Virgin's Skywest sideshow

ACCC approves Virgin's takeover of Skywest, but the airline has bigger fish to fry

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published January 31, 2013 3:12 pm AEDT

Virgin Australia Holdings (ASX:VAH) strategy of taking on Qantas at all levels received another boost today, after the Australian Consumer and Competition Commission (ACCC) approved the airlines' takeover of regional airline Skywest Airlines Ltd (ASX:SXR).

It appears to have been an easy decision for the ACCC, with the airlines only sharing one route, from Perth to Broome.

Now Virgin is waiting upon the ACCC to approve its bid to take a 60% stake in budget airline Tiger Airways Australia. That may be a bit more difficult for the ACCC, as Tiger and Virgin share several flight routes, along with Qantas Airways (ASX: QAN), and the removal of one competitor could see prices rise. The ACCC has already expressed concerns about the return to a duopolistic air travel market controlled by Virgin and Qantas.

Still, Australia has had a duopoly in domestic air routes many times in the past, and it's generally been the third airline that has struggled to compete against the incumbents. Tiger reported a $10 million loss for the third quarter of 2012, higher than the $6.6 million loss it reported in the previous corresponding period. In total, Tiger has lost some $216 million since launching in 2007, according to The Age. If Tiger is unable to turn things around, the airline may be forced to quit Australia, and we may end up with a duopoly anyway.

At several points in time, Ansett was the dominant domestic airline, with Qantas playing second fiddle, but that changed dramatically when Ansett collapsed. After initially controlling an estimated 90% of the domestic air travel market, Qantas now controls around 65%, with Virgin taking a lion's share of the remainder.

The takeover of Skywest gives Virgin another arrow to aim at Qantas, as the once-budget airline aims to compete with Qantas on several levels, with the ultimate aim of eating into the Flying Kangaroo's market share.

The Foolish bottom line

The ACCC's approval of the Skywest takeover is but a small step for Virgin. The more important game for Virgin is the 60% stake in Tiger Airways.

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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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