Feb. 27 (Bloomberg) -- Virgin Australia Holdings Ltd., Australia’s second-largest carrier, will drop a bid for its next-largest rival if the country’s antitrust regulator forces it to increase fleet numbers to a specified level.
Virgin won’t give “commitments that are unrealistic” in order to buy control of budget airline Tiger Airways Holdings Ltd.’s local unit, Chief Executive Officer John Borghetti said in an interview yesterday. The carrier reported first-half profit that missed analyst estimates amid competition with Qantas Airways Ltd. and the impact of a carbon tax.
A cancellation of the takeover would deal a blow to Borghetti’s plans to challenge Qantas’s 65 percent share of the Australian market. Virgin has added business class seats, upgraded lounges and extended flights to outback areas as it seeks to win business from the country’s largest operator, which has the biggest shares of leisure flights, corporate accounts and routes in remote areas.
“If there is anything that stands in its way that doesn’t make it attractive for us, I have no problem in not continuing” the Tiger deal, Borghetti said by phone. “If there are conditions imposed on the deal that I don’t believe is prudent for this company to commit to, we will walk.”
Australia’s antitrust regulator said Feb. 7 that Virgin’s attempt to buy 60 percent of Tiger Australia risked “muted competition following the reduction in the number of airline groups within Australia.” The Australian Competition and Consumer Commission would be more inclined to allow the deal if it was convinced that Virgin would boost Tiger’s fleet from 11 at present to 35 by 2018, according to the regulator.
Tiger’s largest shareholder, Singapore Airlines Ltd., is helping to fund the takeover through buying A$105 million ($108 million) of newly-issued Virgin shares, giving it a 10 percent stake in the carrier. Borghetti’s also spending about A$95 million in cash and shares buying Skywest Airlines Ltd., which operates regional routes mainly in Western Australia state.
Virgin “faces challenges in turning around the mounting losses within Tiger,” Russell Shaw, an analyst at Macquarie Group Ltd. in Sydney, wrote in a note to clients Feb. 1.
Tiger does not plan to and won’t seek new investors for Tiger Australia if the regulator disapproves the venture with Virgin, the budget carrier said in a statement Feb. 7. “Virgin is the right party to partner Tiger, and will be able to strengthen Tiger Australia,” the airline said in the statement.
Virgin shares slumped the most in almost six months yesterday after the company said net income fell 56 percent to A$23 million in the six months through December, missing the A$50 million median estimate of six analysts surveyed by Bloomberg News. The stock closed down 5.8 percent at 41 Australian cents, compared with a 1 percent drop in the benchmark S&P/ASX 200 index.
Virgin Australia doubled the proportion of seats filled in business class as it signed up corporate customers, Borghetti said, without giving specific numbers. The carrier now gets more than 20 percent of sales from corporate customers, while Qantas says it has an 84 percent share of revenue in the market.
To contact the reporter on this story: David Fickling in Sydney at email@example.com
To contact the editor responsible for this story: Anjali Cordeiro at firstname.lastname@example.org