Plane and Simple

6 Nov 2014

Virgin Australia recently scored Tigerair Australia for the bargain price of $1!

Virgin Australia previously owned 60 per cent of Singapore-based Tiger Airway holdings, and made the decision to secure the remaining 40 per cent of the business.

Tigerair is an unprofitable entity, making a loss of $77 million in the financial year of 2013-2014. Virgin Australia has also recorded losses of $45 million before tax. Yet, this loss was 18 per cent better than for the same period last year. Australia’s trademark airline Qantas shouldered a shocking $2.8 billion loss.

Qantas’ domestic arm is the primary cause of loss, whilst their international profits are rising. Virgin Australia are experiencing the reverse: their international arm is suffering and their domestic line is thriving.

To overcome this, Virgin is looking to expand Tigerair to short-haul international destinations. This will enhance competition between low-cost carriers which dominate South-East Asia, such as Scoot, Jetstar and Air Asia.

Dr Pierre Benckendorff is a Senior Lecturer in Tourism at UQ Business School. He believes that Virgin’s plan to project Tigerair to short-haul routes is a sensible and profitable choice.

He believes that Virgin should continue to distinguish the Virgin Australia brand from Tigerair to support their re-branding efforts as a full service carrier.

“Tiger is a low cost carrier (LCC) and although Virgin Australia initially started as a LCC (Virgin Blue) in 2001 it has been working to reposition itself as more of a full service airline with airport lounges, business class and a frequent flyer rewards program.

“Tiger allows the airline to complete more directly with Jetstar with a brand that does not confuse the market in terms of how they are trying to reposition Virgin Australia,” Dr Benckendorff said.

Low cost carriers have received unprecedented success around the world and Australia is no exception. Yet, Dr Benckendorff says that Tiger’s losses were due to delayed entry into the LCC market.

“The LCC model has been hugely successful in Australia, that is why Qantas started its own LCC and it is how Virgin got started in the market. The only brand that has struggled is Tiger and that was because they came into the market late and had some PR disasters,” Dr Benckendorff said.

“Qantas has three problems: Firstly, their major problem is a heavily unionised workforce with high staffing costs. Jetstar has a much lower cost base. Secondly, increasing fuel costs but this impacts on all airlines.

“Thirdly, ownership laws that have given Virgin some opportunities to raise capital to invest in new aircraft are not as flexible for Qantas. Qantas is hamstrung by legislation and regulation, making it difficult for them to compete with airlines like Emirates and Singapore Airlines,” Dr Benckendorff said.

Australia’s air travel market is undergoing significant changes. Despite these changes, consumers are in the best position to travel by plane.

“Relative to income, fares are actually lower than they have ever been. Air transport has become much more affordable for the average Australian,” stated Dr Benckendorff. 

With any luck, resolving market issues will result in cheaper flights for consumers.