely? Given that Jetstar runs the same aircraft type as Tiger, and presumably similar wage structures, someone who knew how those sorts of aircraft and employees ran at a profit in Australian conditions with Jetstar ought to have a fair chance at repeating at Tiger it seems to me. If it cannot, then it will be dropped. The $35m would not be nice to lose, but is not at the high end of the risk spectrum either in the airline industry at this level. In the meantime, it will eat into Jetstar and Qantas.

        • davywavy says:

          I’m not sure why alliances are risks for Qantas, which has a long history of alliances with various airlines, and especially British.

          I find it ironic that Mr. Borghetti has voiced concerns about the Qantas/Emirates alliance, when he is doing exactly the same thing.

          I find it even more ironic that Singapore is paying Virgin to take the troubled Tiger off its hands.

          I suppose I have problems with the idea that Qantas must be the loser, when Mr. Joyce proved, with the grounding, that he has big iron balls. The union leaders, who were behaving like over-muscled apes with the promised “slow bake” of Qantas, surely underestimated Mr. Joyce, too

          • Marks says:

            The alliance risk for Qantas is that anyone in business has a choice of going to London/Frankfurt via Singapore on a much longer and wider seat or going to London via Dubai on a shorter and narrower seat on Emirates.

            If you were a business traveller going to London, which would you prefer? Just for fun, I checked on a Singapore Business fare and compared it to an Emirates equivalent for next April. The Singapore fare was lower than the Emirates one on the same date. Even the Etihad seats are slightly larger than Emirates’ business seats, but the fares seem substantially lower.

          • Marks says:

            As far as the ‘iron balls’ are concerned, I have no problem with the threat to ground the airline. That got the government involved and the industrial umpire and pinned down the negotiations. Fine. No grounding required, he had the unions at the table and in a compulsory bargaining position. Good oh.

            However, he then immediately grounded the airline. When asked in the Senate Inquiry, why he grounded the airline when he already had what he wanted, he replied that it was a safety issue and that the air crews would be stressed. Oh yes, these would be the aircrew that brought back the crippled A380 to Singapore, or the aircrew that saved the Diving Airbuses over the Indian Ocean? Poor delicate petals, we would not want our pilots to be stressed now, would we?

            Now, this wasn’t anything to do with the fact that maybe the shareholders might have been asking awkward questions about why Qantas didn’t buy the B777, or why Qantas management did not have a contingency plan in place if the B787 was delayed, might it? The industrial upheavals took place at a very very convenient time for management to be able to avoid pertinent questions on fleet management. Bit OT, but had to get it off my chest :)

            Disclaimer: I am neither a shareholder nor employee of Qantas, and have no interest in ever becoming either.

          • davywavy says:

            You can still fly via Singapore by transferring to British at SIN. The joint venture is over, but the relationship has not completely ended.

            But given the countless numbers of Australians who have voted with their wallets and flocked to Emirates, and thus Dubai, it clearly isn’t such an unattractive option.

            For the rest, this isn’t a Qantas thread, but I don’t know of any airline that had a contingency in place for the 787. It was unthinkable, then, that Boeing would be so delayed. Air New Zealand surely didn’t have a contingency and has complained bitterly of both the cost and lost opportunities brought about by the 787 delays.

            Heretically, perhaps, I think they should have ordered the very original A350, as they might have done if Boeing had not mysteriously found 787 delivery slots in 2008. That didn’t work out so well.

            I won’t address the 777 debate here, because it wasn’t originally a Joyce decision and that was then, this is now. Joyce has had to clean up several messes that Dixon left behind. That applies, ultimately, to the grounding.

            I recall that it was Dixon who has happy to sell Qantas off to a group of financial buccaneers.

        • CF says:

          Marks – A couple thoughts here.

          First, this does lend some credence to the possibility that Jetstar is successful and that it isn’t just accounting tricks. After all, Borghetti should know. So that is kind of interesting to consider.

          Second, I thought originally that A$35 million wasn’t that much to pay to knock out a competitor. But then I saw that Tiger/VA committed to putting in an additional A$62.5 million to grow it. I’m not sure where that capital is coming from, but VA has to be on the hook for a lot. In addition, they owe Singapore $5 million if it performs. I just wonder if this will end up costing a lot more.

          • Marks says:

            You are right about the cost. In addition, Virgin has to factor in Tiger’s ongoing present losses. My guess (and it is only a guess) is that Tiger in Australia was a disaster for Singapore. Selling it to someone else (even though Singapore now has a big stake in Virgin) means that they save face. A very big deal in Asian business. They sold Tiger Australia for some money (face saved), if Borghetti manages to turn Tiger round, then they share in the profit (more face saved), and if he cannot, then they can argue that it wasn’t on their watch that Tiger in Australia had to be junked (some face saved).

            The question of whether or not Jetstar is profitable, or more to the point, how profitable it really is, is another reason I don’t like Qantas all that much from an investor perspective. Its internal workings are just too opaque to make a judgement about whether it is a good business or not. There are so many claims of cross subsidy and book fudging that are not able to be checked – when that happens, one tends to get suspicious. It might be all above board, but if I cannot tell, and no perusal of the various financial analysts reports from stock brokers can tell me. It says: “Be very careful”.

