The deal risks “muted competition” if Australia’s second- largest carrier is allowed to buy third-ranked Tiger, the Australian Competition and Consumer Commission said in a statement. Virgin was preparing a response and “strongly believes” the deal will increase competition, the company said in a regulatory statement.
At stake in the Tiger deal are Virgin’s growth plans that challenge Qantas Airways Ltd.’s control of about 65 percent of Australia’s domestic aviation market. The regulator said it would consider whether Tiger would otherwise quit the market without a deal and plans by the proposed merged group to increase capacity from 11 aircraft to 35 aircraft.
“A number of people in the marketplace have questioned whether buying Tiger is a great strategy for Virgin,” John O’Shea, an analyst at Bell Potter Securities Ltd., said by phone from Melbourne before today’s announcement. “If they’re not able to do this they can focus on competing in their core activities” of serving more profitable business and non-budget passengers, he said.
The regulator has called for further submissions and will issue a final ruling on March 14, it said.
Singapore-based Tiger has already backed Virgin’s A$35 million ($36 million) offer for a 60 percent stake in the budget carrier’s Australian unit.
Virgin shares fell 3.3 percent to 43.5 Australian cents at the close in Sydney, its biggest drop since Nov. 21. The stock has gained 23 percent over the past year, compared with a 15 percent advance in the benchmark S&P/ASX 200 index.
The regulator last week cleared the Skywest deal, worth about A$96 million in cash and shares.
The Tiger acquisition would attract “much more scrutiny,” Matthew Spence, an analyst at Bank of America Corp.’s Merrill Lynch, wrote in a Feb. 4 note to clients.
The regulator had previously signaled skepticism about whether the deal could go ahead without harming competition.
“Having a third player in there like Tiger does discipline the other two players,” Chairman Rod Sims said in an Oct. 30 interview. “If you have that taken out you do lose that discipline.”
Airlines can increase profitability by making sure that capacity increases fall short of rising passenger demand, a process that can backfire if rivals undercut them to increase their share of the market.
Analysts at UBS AG and Merrill Lynch expect yields, a measure of ticket prices, to have fallen by about 1 percent in the six months through December as Virgin, Qantas and Tiger add capacity in a fight for market share.
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