Check out these 3 reasons why Tiger's Virgin Australia plan is a good move

Tiger puts a game face on against Qantas.

According to OCBC, in a deal worth a potential gain of S$119.8m, Tiger announced a proposed divestment of 60% of Tiger Australia to Virgin Australia (subject to regulatory approval).

Here's more from OCBC:

This would allow TGR to shed a substantial portion of the loss-making entity while retaining an operating presence in Australia. A JV will subsequently take charge of Tiger Australia, which will be managed independently from both companies.

Both parties have also committed A$62.5m in the first five years of the JV to expand the existing fleet from 11 to 35 aircrafts.

Win-win for TGR: We view this divestment positively. Shedding a substantial portion of the loss-making entity at this juncture makes sense for TGR in a time where the operating environment remains challenging and a turnaround could potentially be delayed.

Furthermore, it also allows for TGR to stay vested in the Australian market and participate in any potential upside when Tiger Australia eventually does turn around.

With an approximate domestic market share of around 7%, Tiger Australia will be able to gain from Virgin Australia’s 30% share. Intuitively, the deal will exploit synergies between both carriers via an expansion of bases and destinations – perhaps even regional travel – and the sharing of cost burden to expand the fleet.

Consolidation in Australia to fight off competition: After Qantas’s potential tie-up with Emirates in Dubai, competition is heating up. Following the announcement of the share sale, Virgin Australia also announced that it is planning a A$98.7m takeover offer for Skywest Airlines, a regional carrier in Western Australia.

With these two deals, Virgin Australia will likely utilize the JV vehicle with TGR to compete with Jetstar and add on to their existing market share of about 30% of the domestic market, while SkyWest will give it access to any increases in travel and charter flights related to the mining boom in Western Australia.

Counteracting Qantas threat: In a triple deal, Singapore Airlines (SIA) announced that it will take up 10% of Virgin for A$105m. We view this move as a way for SIA to counteract Qantas’s ambitions of competing within the Asia-Pacific premium market by shifting focus back onto the domestic Australian market.

SIA already has an existing alliance with Virgin Australia but this deal will consolidate this partnership further, and allow it to benefit from Virgin’s corporate and business traveller segment, and potentially exert pressure onto Qantas in its home turf.

Ownership of Virgin Australia will now be in the following configuration: 25% Sir Richard Branson, 20% Air New Zealand, 10% for SIA and Etihad with the remainder in the hands of other shareholders.

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