Virgin's plan to seize control of budget carrier Tiger Airways has hit a stumbling block, with the competition watchdog flagging that it has some concerns.
Australian Competition and Consumer Commission (ACCC) chairman Rod Sims says the watchdog's preliminary view on the deal was that it may raise competition concerns in the market for Australian domestic air travel.
"The ACCC's concerns relate to the risk of muted competition following the reduction in the number of airline groups within Australia from three to two (excluding regional airlines), and the loss of Tiger Australia as an independently-owned discount competitor," he said in a statement on Thursday.
"This potential reduction in competition arises as a result of the increased ability on the part of Qantas/Jetstar and Virgin Australia/Tiger Australia to co-ordinate their activities once Tiger Australia is no longer operating as an independent low cost carrier."
Mr Sims said other factors that could affect the ACCC's final decision included Tiger Australia's financial position and the likely size and strength of the airline if Virgin was allowed to buy it.
"If the ACCC were to conclude that Tiger Australia would exit the market in the absence of the proposed acquisition, this would be highly relevant to our assessment," Mr Sims said.
Mr Sims said Virgin and Tiger both planned to expand Tiger's Australian fleet from 11 aircraft to 35 by 2018.
"If the ACCC was satisfied that a significant increase in capacity would take place, this would also diminish the prospect of any increase in co-ordinated conduct in the market," Mr Sims said.
Virgin said it was preparing a response for the ACCC.
"Virgin Australia strongly believes the proposed acquisition will increase competition in the market to the benefit of Australian consumers," it said in a brief statement.
Tiger Airways' shareholders approved Virgin's move to buy a majority stake in the airline on February 1.
Approval is also needed from the Foreign Investment Review Board.
Virgin's shares closed 1.5 cents lower at 43.5 cents.