Virgin Australia will consider deploying budget arm Tigerair Australia on short-haul international routes to destinations like Bali, Fiji, Phuket and New Zealand after taking full control of the loss-making carrier for just $1.
Virgin will buy the 40 per cent it doesn’t already own from Singapore-based Tiger Holdings for the bargain price, having spent $35 milllion for its existing 60 per cent stake last year. But as a result, it will take on all of the losses as well. Tigerair lost $77 million before tax in the financial year ended June 30.
Virgin chief executive John Borghetti said Tigerair should return to profitability by the end of 2016 now that it has brand rights to operate internationally and will be better integrated into Virgin’s own operations. As a wholly-owned subsidiary, Tigerair will have access to Virgin’s supply contracts and office space.
Tigerair’s total first quarter pre-tax loss rose by 19 per cent to $19.3 million amid ongoing subdued conditions in the leisure market.
Virgin will in the future have to consolidate that figure within its own financial results. In its first-ever quarterly results released on Friday, Virgin said it lost $45 million before tax on an underlying basis excluding Tigerair, which was 18 per cent better than the same period last year. Last year, Virgin was profitable in the second quarter, which is a seasonally better period for the airline. In the first quarter, Virgin managed to maintain cost increases to within less than 1 per cent.
So far this year, rival Qantas has reported ongoing falls in its yields, or returns on fares, from its domestic arm but improvements in its international arm. Virgin reported the reverse, with its international yields falling in part due to heated competition on flights between Australia and Bali but its domestic yields rising as it picks up more corporate and government traffic.
Virgin has yet to disclose how it will deploy Tigerair in the international market, having ruled out major growth in the domestic market while conditions remain difficult for low-cost carriers due to a lack of consumer confidence.
But Mr Borghetti said examples could include using Tigerair aircraft more during nighttime periods when they were currently sitting at Sydney Airport or Perth Airport as a result of the Sydney Airport curfew restrictions.
“You could quite easily change the schedule and allow the aircraft to go to Bali and back [from Perth] … or Fiji and back from Sydney if it departed just before the curfew,” he said.
The Bali market in particular has proven highly competitive between Virgin, Jetstar and Garuda-Indonesia. Indonesia AirAsia X is poised to launch direct flights from Sydney and Melbourne to Bali in December, making it even tougher.
“There are a lot of carriers on that route now,” Mr Borghetti said. “A lot are low-cost carriers. The competition is pretty fierce. One could come to the conclusion, why wouldn’t you put the lowest cost vehicle you have got in there, which is Tigerair?”
He said there were no plans for Virgin to stop flying to Bali itself, since some customers preferred the premium carrier. But he suggested if there were two flights a day, which there are on some days for Virgin’s Bali flights, one might be operated by Virgin and the other by Tigerair.
“The one thing I can absolutely say is the way we have kept Tiger product positioning separate to Virgin domestically is exactly how we will operate it internationally,” he said.
Tigerair operates A320 aircraft while Virgin uses Boeing 737s on its short-haul international routes.
Mr Borghetti said he would not rule out the prospect of some Virgin 737s being transferred to Tigerair in the future, but said there were no plans to do so at present.
Tiger Holdings, which is part-owned by Virgin shareholder Singapore Airlines, said it would take $S59.8 million impairment charge on the divestment of its stake in Tigerair Australia.