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Buying an airline for 88 cents
Airline Virgin Australia has coughed up a whopping one Australian dollar ($0.88) to buy the 40 percent of Tiger Australia it didn't already own, ending a joint venture between the carriers.
While Tiger (Singapore Exchange: TAHL-SG) may be lamenting how the recent sharp drop in the Australian dollar (Exchange:USDAUD=) will hurt its returns from the sale, the Singapore-based carrier said in a statement it views the exit as a step toward stemming further losses.
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"They're now finally capitulating," K Ajith, an analyst at UOB KayHian (Singapore Exchange: UOKH-SG), said. "It's a highly competitive market to begin with. [Tiger Airlines] have been operating in the red for four or five years. They've made a profit for one or two quarters since listing."
The deal brings Tiger's rocky story down under to a close. In July 2011, the Australian Civil Aviation Authority grounded its operations for six weeks due to safety concerns.
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After the sale, Australia's domestic market will be left with essentially just two players, Virgin (ASX:VAH-AU) and Qantas (ASX:QAN-AU), with both carriers already posting losses even as they engage in ticket price wars.
"Given the ongoing subdued consumer demand in the Australian domestic market, the growth of the Tigerair Australia fleet is likely to be reduced," said John Borghetti, Virgin Australia CEO, in a statement. "We will benefit from the economies of scale and achieve profitability ahead of schedule by the end of 2016 by leveraging the resources of the wider Virgin Australia Group."
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In addition, Australia's international airline market has become a tough market as well. In August, Aviation Week reported, citing the CAPA Center for Aviation that as many as 10 Asia-based low-cost carriers were set to enter the market within 18 months.
Tiger isn't walking away from Australia entirely scot-free. It reported Friday a loss of 182.4 million Singapore dollars (Exchange:SGD=), or around $145.9 million, for its fiscal second quarter, including a $59.8 million Singapore dollar charge for exiting its venture with Virgin. It plans to raise up to 234 million Singapore dollars via a rights issue, which will see its largest shareholder, Singapore Airlines , increase its stake to around 55 percent from 40 percent currently.
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Virgin Australia will continue to use the Tiger brand name and Tiger will still provide its one-time Australian partner with some services in exchange for franchise revenue.
The transaction will need approval from Foreign Investment Review Board and Tiger shareholders before it can proceed.
-By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1
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