            However, back to my point, if anyone outside the Qantas group knows where the real cross subsidies are, it would be John Borghetti. So, presumably, he would not take on Tiger if he thought it was a hopeless cause. He has too much skin in the game for that. That is not to say that he is above making a blunder, merely that if anyone knows what the real position of Jetstar is (and hence potentially Tiger in Australia), and can make himself a hero, then that person is JB.

  6. What I’m more interested in is Singapore Airlines’s involvement… They own roughly half of Virgin Atlantic as well do they not?

    What keeps them interested in doing these deals? or perhaps are they just a profitable airline that has money to throw around? (Wait, such things exist?)

    • CF says:

      Nick – Yep, Singapore owns 49 percent of Virgin Atlantic. It bought it back in 1999/2000.

      I can’t explain the Virgin Atlantic equity deal, but this one makes a little more sense. It gets them off the hook with Tiger Australia, and that has to be a persistent nag right now. It also creates a stronger partnership with Virgin Australia to feed Asian flying. I do wonder if Scoot has something to do with this. The lines are somewhat blurry in my mind right now.

      • Marks says:

        Scoot has mainly B777 cheap cheap cheap seat layour, with orders for 20 B787.

        It seems to me that if you were to combine Tiger and Scoot (after they get their B787, it looks pretty much like Jetstar).

        So, my guess is that if Borghetti could turn Tiger round in Australia, the next job would be to turn the blowtorch to Tiger Asia, combine them with Scoot, and there is pretty much a toe to toe competitor for Jetstar.

        If Borghetti cannot turn Tiger Australia round, it is hard to figure what they will do with Scoot. But the B787 should not be hard to pass onto some other deserving airline.

  7. MW says:

    Just one point you missed in your otherwise excellent summary: The key relationship for Virgin with Skywest is not so much about the FIFO market and more about the fact that they have been operating as the regional feeder partner for VA. They have been operating ATR’s for Virgin Australia (under the Virgin brand) on the east coast to counter Qantas(link)’s dominance in the regional market. They currently have about 6 ATRs and another 10 or so on order that they will operate for VA.

    The general perception in Australia is that the Skywest move is not so much about the FIFO in WA market but about setting up a regional feeder network to take on Qantaslink.

    • CF says:

      MW – You think the regional stuff is a reason why they bought Skywest? It seems to me that they already have that relationship and are getting the benefit. They can contract with Skywest to set up as much of a regional network as they want without buying them. That’s why it seems to me that VA wants to get the piece of the business that isn’t Virgin-branded so that it can sell the entire thing to big mining business. Do you have any links where people are talking about this? I’d love to read more.

      • davywavy says:

        The FIFO flying, which represents a very healthy percentage of Skywest business, is certainly part of the equation:

        http://www.ausbt.com.au/virgin-australia-to-buy-skywest-to-beef-up-perth-business-flights

        “Virgin Australia CEO John Borghetti said today that the deal “will enable us to fast-track our advancement in the high growth fly-in-fly out and regional markets, increasing competition in these important segments.”

        The Skywest CEO has said that the offer is a substantial premium to Skywest the trading price, but doesn’t necessarily think it is the last word:

        http://uk.finance.yahoo.com/news/skywest-airlines-ltd-receipt-proposal-070400262.html

        “The Proposal will only proceed in the absence of a superior offer. Skywest will be appointing a Singaporean independent expert to advise the board on the value of the proposed consideration.”

        There may be two interpretations of this. Either the airline goes to Virgin and he is establishing that the best interests of the shareholders have been explored.

        Or he thinks there may be more money out there somewhere – and arguably in Singapore.

      • MW says:

        Cranky – A lot of the analysis here has been about the parallel structures that now exist. Virgin Australia > QF mainline, Tiger > Jetstar, Skywest > Qantaslink. I’m sure the seamless FiFO connections are a big part of the equation but equally i think this frees Virgin’s hand to compete in every segment that qantas does.

        Here’s an example, “Tiger will become Virgin’s budget competitor to take on Qantas’ much bigger Jetstar while SkyWest will compete with QantasLink at the regional level.” http://www.heraldsun.com.au/business/in-the-black/virgin-move-makes-skies-interesting-for-investors/story-e6frfinf-1226506989424

        Another here [Virgin will] “acquire the regional airline Skywest, which will enable it to take on the QantasLink operations” “http://www.theaustralian.com.au/business/opinion/borghetti-ups-stakes-to-crowd-the-airspace/story-e6frg9kx-1226507017668

        Certainly not saying the FiFO isn’t a major part of the thinking but while you mentioned a marketing partnership the existing relationship goes a lot deeper. SkyWest is already flying Virgin Australia branded planes, they already have a common FF program, they’ve recently introduced pilot cadetships that progress through Skywest regional and on to Virgin mainline, etc. At least part of this is about the many regional markets where Qantas has no competition flying their Dash-400s that Virgin are keen to feed into their network.

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