Caged Beast or Jungle Predator?

AUSTRALIAN MEDIA HAVE BEEN LAMPOONING TIGER AIRWAYS for abusing feline cliches in its press releases since it inaugurated services down under in November 2007: How the Singapore-based airline would "pounce on" its competitors and "claw its way" into the market. The scribes' mirth has been fueled by Tiger Airways Australia's modest domestic penetration despite the hefty clout of its core group owners, a phenomenon that has mystified many in one of the world's fastest-growing and most robust aviation markets.

But it would seem that Tiger is about to make good on its publicity and the fangs have been bared after its successful public stock offering, new route announcements and decision to ramp up deliveries of five A320s into the current fiscal year and four into 2011-12.

Many industry watchers have thought Tiger has been hobbled by the fact that its biggest shareholder is Singapore Airlines, which may not be eager to have an LCC on its doorstep attacking yields on lucrative Southeast Asia routes. Centre for Asia Pacific Aviation Chairman Peter Harbison notes that SIA "had not been keen to enter the low-cost market with its own subsidiary SilkAir but eventually the flag carrier made the move, apparently tentatively and arguably from its own point of view, sub-optimally."

Tiger, which commenced service in September 2004, is wholly owned by Tiger Aviation, a holding company formed in 2007 to manage it and the Australian operation. Following the January IPO its largest shareholders still are its founding investors: SIA with a 34.4% stake; Indigo Partners 15%; RyanAsia, an investment vehicle for the Ryan family, 11.2%, and Dahlia Investments, a unit of Temasek Holdings that also controls SIA, 7.7%.

The airline's relationship with its largest investor is complicated. Its IPO prospectus notes that SIA and SilkAir are "significant" competitors, vying on 15 routes. But it also purchases MRO, ground handling, catering and other services from affiliates of SIA. Meanwhile, SIA appointees "participate in Tiger board meetings" and Tiger acknowledges that through these SIA "will be able to exercise substantial control over our company . . . and may have interests that are different from those of our other shareholders . . . Singapore Airlines will have the ability to indirectly exercise control over our company."

Tiger CEO Tony Davis disputes the notion that SIA has clipped the feline's claws, telling ATW that its creeping expansion was all about "profitable growth" and not overextending with too many aircraft and new routes. "We are now profitable in Australia after just 18 months--something everyone said we couldn't do," he says. He is vague, however, on defining what "profitable" means, although the airline was expected to disclose those figures in results for its just-ended fiscal year. It posted an operating loss of A$44.1 million on Australian services in the year ended March 31, 2009.

"There are some fairly wild accusations being made in terms of our performance by our competitors in Australia and there is a track record in Australia of the incumbent airlines doing just about anything they can to prevent airlines like us becoming successful," Davis says.

The airline group operates 18 A320s configured for 180 seats, with 10 based in Singapore and the balance in Melbourne and Adelaide, serving 33 destinations in 11 countries. Service is all point-to-point and Tiger does not connect passengers or bags nor does it interline. It claims its standard turn time is 30 min. Aircraft and flight crews return to their bases at the end of each day. Aircraft utilization has risen from approximately 11.8 block hr. a day in the fiscal year ended March 31, 2009, to 12.1 hr. in the six months ended Sept. 30, 2009. The fleet flew an average of 4.7 and 5.3 sectors per aircraft per day respectively in the two periods and the LCC thinks this can be increased.

It operates 190 weekly frequencies out of Singapore, where it uses the low-cost terminal, and 200 weekly flights within Australia. According to its IPO prospectus, it outsources "aircraft and engine maintenance, ground handling, passenger handling, training and payroll," enabling it to have just 32.9 employees per aircraft, with none based outside of its three bases. As of Sept. 30 it had just 530 employees. Nearly 97% of bookings come from its website. It uses Navitaire's OpenSkies reservations system. Last December it celebrated its 12 millionth passenger since operations began (by comparison, AirAsia and its affiliate airlines are carrying more than 12 million passengers per year on 90 aircraft).

A New Era

There is little doubt that the IPO changes the dynamics for Tiger considerably. It raised S$247.7 million ($175.2 million) through the sale of 165.1 million shares priced at S$1.50, valuing the company at S$781.3 million. Around two-thirds of the capital raised--S$166 million--was allocated to funding new aircraft, and plans call for a fleet of 68 A320s by 2015, a significant ramp-up on the existing operation.

While analysts were not impressed with the prospectus and gave it the thumbs down, investors eyed the success of AirAsia and Jetstar and saw significant upside if, as they believed, Tiger was allowed free rein to go for growth. According to a report from CAPA, that is exactly what the sentiment was "the hope of an upside." It noted that "establishing a healthier balance sheet will undoubtedly reduce the future exposure to risk."

But Harbison comments that "the golden age" for LCC startups in the Asia/Pacific region was between 2000 and 2004 when cheap aircraft, pilots and other skilled resources were plentiful, fuel was a bargain, credit was easy and there were soft new markets to plunder. "Tiger arrived late on the scene in those terms, after others had established their positions and as cost pressures were heading upwards in its target markets. Virgin Blue, AirAsia and Jetstar were already well along the track in their respective spheres," he points out.

That late arrival with associated higher costs has impacted the group's finances and it took three years to turn a profit, although Tiger Airways Australia with higher ticket prices is now in its second quarter of profitability, according to Davis.

