Finance Finance News Airfares tipped to rise as Virgin axes low-cost Tiger
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Airfares tipped to rise as Virgin axes low-cost Tiger

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Virgin Australia’s new owners will axe the low-cost Tiger brand as industry commentators warn fallout from the pandemic could drive up airfares.

In a note to investors, Virgin CEO Paul Scurrah said the budget carrier will be shuttered for the foreseeable future as demand for cheap flights is “not sufficient” to justify keeping it airborne.

About 3000 workers will lose their jobs as part of broader changes made to Virgin.

Tiger’s closure comes as little surprise.

In the lead up to Virgin’s sale, industry insiders tipped the budget carrier to become extinct after new owners Bain Capital said it would convert Virgin into a ‘mid-market’ offering.

Its disappearance from Australian skies is not enough on its own to drive up airfares, but separate economic turbulence might be. 

That’s because airlines will likely struggle to bring in customers after pandemic restrictions are eased, according to Monash Business School Professor Greg Bamber.

Rising unemployment and shrinking wages will stop many customers taking to the skies, Professor Bamber said, while health concerns will discourage others who can afford it. 

Although a fall in demand may prompt some airlines to offer discounts and sales, high operating costs could prompt many to increase their fares to cover any lost revenue from flying with empty seats.

“Planes are going to be less full, which means fares are going to be higher,” he said.

Generally speaking, a 10 per cent decline in the number of occupied seats on a flight translates to a 6 per cent increase in airfares.

“The countervailing argument is that airlines will lower their costs because they only make money when they’re transporting passengers – airports are very expensive car parks,” Professor Bamber said.

“But on balance I think we’re going to see them hit higher levels in the medium-term future, because airlines have lost so much money and they’ll be trying to recoup those losses.”

Final nail in the coffin

Although Tiger was a lower-cost carrier, University of New South Wales economics professor Tim Harcourt said its closure is unlikely to put upward pressure on airfares, as it was a “pretty marginal” brand.

“They weren’t a big enough player yet,” he said.

Professor Harcourt added the brand was probably on its way out even before the pandemic took hold.

Air traffic is down.

“I don’t think Tiger was ever a big success in Australia,” Professor Harcourt said.

Coronavirus has finally killed it off, but I think it was already on its last legs.’’

Border closures on the east coast played a significant role in the budget airline’s demise.

Flying Australians between Sydney, Melbourne and Brisbane is highly profitable for the aviation sector.

Routes between these cities are among the busiest and most profitable globally, with Sydney to Melbourne ranked the second-busiest domestic route worldwide in 2019.

So when the pandemic effectively shut down these sources of revenue, Tiger, an airline already struggling to keep afloat, had little hope of survival.

But Virgin CEO Mr Scurrah said the company would maintain Tiger’s operator’s certificate and relevant resources so it can be revived in the future if demand recovers sufficiently.