ANALYSIS: Virgin Australia moves to challenge Qantas in domestic market

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Going toe-to-toe against his former employer and now-rival Qantas Airways certainly does not appear to be a problem for Virgin Australia chief executive John Borghetti.

Three announcements by his airline on Tuesday, 30 October 2012 certainly appear to show that it plans to take on Qantas across the increasingly competitive Australian domestic market. These, Virgin adds, will commence the "Game On" phase of its development.

Virgin has said that it plans to take a 60% stake in Tiger Airways Australia and acquire its smaller regional partner Skywest Airlines. If approved by regulators, these plans will give it greater access to the country's highly lucrative budget, regional and mining charter markets.

"The transactions overall represent a monumental shift for Virgin Australia which, if approved, will see a more even playing field in Australian aviation," say Macquarie Bank analysts. "They arguably create a replica of Qantas."

With Tiger, Virgin will effectively return to having an indirect presence in the budget end of the domestic Australia market. This was a segment Virgin had largely stayed out of since Tiger entered the market in 2007, around the same time when it began to refocus its business towards the more lucrative business travel market.

"This transaction 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.

"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.

That commitment could lead to the growth of Tiger Australia's fleet to 35 aircraft by 2018, a major increase from the 11 Airbus A320s it currently operates. That is likely to result in Tiger Australia entering into some fierce competition with Jetstar on its domestic services and could even pave the way for access to short-haul international markets from Australia.

Virgin has also shown great faith in the Tiger Airways brand, which became tarnished in last year after the Australian Civil Aviation Safety Authority (CASA) grounded the airline for over a month, citing safety concerns.

Since then, there have been a number of changes in management, including the appointment of former Virgin executive Andrew David to the position of chief executive of Tiger Australia. Just a week ago, CASA lifted all the restrictions on Tiger Australia's air operator's certificate that limited the number of flights it could operate.

Importantly, Borghetti has signalled that there will be high-level co-ordination between the two airlines to avoid cannibalisation of each other's market, which has happened in other markets.

The move reflects that of Qantas, which has long brought together decisions on the network for mainline and Jetstar services through its flying committee - one that Borghetti was involved in while he was executive general manager at Qantas.

The other announcement is of a proposed takeover of regional carrier Skywest Airlines, with which it has enjoyed a strong strategic partnership in recent years.

"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," says Borghetti.

Skywest is expected to be used to attack Qantas's recent forays into the resources charter market, particularly in its home state of Western Australia where it acquired Perth-based Network Aviation in December 2010.

With Network, Qantas has been aggressively pursuing new FIFO contracts under the leadership of former Skywest managing director Hugh Davin and it has already been able to steal some significant clients away from Skywest.

Virgin will also no doubt use the acquisition of Skywest to fast-track its push onto regional routes, an area understood to have been highly profitable for the Qantas Group in recent years.

Skywest Airlines and Tiger Airlines Australia route map (Oct 2012) 

 tiger airways skywest route map
 Key: pink=Skywest, orange=Tiger, black=both; Source: Innovata Flightmaps Analytics

Virgin Australia domestic route map (Oct 2012) 

 virgin australia domestic route
 Source: Innovata Flightmaps Analytics

Skywest has seven ATR 72-600s on order and 17 options. Under the Virgin wing, it appears that those options will be exercised to build up its regional network to compete effectively against QantasLink. SkyWest also has 10 Fokker 100s and one Airbus A320.

It is also worth noting that Virgin itself has started to make major inroads into the corporate market, an area that Qantas has dominated for over 10 years.

With the introduction of Airbus A330-200s on longer domestic routes, the rollout of business class and lounges, and the revamping of its Velocity loyalty programme, the Virgin brand has turned heads and successfully moved away from its cheap and cheerful roots as Virgin Blue into a sophisticated and contemporary brand that is gaining traction against its larger rival.

As the other pieces of Virgin's competitive puzzle come into focus, they build on its successful international strategy.

This has seen the carrier building partnerships with Etihad Airways, Singapore Airlines, Air New Zealand and Delta Air Lines, connecting Australian passengers to key hubs in the European, Asian, South Pacific and US markets.

This has also resulted in some of its partners buying into Virgin, with SIA announcing on 30 October that it will pay Australian dollars (A$) $105 million ($109 million) for a 10% stake. Air New Zealand owns 19.99% of Virgin, while Etihad has a 10% stake.

Virgin believes that with these three announcements, it can use the "Game On" phase in this fiscal year to leverage on its partnerships to deliver earnings growth in the fiscal year 2014. By the fiscal year 2015, it plans to be positioned for "sustainable and resilient" earnings growth.

"Virgin Australia will have a low-cost base in all market segments, creating a strong platform from which to compete profitably for the long term," says the airline. "In combination, [the transactions] will fast-track growth, build a sustainable long-term business and improve Virgin Australia's competitive position."