LCC Growth

But the LCC trend in the region is compelling. Airbus COO-Customers John Leahy told ATW at the Singapore Airshow in February that "in September 2001 only 48 city-pairs were connected by LCCs [while] by September 2009 there were 576 airport pairs." Interestingly, "the average distance between LCC city-pairs in 2001 was 700 km. [and] this grew to 1,800 km. last year," he notes. While annual passenger growth in the region has averaged 6% since 2001, LCCs have grown at 38% annually and have seized a 14% share of the intra-Asia travel market.

That share is set to expand with the progressive liberalization of international markets, especially within ASEAN, where the goal is for open skies by 2015, says CAPA. Supporting that assertion, the deregulation of the Kuala Lumpur-Singapore route saw a 72.5% growth in frequencies in the 12 months to September 2009.

Within Australia, Tiger slowly has increased its presence to account for a 10% domestic capacity share at its main bases of Melbourne and Adelaide and a 4% share at Sydney. It serves 13 destinations but that number is set to increase, with transtasman service to New Zealand possibly on the radar. However, Harbison cautions that "there is tenacious competition from the established players [in the NZ market] and only limited market growth prospects in the relatively mature Australian market."

There is also tenacious competition in Asia, where Tiger is fighting Jetstar Asia and AirAsia. Compared to AirAsia in Malaysia, Tiger has higher revenue per ASK at 3.8 cents versus 3.58 cents but its costs are higher at 4 cents compared to AirAsia's 3.21 cents, according to CAPA data.

One of the reasons for the higher costs has been Tiger's fleet strategy of leasing aircraft. This recently has been reversed with the appointment of Standard Chartered Bank to oversee financing for the purchase of aircraft and Davis says the airline "now plans to finance future aircraft in a similar fashion." He tells ATW that it will grow its fleet to "33 within two years."

And he has more destinations on the radar in both Australia and Asia. "China and India are very important to us," he says. In China the carrier is looking at Hangzhou, Shantou and Xiamen on top of its current five destinations and in India it is "exploring the feasibility" of adding Trivandrum, Kochi and Trichy to Chennai and Bangalore, both of which are served from SIN. Davis promised new services in Australia would be announced in March.

Solid Result

Tiger had good news for its new shareholders in February when it announced a net profit of S$14.1 million for the third quarter ended Dec. 31, a S$22 million improvement over a loss of S$8 million in the year-ago period. Operating profit was S$23.5 million, a margin of 17% on revenue of S$139.5 million.

"That is fantastic for an LCC," quips Davis. The revenue figure represents growth of 29% from the year-ago period. The result was described by Davis as "positive" with cost per ASK 16% lower while CASK excluding fuel decreased 4%. "With this result, [nine-month] underlying operating profit, excluding fuel hedging losses of S$22.2 million and IPO-related expenses of S$7.6 million, was S$36.6 million--a S$68 million turnaround from the previous financial year." The upbeat figures were a welcome change from a loss of S$50.8 million for the year ended March 31, 2009, which followed a S$9.9 million profit in 2007-08.

Davis said the result "demonstrates that we have the right model in the right markets. What was most pleasing is that we achieved this profitable result with a 19% reduction in average passenger fares. We will continue to focus on reducing our operating costs, which in turn will allow us to offer our passengers even lower fares.'' He added that ongoing focus on cost containment would "continue to bear fruit heading into the fourth quarter." In 2008 the average fare on Tiger was S$129.90, dropping to S$103.50 in 2009 and S$79.40 in the nine months to Dec. 31, 2009.

Growing ancillary revenue is a major goal. In 2008 it accounted for just 4.9% of revenue, rose to 13.3% in 2008-09 and was 20% for the nine months to Dec. 31. Per passenger it lifted from S$2.60 in 2007 to S$6.70 in 2008 to S$15.90 in 2009 and topped out S$18.80 for the nine months to Dec. 31. Davis is targeting 25% of revenue for the next fiscal year. Ancillary revenues are generated through baggage service and seat selection fees and inflight sale of beverages, food and merchandise. Some revenue comes from distribution of accommodation services, car rental services and travel insurance through the airline's website.

A new source of revenue, cargo, was trialed on flights from Singapore to Bangkok, Jakarta, Kuala Lumpur, Kuching and Penang in January. Davis says cargo must not disrupt the schedule and thus the LCC model so far is "working fine. It's a bit like excess baggage. We are getting a lot of requests and it's a useful addition to our revenue." The trial now is being extended to Hong Kong, Macau, Shenzhen, Guangzhou, Hanoi and Ho Chi Minh City.

In Australia he is interested in using secondary airports and underused military airfields such as Amberley to the west of Brisbane, Richmond northwest of Sydney and Pearce north of Perth in an effort to reduce airport charges. The imperative is not only cost but capacity issues at Sydney, Brisbane and Perth at peak times.

With blue chip backers and a well-established network and infrastructure, the only impediment to Tiger's ability to pounce on its prey will be its watchful and leery shareholder SIA, whose embrace of the low-cost model has been less than enthusiastic. And in that there is more than a touch of irony, for it was SIA in its original guise of Malaysia Singapore Airlines that made its name by thumbing its nose at IATA by cutting fares and giving free drinks and headsets to all passengers.