Buying a stake in Tiger Airways Australia allows Virgin Australia to re-enter the low-cost segment after four years and embark on a two-brand strategy in the domestic market.
This will also allow Virgin to provide competition across all market segments in Australia, says its chief executive John Borghetti.
Virgin said on 30 October that it will buy a 60% stake in Tiger for Australian dollars (A$) 35 million ($36.2 million), with the low-cost carrier's Singapore-based parent retaining 40%. The Australian carrier will also make a deferred payment of A$5 million to Tiger upon achieving certain targets.
This comes after the airline rebranded itself as a full-service carrier in 2008 and introduced premium economy in some of its cabins. That was done as the airline sought to compete more effectively against Qantas Airways, the Australian flag carrier.
With Tiger, Virgin will have a company that can be deployed against Qantas's low-cost arm Jetstar.
"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.
"By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia's competitive cost base and build a sustainable budget carrier."
Tiger remains committed to growing its Australian fleet and adding more destinations and frequencies, says Tiger Airways Holdings' group chief executive Koay Peng Yen.
"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," adds Koay.
Both Virgin and Tiger Australia will continue to operate separately under their own management, but will have a joint board and a co-ordinated route network.
The acquisition is subject to approval from Australia's Foreign Investment Review Board, competition authorities and Tiger Airways' shareholders.
Tiger and Virgin also say they would collectively invest a further A$62.5 million to fund the growth of Tiger in Australia. With this, its fleet could grow to 35 aircraft by 2018, an increase from the 11 Airbus A320s it operates.
When the transaction is completed, Tiger Australia will try to re-finance part or all of such aircraft funding through external financiers. Out of these additional aircraft, eight will be procured from Tiger Airways' existing orders with Airbus and are expected to be delivered by 2015.
Virgin has also agreed to maintain the Tiger brand for 20 years, paying an annual licensing fee to Tiger.
With Tiger catering to the budget sector, Virgin Australia is likely to continue to focus on gaining more share of the business travel market.
In August, the carrier introduced complimentary meals for economy class passengers on its Airbus A330 services from Perth to Sydney and Melbourne, and last year it rolled out business class across its fleet of Boeing 737s and Embraer 190s.