The future of one of Australia’s major airlines is up in the air, with industry chatter growing louder that the aviation brand could be axed.
Virgin Australia may be forced to shut down its Tigerair low-cost offshoot to stem its bottom line losses and turn the parent company around, an investment manager has said.
Last month, Virgin Australia’s newly minted chief executive officer announced cutbacks to both its Virgin and Tigerair routes and a reduction in its fleet.
Nevertheless, Virgin has said it “refutes speculation” the closure of Tiger is being considered.
But an aviation analyst has told news.com.au that Virgin’s handling of Tiger following its purchase in 2014 was “monumentally stupid” and it would “bring them down” if they didn’t make radical changes, including cutting the brand.
The appointment of Paul Scurrah as CEO in March has already led to big changes at Virgin Australia as it deals with a $349 million full year loss and a sinking share price.
The airline has announced plans to make 750 staff redundant, cut routes including Melbourne to Hong Kong and a swag of domestic destinations, and it has bought out the remainder of the Velocity frequent flyer program it didn’t already own.
Tiger has been a particular problem. It hasn’t made a profit since a modest $2.2 million in 2016.
Last year the division made a loss of $45 million due, the company stated, to a reduction in capacity and passengers, fuel costs, industrial action and the cost of transitioning to an all Boeing fleet.
Last week, Mark Landau, managing director of investment firm L1 Capital, said shutting Tiger could help claw back profits rise at both the Virgin and Qantas groups.
“Tiger is losing money on many routes and it will be forced to significantly cut capacity or shutdown altogether,” he was quoted as saying in the AFR.
“That will be the step change that will see both airlines significantly increase their profitability.”
The removal of Tiger entirely could see fewer flights overall and that could see fares edge up, benefiting the big two.
Mr Landau, whose firm is a Qantas investor, said a renewed focus by Virgin on the profitability of individual routes would be felt more severely at the low cost carrier. In contrast, the Virgin branded domestic airline is continuing to make money.
A Virgin Australia spokesman told news.com.au: “Tigerair will continue to play a very important role for the group.”
“Operating a budget carrier enables us to cater to a growing budget market in Australia,” he said. “A number of changes are under way to improve Tigerair’s financial performance.”
These changes are that Tiger will cease flying between Brisbane and Darwin, Brisbane and Adelaide and Proserpine to Sydney from early 2020. The cutbacks will allow Tiger to remove two airline from its fleet which will also cut costs.
These changes would ensure the budget carrier was “flying on the routes it is best suited to”, he said.
However, aviation analyst Neil Hansford told news.com.au he is doubtful the changes go far enough. “It didn’t make money when they bought it, it doesn’t make money now; they should not have bought it,” he said.
Founded in Singapore, Tiger first entered the Australian market in 2007. For five weeks in 2011, the civil aviation regulator grounded the airline over safety concerns.
In 2012, Virgin Australia took a majority stake in the airline, taking full control from Singapore Airlines two years later.
“Virgin’s big mistake was to invest in a business that was losing money. I don’t think it will ever turn a profit,” said Mr Hansford from consultants Strategic Aviation Solutions.
“It got off to such a bad start when it was suspended from flying and it’s just not big enough with its small fleet to have a critical mass.”
After its upcoming route cuts, Tiger will fly just 14 aircraft compared to the 99 planes that operate under the Virgin brand.
Jetstar has 94 aircraft with the Qantas owned budget carrier posting an underlying profit of $370m last year, although that was a drop on the year before.
“Jetstar works because it’s on the right routes and Qantas didn’t inherit it like Virgin did with Tiger,” said Mr Hansford.
“And Virgin has done some monumentally stupid things with Tiger like investing in changing the fleet to try and make it the same as Virgin when even Virgin doesn’t have a common fleet.”
He’s referring to Virgin’s determination to rid Tiger of its fleet of Airbus A320 aircraft – a type Jetstar and Air New Zealand operate – in favour of the Boeing 737 which makes up the majority of the rest of Virgin’s planes.
The time and money this is still taking, said Mr Hansford, hasn’t been worth the outcome of having one less aircraft type to look after. Especially given Virgin Australia operates four other aircraft types under its own brand.
Virgin has said it has no plans to halt its move to Boeing jets which will offer “long term cost benefits”.
TURN TIGER INTO ‘VIRGIN LIGHT’
Virgin has axed the Tiger CEO position and is bringing it managerially closer to Virgin. Mr Hansford said that wasn’t enough with Tiger saddled with expensive overheads including its own Air Operators Certificate (AOC) and the high staffing costs every airline has in Australia.
“Tiger has got the low fares but it never got the right margins,” he said.
“There’s value in the Virgin brand but not in the Tiger brand. They have to get rid of the head office, the management, the AOC and make it a product of Virgin not a separate airline.”
Years of Virgin trying to use its main brand to compete with Qantas hadn’t paid off. If the airline now retreated even partially towards its low cost routes that left little room for Tiger in its portfolio.
Virgin could keep its business class offerings on busy capital city routes on the east coast, Mr Hansford said. But elsewhere a reabsorbed Tiger could form the genesis of “Virgin Light”. This airline within an airline could offer a basic service for price sensitive customers.
“Virgin Light could strip out business class and sell ancillary revenue through bundles and extras to passengers.
“Jetstar is one of the best in the world at ancillary revenue through selling extras.
“Unless they are prepared to do this, to get rid of Tiger, it will bring them down.”
In a statement to news.com.au, Virgin Australia said Tiger played an important role in the Australian aviation sector ensuring “strong competition at the budget end” for passengers.
“The Virgin Australia Group refutes speculation on the future of Tigerair,” it said.
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