Virgin Australia took full control of Tiger Australia, buying the remaining 40% it did not already own from the budget carrier's Singapore-listed parent.
SYDNEY—Budget carriers turn a buck by keeping costs down on everything from airfares to in-flight drinks. But in the case of Tiger Australia, it is the airline itself that is going cheap—a nominal one Australian dollar.
On Friday, Singapore-listed Tiger Airways Holdings Ltd. said it was exiting the Australian aviation market by selling its 40% interest in the loss-making budget carrier to Virgin Australia , which owns the remaining 60% stake.
For Virgin, the deal gives it more heft to take on dominant carrier Qantas Airways Ltd. , with which it has been locked in a battle to rule the domestic market for years. Qantas, Australia’s flagship carrier, currently has around two-thirds of the market for domestic air travel.
Selling assets for a token amount has long proven a useful tactic for companies wanting to cut their losses without destroying a brand. In 2010, stereo mogul Sidney Harman agreed to acquire Newsweek magazine from Washington Post Co. in a deal that saw little or no cash changing hands.
A year earlier, Russian billionaire Alexander Lebedev agreed to pay a nominal sum to Britain’s Daily Mail & General Trust PLC for 75.1% of the unprofitable Evening Standard newspaper. Other well-known assets that have gone virtually for free have included the Glasgow Rangers, which was sold for £1 in 2011 just before the football club won a third consecutive Scottish Premier league title.
Of course, such price tags rarely reflect the additional costs the buyers are taking on. Mr. Harman took on more than $50 million in liabilities, according to documents reviewed by The Wall Street Journal at the time. In the 18 months that followed the sale of Glasgow Rangers, the club was pursued by the British tax authorities for potentially huge debts, put into administration and, finally, liquidation.
Virgin Australia Chief Executive John Borghetti has spent the past four years trying to pinch market share from his former employer, Qantas Airways. ENLARGE
Virgin Australia Chief Executive John Borghetti has spent the past four years trying to pinch market share from his former employer, Qantas Airways.
The deal to buy the stake from Singapore’s Tiger Airways gives Virgin Australia more power to try and turn around the performance of the loss-making unit, which has struggled financially since safety breaches in 2011 forced the temporary grounding of its entire fleet.
Virgin Australia bought its majority stake in Tiger Australia last year for A$35 million, at the time agreeing to invest millions more in the business. Under the stewardship of former senior Qantas executive John Borghetti, Virgin Australia has spent the past four years trying to pinch market share from his former employer by attacking it at all price points.
At the budget end of the market, Mr. Borghetti has wanted to use Tiger to take on Qantas’s low-cost offshoot, Jetstar. At the top end, his strategy has been to roll out business-class seats on Virgin Australia’s domestic flights, and offer more services to mining hubs in the resource-rich west of the country.
The battle, however, has been bruising, and Virgin Australia said it was now likely to grow Tiger Australia’s fleet more slowly than originally anticipated, citing subdued consumer demand.
The company, which published its first-quarter results on Friday, said it booked a net loss of A$59.1 million, which included losses totaling A$11.6 million from its existing 60% Tiger Australia stake.
Taking full control of the airline would allow Virgin Australia to speed up planned improvements, Mr. Borghetti said. “Under this proposed transaction, we will benefit from the economies of scale and achieve profitability ahead of schedule by the end of 2016.”
Virgin Australia has been able to pursue its aggressive growth strategy with the support of three state-backed airlines, each shareholders with deep pockets: Air New Zealand Ltd., Singapore Airlines and Etihad Airlines. Together, those companies own about two-thirds of Virgin Australia.
By contrast, Singapore-listed Tiger Airways has racked up a number of annual losses in recent years, amid rising competition in the Asian low-cost-airline space. Tiger Airways said Friday it would issue new shares to raise S$234 million (US$184 million) after booking a S$182 million second-quarter net loss, adding that shareholder Singapore Airlines would boost its stake in the carrier to 55% from 40%.
Virgin Australia, meanwhile, said its first-quarter net loss of A$45.0 million-on an underlying pretax basis was 18% narrower than in the same period in 2013. “It is also important to note that the first quarter of the year is traditionally a weaker demand period compared to the second quarter,” Virgin Australia’s chief financial officer said in a statement.