Whether it was a PR smokescreen or not, much more changed than was immediately visible in Australia’s airline sector when Virgin Australia said it was buying the remaining 40% of Tigerair Australia from Singapore Airlines for $1.
Virgin Australia is going to use the behind-the-scenes services of the Tiger franchise to lower the cost base of its full-service operations. This is what Qantas originally intended to do with Impulse Airways when it bought it out in 2001 — a move that hastened the already doomed Ansett Airlines to its collapse and set up the foundations for the Qantas-owned low-fare carrier Jetstar.
The common element in this is Virgin Australia CEO John Borghetti, who gets to widen the cost advantage of Virgin Australia over Qantas just when the latter thought it had narrowed it. Borghetti was in senior Qantas management during the Impulse acquisition and the setting up of Jetstar, and has publicly indicated more than once that Qantas blew the merits of the strategy and that Virgin Australia wouldn’t make the same mistakes.
But that wasn’t all that happened when Virgin made its symbolic buy. After offloading Tigerair Australia, which was burning a hole in its precarious financial affairs, Singapore Airlines lifted its stake in the Tiger Airways Holding company and will now gain control over Tigerair Singapore.
It’s a change of strategy for the airline — and it could be a game changer in the region. When Singapore Airlines set up the transborder low-cost franchise called Tiger Airways with a series of joint ventures in the Philippines, Indonesia and Australia, Qantas did similarly, with Jetstar Japan, Jetstar Pacific (Vietnam), Jetstar Asia (Singapore) and Jetstar NZ, plus the stillborn but costly attempt to set up Jetstar Hong Kong.
But both the Jetstar and Tigerair transborder franchises have failed to perform. Tiger, at the direction of Singapore Airlines, is out of there, while Qantas is still in it. And painfully so, considering the sums invested and the ruinously poor results to date.
Tiger Holdings had already abandoned its Philippines and Indonesia misadventures earlier this year. With Tigerair Australia gone for a gold coin, the original Tiger operation is now free of all loss-making distractions except for its operations out of Singapore, meaning it can devote all of its efforts to crushing Jetstar Asia, whose presence at Changi airport presents Tigerair Singapore with its best opportunity to win enough low-fare customers to make its operations profitable.
In short, Qantas and Singapore Airlines faced the same low-cost carrier killer: empty seats. The low-cost model requires full seats, along with lots of “gotcha” penalties and ancillary charges for cold beers, lukewarm pies and aisle or exit row seats.
Jetstar and Tigerair are two airline franchises with the same problems, but with Singapore Airlines opting for the retreat, consolidate and crush strategy.
The clear and present threat to Qantas is that it will end up with a Jetstar franchise that it can’t afford to keep but that no one is likely to buy, at least not at anything like the price Qantas would want.
The official line at Qantas, for more than six years, has been that Jetstar abroad is making fabulous “progress”, which appears to be its euphemism for burning cash, and that its key divisions will make money within 18 months.
This is the sort of fiction that just hit the wall in Singapore. How much longer such delusions will be entertained in Qantas’ board room and among its investors has become a more urgent question.