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Virgin-Tiger reservations

The ACCC has raised concerns that Australia will return to a duopoly if Virgin Australia Holdings (ASX: VAH) is allowed to acquire 60% of Tiger Airways.

As a result of that duopoly, and the loss of Tiger Australia as an independently owned discount competitor, the Australian Consumer and Competition Commission (ACCC) has suggested competition will fall, and could result in rising ticket prices for airline passengers.

In a statement released today, the ACCC said, “This potential reduction in competition arises as a result of the increased ability on the part of Qantas/Jetstar and Virgin Australia/Tiger Australia to coordinate their activities once Tiger Australia is no longer operating as an independent low cost carrier.”

The ACCC also suggested that it would consider the impact on Tiger, if the deal fell through, as well as the likely size and strength of the airline post-acquisition. A complication for the ACCC is that because Tiger Australia is not profitable, the airline could be forced to exit Australia if it wasn’t supported by Virgin. The Age has estimated that Tiger has lost some $216 million since launching in 2007, and recently reported a $10 million loss for the third quarter of 2012.

Qantas Airways (ASX: QAN) will no doubt welcome the news, as the acquisition of Tiger is a big part of Virgin’s strategy of being able to compete with Qantas and its subsidiary, Jetstar on all levels. The ACCC has already given its blessing to Virgin’s takeover of regional airline Skywest Airlines Ltd (ASX: SXR), but the ACCC’s potential knock back of the Virgin/Tiger deal would be a big blow for Virgin.

However, ACCC chairman Rod Sims said, “Another relevant factor is that the merger parties have publicly announced an intention to expand Tiger Australia’s fleet from its current 11 aircraft to 35 aircraft by 2018. If the ACCC was satisfied that a significant increase in capacity would take place, this would also diminish the prospect of any increase in coordinated conduct in the market.”

The Foolish bottom line

If Virgin can prove that it will expand Tiger’s capacity, and show that there were serious doubts about Tiger’s viability in Australia without Virgin’s support, we may yet see the deal approved.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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