Virgin Australia and Tigerair Australia move to implement the group’s dual airline brand strategy

Tiger will launch six times weekly services between Sydney and Perth in Dec-2013

Tigerair Australia has made its first strategic move since coming under 60% control of Virgin Australia as it launches six weekly services between Sydney and Perth from 19-Dec-2013.

Tigerair Australia will add 1,080 one way seats per week to the route, adding to Virgin Australia's 7,333 one way seats in December. This will give the combined Virgin Australia-Tigerair Australia Group 36% capacity share against Qantas' 15,059 one way seats and Jetstar's 2,252 seats.

Qantas and Jetstar are yet to respond to the capacity increase which will still see it retain a near 65% market share on the route, in line with the group's profit optimising bottom line of maintaining an overall 65% market share.

See related report: Qantas reports AUD192 million profit as the Emirates deal helps long-haul losses halve

Sydney to Perth (seats per week, one way): 19-Sep-2011 to 23-Mar-2014

Source: CAPA - Centre for Aviation & Innovata

Tigerair Australia's new service will not cannibalise Virgin Australia's leisure market

Tigerair Australia CEO Rob Sharp stated the new Perth service would not cannibalise Virgin Australia's leisure market on the route but would stimulate the low-cost travel sector of the market. "We're much more of the leisure, value end of the market," said Mr Sharp to The Australian. "There are timings of the day which suit that market, so we co-ordinate the timings and I suppose compare notes about market depth, etcetera."

The Sydney-Perth service would allow Tigerair Australia to optimise its fleet utilisation without having to suspend or reduce operations on other routes. Tigerair Australia already bases four of its 11 A320 aircraft in Perth to serve 13-times weekly frequencies to Melbourne, currently its only trans-continental route.

Tigerair Australia's flight to Perth will depart Sydney at 19:55 or 21:55 and arrive in Perth at 21:55 or 23:55. The return services depart Perth at 22:50 or 01:00, arriving in Sydney at 06:05 or 08:15.

Virgin Australia operates 27 frequencies per week on the route with a mix of A330-200s and 737-800s. Tigerair Australia's services will depart within five minutes of Virgin Australia's 20:00 departure time on four of the six days but its A320 LCC product will compete with Virgin Australia's two class full service A330-200 offering. Tigerair Australia's cheaper one way fare of AUD159.95 (USD150.95) compared to AUD245.00 (USD231.21) will help to differentiate the two brands and their market segment appeal.

For the return Perth-Sydney flights Tigerair Australia's 22:50 departure is 25 minutes ahead of Virgin Australia's final departure of the day at 23:15 with the same product and price differentiation.

While Tigerair Australia's schedule is focused on evening departures, Jetstar offers a daily 07:00 Sydney-Perth service with a 220-seat A321 while a second four times weekly frequency using an A320 departs at 20:00. The morning flight departs for the return leg at 09:45 while the evening return departure is timed for 22:45.

Sydney-Perth is Tigerair Australia's sixth new route in 2013

The Sydney-Perth route is the sixth new route launched by Tigerair Australia in 2013 and complements the carrier's 13-times weekly Melbourne-Perth service. The other new routes launched were Sydney-Coffs Harbour, Sydney-Cairns, Sydney-Alice Springs, Melbourne-Alice Springs, and Melbourne-Sunshine Coast.

Tigerair Australia top 10 routes (seats): 30-Sep-2013 to 6-Oct-2013

Source: CAPA - Centre for Aviation & Innovata

Tigerair Australia is conducting a "deep dive" to assess the direction of capacity demands from FY2015 (from 01-Jul-2015) and beyond.

Mr Sharp has stated that while the strategy is to bring Tigerair Australia up to critical mass, the carrier would not rush at the market with large volumes of capacity which would risk a strong defensive response from Jetstar or create an oversupply situation. "It's about getting the balance right."

Tigerair Australia is also beginning to back away from stated commitments to expand the fleet to at least 23 aircraft by 31-Mar-2018, with potential to grow to 35 aircraft.

Tiger Airways Holdings Group's Tiger Airways and Virgin Australia committed to investing AUD62.5 million (USD59 million) to fund Tiger Australia's growth as part of their joint venture which included a commitment to increase Tiger Australia's fleet to 23 aircraft over the next five years.

However Mr Sharp told CAPA that the fleet expansion plan was not set in stone and could be brought forward or pushed back. "It's going to be market driven."

See related report: Virgin Australia gains Tiger Australia to complete the domestic set

Mr Sharp told CAPA that once a sustainable base had been established any additional growth would have to be market driven. "I think the pie is going to grow at the budget end. The question is how much is that pie going to grow and getting the right mix." The best yields would be achieved by aligning capacity to demand.

Mr Borghetti said Tigerair Australia's performance improvement would be driven by increasing the size of the business by growing the fleet to bring economies of scale and increase cost advantages. In addition, higher yields will be achieved through improving operational and service standards while margins will be improved by extracting synergies through leveraging off its major airline shareholders for certain functions such as procurement.

See related report: Tiger Airways Australia becomes cuddly Tigerair as the Virgin Australia partnership approaches

Tigerair Australia will take delivery of two more A320s over the next six months

Further network or capacity expansion is on the cards with Tigerair Australia planning to take delivery of its 12th A320 before the end of 2013 and another in the first quarter of calendar 2014. The two aircraft form part of eight A320s on ordered for delivery by 2016.

