Virgin Australia Holdings (VAH.AX) strategy of taking on Qantas at all levels received another boost today, after the Australian Consumer and Competition Commission (ACCC) approved the airlines’ takeover of regional airline Skywest Airlines Ltd (SXR.AX).
It appears to have been an easy decision for the ACCC, with the airlines only sharing one route, from Perth to Broome.
Now Virgin is waiting upon the ACCC to approve its bid to take a 60% stake in budget airline Tiger Airways Australia. That may be a bit more difficult for the ACCC, as Tiger and Virgin share several flight routes, along with Qantas Airways (QAN.AX), and the removal of one competitor could see prices rise. The ACCC has already expressed concerns about the return to a duopolistic air travel market controlled by Virgin and Qantas.
Still, Australia has had a duopoly in domestic air routes many times in the past, and it’s generally been the third airline that has struggled to compete against the incumbents. Tiger reported a $10 million loss for the third quarter of 2012, higher than the $6.6 million loss it reported in the previous corresponding period. In total, Tiger has lost some $216 million since launching in 2007, according to The Age. If Tiger is unable to turn things around, the airline may be forced to quit Australia, and we may end up with a duopoly anyway.
At several points in time, Ansett was the dominant domestic airline, with Qantas playing second fiddle, but that changed dramatically when Ansett collapsed. After initially controlling an estimated 90% of the domestic air travel market, Qantas now controls around 65%, with Virgin taking a lion’s share of the remainder.
The takeover of Skywest gives Virgin another arrow to aim at Qantas, as the once-budget airline aims to compete with Qantas on several levels, with the ultimate aim of eating into the Flying Kangaroo’s market share.
The Foolish bottom line
The ACCC’s approval of the Skywest takeover is but a small step for Virgin. The more important game for Virgin is the 60% stake in Tiger Airways.
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