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.

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

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nicholas.irving
Member

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
Guest

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

David SF eastbay
Member

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.

chinger
Guest

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
Member

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
Guest

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
Member

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.

Alex Hill
Member
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… Read more »
Marks
Guest
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… Read more »
Davywavy
Member
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… Read more »
Marks
Guest
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… Read more »
Davywavy
Member
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… Read more »
Marks
Guest
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… Read more »
Marks
Guest
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… Read more »
Davywavy
Member
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… Read more »
Nick Barnard
Member

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?)

MW
Guest
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… Read more »
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