Tigerair Australia plans to increase capacity between Sydney and Coffs Harbour in Nov-2013 and Dec-2013 taking its one-way seats per week on the route to 1,260 from 900 in Oct-2013, according to Innovata.

Sydney to Coffs Harbour (seats per week, one way): 19-Sep-2011 to 23-Mar-2014

Source: CAPA - Centre for Aviation & Innovata

But Tigerair Australia is reducing capacity on the Sydney-Cairns route which it launched in Apr-2013. The carrier offered a peak of 1,800 one-way seats per week in Sep-2013 but will reduce that to 1,260 seats from 14-Oct-2013 and to just 720 seats in Feb-2014, according to Innovata.

Jetstar has a market leading position on the route with up to 5,888 one-way seats per week in Oct-2013.

Sydney to Cairns (seats per week, one way): 19-Sep-2011 to 23-Mar-2014

Source: CAPA - Centre for Aviation & Innovata

Virgin Australia breaks Qantas' hold on Cloncurry with a direct link from Brisbane

Virgin Australia has also taken the next move in the battle for the lucrative Australian regional market with the decision to launch the first direct Brisbane service to Cloncurry in north-west Queensland.

Virgin Australia will commence operating the route twice weekly on 27-Nov-2013 using a 98-seat E190 regional jet. Currently the only air access to Brisbane from Cloncurry is via Mount Isa three-times weekly or twice weekly via Townsville both operated by Qantas using Q400s.

Virgin Australia CCO Judith Crompton stated: "Cloncurry is an important regional centre that has seen strong growth in the agriculture and resources industries".

The route takes Virgin Australia's regional network in Queensland to 16 destinations. However, Qantas maintains a dominant market position with 22 destinations served in the state of which all but three are served direct from its Brisbane hub, excluding neighbouring Gold Coast, according to Innovata.

Qantas Queensland Route Map

Source: CAPA - Centre for Aviation & Innovata

Virgin Australia has indicated that it will seek to break more of Qantas' monopolies on regional routes; Qantas has nine in Queensland, including Townsville to Mackay and Moranbah, Cairns to Horn Island and Hamilton Island, Brisbane to Biloela and Hervey Bay, Rockhampton-Gladstone, Blackall-Longreach and Charleville-Roma.

Regional Australia has become the new competitive focus for domestic carriers in the wake of a capacity battle on routes between state capitals and Virgin Australia's acquisition of Skywest in Western Australia and moves by Qantas to firm up its position in the east.

Virgin Australia launched daily Brisbane-Bundaberg services in May-2013 using ATR72 aircraft in competition with Qantas, which has had the route to itself for more than 10 years.

But while regional traffic has been growing, Virgin Australia's efforts to enter some markets are being hampered by regulatory restrictions imposed by the Queensland government in the interest of service stability.

The carrier has been further frustrated by a decision to delay the next round of tenders for several regulated and subsidised regional routes in Queensland until Mar-2014, pending the outcome of a review by the state's Department of Transport; the result is to extend the duration of existing regulated services.

See related reports:

• Virgin Australia moves to integrate Skywest and challenge Qantas' regional domination
• Qantas and Virgin Australia reach an uneasy truce on domestic capacity expansion

Virgin Australia also adds capacity on the Perth-Karratha route as demand increases

Virgin Australia announced on 25-Sep-2013 that it will increase Perth-Karratha frequency from 20 to 22 times weekly from 22-Oct-2013, using Fokker 100 aircraft. Virgin Australia Regional Airlines Group executive Merren McArthur said the carrier had experienced increased demand on the route which is dominated by Qantas.

Perth to Karratha (seats per week, one way): 19-Sep-2011 to 23-Mar-2014

Source: CAPA - Centre for Aviation & Innovata

Tigerair Australia's growth is a fine balancing act to ensure the success of Virgin Australia's dual brand ambitions

Tigerair Australia is making its first move to implement a growth strategy that will form a key plank in Virgin Australia's ambitions to duplicate the successful Qantas/Jetstar dual brand model. In this scenario, LCCs Tigerair Australia and Jetstar focus on the leisure market, leaving the mainline brands of Virgin Australia and Qantas to fight it out for the corporate market.

Virgin Australia's challenge on the domestic regional network, much of which lacks competition, should result in lower fares as well as stimulating new traffic

But Tigerair Australia's expansion will need to walk a carefully balanced line between the need to build the critical mass necessary for the carrier to become a viable proposition, while also avoiding triggering a strong reaction from Jetstar. The result would lead to lower fares and yields, making it more difficult for the carrier to turn around its loss making history - although most of its other major shareholding is sympathetic to Virgin's domestic aspirations (the balance of 40% ownership is held by the Singapore-listed Tiger Airways Holdings, in which Virgin partner Singapore Airlines holds one third of the equity. Another 7% is held by Dahlia Investments Pte Ltd, a subsidiary of Singapore government investment arm Temasek).

For both Qantas and Virgin Australia groups, each professing a wish to avoid capacity inflation, especially as market conditions soften, competitive action and reaction will be tempered by these imperatives. At the same time, Virgin Australia is anxious to capture as much market share as reasonably possible in its bid to match the bigger group across the board. The likely outcome for both groups is a lean financial outlook for at least a few more months to come.