Virgin Australia Holdings (ASX: VAH) has received approval for its takeover of Skywest Airlines by the Singaporean regulator.
Skywest Airlines (ASX: SXR) is incorporated in Singapore – hence the need for Virgin to get their approval.
Virgin still need Australian Consumer and Competition Commission (ACCC) approval both for its Skywest acquisition and a 60% stake in budget airline, Tiger Airways Australia. It’s likely that approval will be forthcoming as Virgin and Skywest already share a close relationship, with a code share agreement and coordinating their activities when chasing corporate accounts.
The controlling stake in Tiger may be a tough issue for the ACCC, as it effectively removes the third domestic Australian carrier, leaving just Virgin and Qantas Airways Limited (ASX: QAN). Although, Australia has had a duopoly for many years, with the third carrier usually falling over – see Ansett, Compass Mark I and II (or Southern Cross).
Australia had a two-airline policy up until 1990, when it was abolished. Since that time, any incoming third airline has struggled. With Australia’s population of just 22 million, and spread across such a wide area, most routes can be serviced efficiently by just one or two airlines. With the entry of a third, it’s literally a fight to the death – with the two incumbent airlines winning.
Virgin has embarked on an ambitious program to attack Qantas on all levels. The company has introduced business class airfares and is actively targeting corporate clients – once the domain of Qantas and Qantas alone. Virgin plans to use its stake in Tiger to actively compete against Qantas’ subsidiary, Jetstar, and the acquisition of Skywest is likely going to be targeted at Qantas Link, which operates predominantly regional and country air services.
And the evidence appears that Virgin is gaining some traction, given the heavyweight airlines that have taken a stake in the company. Apart from Air New Zealand (ASX: AIZ), Virgin also boasts Singapore Airlines and Etihad as significant shareholders.
Despite Virgin’s proactive approach to grow its market share, airlines are notoriously bad businesses and we don’t see the company as attractive. The great thing about the sharemarket is that you don’t have to swing at every pitch. In Virgin’s case, we’ll just let it by and move on.
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Motley Fool writer/analyst Mike King doesn’t own shares in airlines and is unlikely to ever. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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