SIA Investment Opens Door to Virgin Australia Domestic Spending Spree

Virgin Australia Holdings has revealed plans to expand its domestic presence through the purchase of a majority stake in Tiger Australia and full control of Skywest Airlines after Singapore Airlines acquired a ten per cent stake in the carrier as ties between the two operators continue to develop.  According to the carrier these transactions are in line with its strategy to become the airline of choice in all markets, in order to diversify its earnings and drive growth opportunities for the business.

Already a major commercial partner of Virgin Australia, Singapore Airlines has agreed to acquire ten per cent of the issued capital of the Australian carrier (approximately 245,577,511 shares) in a deal valued at over AUD100 million.  The placement to Singapore Airlines has already received approval under the Australian Government's Foreign Investment Policy

“Singapore Airlines is an important strategic alliance partner of Virgin Australia and we are very pleased to have their support as an investor. We believe this investment demonstrates their confidence in our strategy and it enables Virgin Australia to fast-track its growth plans,” said John Borghetti, Chief Executive Officer, Virgin Australia.

At the same time, n the first part of its domestic expansion, Virgin Australia Holdings has entered into a Share Purchase Agreement (SPA) to acquire 60 per cent of the existing shares in budget carrier Tiger Airways Australia for AUD35 million.  The announcement follows just weeks after Tiger Australia was issued with a new Air Operators Certificate (AOC) by the Civil Aviation Safety Authority of Australia (CASA) without any restrictions associated to its previous 2011 grounding.

Alongside the investment, Tiger Australia has agreed to make a payment of AUD5 million to Tiger Airways, if Tiger Australia achieves certain financial performance targets within five years.  In addition Tiger Australia will pay an annual license fee to Tiger Airways for the use of the Tiger brand for 20 years based on a fixed percentage of Tiger Australia’s total gross revenue, with options to renew for another two periods of five years each.

Under the terms of the deal Tiger Airways and Virgin Australia have committed to invest up to a further AUD62.5 million collectively into the business to fund growth in the low-cost venture which could ultimately see Tiger Australia’s fleet grow from 11 to up to 35 aircraft by 2018.  The transaction is subject to conditions and regulatory approvals, including ACCC clearance and FIRB approval.

Virgin Australia has its roots in the low-cost market through Virgin Blue and this agreement will see it once again develop its activities in this key business sector.  “This transaction enables Virgin Australia to access the budget market and enables Tiger Australia to expedite its growth,” said John 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, and we look forward to collaborating with Tiger Airways as the business grows,” he added.

Tiger Australia currently operates eleven aircraft on approximately 450 flights per week, to nine Australian destinations, including its headquarters in Melbourne and its second base in Sydney.  It has plans to significantly expand its domestic network.  “This is a significant step forward for us. The joint venture will bring about a stronger and more competitive Tiger Australia, and allow us to deploy more capacity and attractive budget offerings to our customers,” said Koay Peng Yen, Group CEO, Tiger Airways.

Virgin Australia has also agreed in principle to acquire control of independent venture Skywest Airlines which will boost its activities in the regional and lucrative fly-in-fly-out market attached to the thriving resources industry.  Skywest has been one of Australia’s most successful regional airlines providing vital links for regional communities, tourists and businesses since the mid 1960s.  Each year it flies more than 350,000 passengers across Western Australia, the Northern Territory, Melbourne and Bali, covering 18 commercial destinations alongside six key mining centres.

Virgin Australia Holdings will purchase the entire 100 per cent issued capital in Skywest   Under the terms agreed in-principle, Virgin Australia Holdings will purchase the entire 100 per cent issued capital in Skywest and will offer shareholders consideration of AUD0.45 per share with AUD0.225 per share expected to be paid in cash and 0.53 new Virgin Australia Holdings shares for every Skywest share.

However, the deal remains subject to approval from the Securities Industry Council of Singapore, the Australian Competition and Consumer Commission, the Australian Foreign Investment Review Board, the Singapore High Court and Skywest shareholders at an Extraordinary General Meeting.

“If approved, this transaction will enable us to fast-track our advancement in the high growth fly-in-fly-out (FIFO) and regional markets, increasing competition in these important segments, said John Borghetti.  “Under the agreement, Skywest would become part of the Virgin Australia brand but will continue to operate under its current Air Operator’s Certificate (AOC) with its own CEO and management team, based in Western Australia.

The takeover follows a successful network partnership between Virgin Australia and Skywest that was introduced in October 2011.  Under this agreement Skywest has been operating a number of Virgin Australia’s new ATR turboprops and the two airlines have been codesharing on selected routes.

“Now we will be able to realise the full potential of the operation through developing a more integrated network, service and frequent flyer program,” said John Borghetti. “Importantly, we will invest to support the growth of Skywest, which will benefit jobs, business and tourism, particularly in Western Australia and throughout regional Australia.”

According to schedule data for 2012, Virgin Australia holds a 29.6 per cent share of the seat capacity when you analyse published carrier information (this collates all regional flying by partners back into the mainline airline).  When you add the operations of Skywest Airlines (0.9 per cent) and Tiger Australia (2.4 per cent), this increases its share to 32.9 per cent and will strengthen its competition against Qantas and its low-cost subsidiary Jetstar Airways which respectively hold 41.9 per cent and 18.9 per cent shares of the capacity this year.

In the table below we highlight the growth of the Australian domestic market since 2000.  In this period, through predecessor Virgin Blue for much of the period, Virgin Australia has significantly increased its marketshare from just 5.3 per cent in 2001 to its current 29.6 per cent.  Since 2000 the size of the Australian domestic market has grown 57.9 per cent, an average annual growth rate of 4.8 per cent. 

SCHEDULED DOMESTIC AIR SERVICES IN AUSTRALIA (non-stop departures)

Year

Departures

% Change

Seat Capacity

% Change

2000

624,928

4.3 %

47,948,957

2.6 %

2001

610,150

(-2.4) %

48,988,271

2.2 %

2002

495,437

(-18.8) %

45,788,067

(-6.5) %

2003

487,998

(-1.5) %

46,222,910

0.9 %

2004

522,764

7.1 %

51,632,679

11.7 %

2005

540,489

3.4 %

55,164,699

6.8 %

2006

541,847

0.3 %

57,911,569

5.0 %

2007

550,538

1.6 %

60,852,620

5.1 %

2008

560,526

1.8 %

67,377,369

10.7 %

2009

534,234

(-4.7) %

64,371,718

(-4.5) %

2010

569,225

6.5 %

68,750,307

6.8 %

2011

573,343

0.7 %

70,114,313

2.0 %

2012

594,613

3.7 %

75,733,285

8.0 %

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