Virgin Australia Holdings Ltd (ASX: VAH) has acquired the remaining 40% of Tigerair Australia that it doesn't already own for just $1.
Virgin paid $35 million to Singapore-listed Tiger Holdings for its 60% stake last year, but will now own 100% of the airline, and will also assume 100% of the budget airline's losses and profits (if it generates any of course).
Virgin will also secure the brand rights to fly Tigerair Australia to a number of short-haul international destinations. Virgin CEO John Borghetti noted today that due to ongoing subdued consumer demand in the Australian domestic market, the growth of the Tigerair domestic fleet is likely to be reduced.
Tigerair will remain as a separate brand, and Virgin will maintain the airline's low cost business model. As we've noted previously, Virgin's strategy to take on its bigger competitor, Qantas Airways Limited (ASX: QAN), is to utilise its Virgin Australia brand against Qantas, while allowing Tigerair to compete directly with Qantas' budget airline Jetstar.
Virgin has plenty to do to get back to profitability, even more so now after the Tigerair acquisition. In the last quarter Virgin reported an underlying loss before tax of $45 million, despite revenues rising 1.3% over the previous period. That excludes equity accounted losses from Tigerair of $11.6 million in the quarter.
As we've maintained for some time, airlines are low quality businesses, subject to many varied external factors that can't be controlled by management, are highly capital intensive, and accounting rules mean reported profits or losses bear little resemblance to the companies' ongoing performance. Aircraft are expensive, and by the time their use by date rolls by, newer planes are even more expensive forcing airlines to increase debt and raise capital on an ongoing basis.
When you have a small regional airline like Regional Express Holdings Ltd (ASX: REX) that is more profitable than both of Australia's two major airlines combined, you know there's something wrong with the sector.
With plenty of other fish in the ASX sea, we prefer to bypass airlines such as Virgin and Qantas and fish in more investor friendly waters where we can find top quality companies such as this…
