25-Oct-2013 7:48 PM

Tigerair challenges continue as losses are recorded in Australia, Indonesia, Philippines & Singapore

Analysis

Tigerair continues to face challenges, with all four of the group's carriers reporting operating losses for the three months ending 30-Sep-2013. Tigerair's outlook remains relatively bleak as it continues to expand despite intense competition in all four of its home markets.

Tigerair Singapore has struggled to maintain yields and load factors as it has expanded capacity this year at a clip exceeding 25%. While Tigerair has succeeded at becoming the largest LCC brand in Singapore, with a now sizeable gap over Jetstar and AirAsia, its operation in Singapore has slipped into the red for the first time since early 2012 due to over-capacity.

Tigerair Australia, Tigerair Mandala (Indonesia) and Tigerair Philippines remain unprofitable. The group is bullish on their prospects but over the short term the potential for profitability is slim.

Tigerair posts group profit due to sale of 60% stake in Tigerair Australia

Parent company Tiger Airways Holdings announced on 24-Oct-2013 a net profit after tax of SGD24 million (USD19 million) for the quarter ending 30-Sep-2013 (2QFY2014), compared to a net loss after tax of SGD18 million (USD15 million) in 2QFY2013. But the profit was driven by a one-time SGD106 million (USD85 million) gain from the 8-Jul-2013 completion of the sale of a 60% stake in Tigerair Australia to Virgin Australia. This was partially offset by a SGD27 million (USD22 million) impairment loss related to its investment in its two other affiliates.

On an operating level, the group incurred a SGD13 million (USD10 million) loss in 2QFY2014, compared to a SGD12 million (USD10 million) loss in 2QFY2013. Group revenues dropped by 17% due to the reduction in its stake in Tigerair Australia.

Tiger Airways Holdings financial highlights: 2QFY2014 vs 2QFY2013

Tiger Airways Holdings, which has been publicly listed since early 2010, now has a 100% stake in Tigerair Singapore, 40% stakes in Tigerair Australia and Tigerair Philippines and a 35.8% stake in Tigerair Mandala. During the quarter it raised its stake in Mandala from 33% to 35.8% as SGD13 million (USD10 million) in loans was converted into additional shares.

Tigerair Singapore recorded an operating loss of SGD18 million (USD15 million) for 2QFY2014, compared to an operating profit of SGD5 million (USD4 million) in 2QFY2013. It was the carrier's first operating loss since 4QFY2012. Tigerair Singapore is by far the largest of the Tigerair-branded carriers, operating 23 of the group's 48 A320s.

Tigerair Mandala and Tigerair Philippines are again unprofitable

Tigerair Mandala has been highly unprofitable since launching services in Apr-2012. Tiger Airways Holdings incurred a loss of SGD8 million (USD6 million) related to its investment in Mandala in 2QFY2014, meaning Mandala's overall loss was for the quarter was about SGD22 million (USD18 million). Mandala, which currently operates a fleet of nine A320s, has now accumulated SGD129 million (USD104 million) in losses since it re-launched services under the partnership with Tigerair.

Tigerair Philippines, which only operates five A320 family aircraft, has been even more unprofitable on an operating margin basis. Tiger Airways Holdings recorded a loss of SGD9 million (USD7 million) in 2QFY2014 related to its investment in Tigerair Philippines, formerly known as SEAir. As a result, Tigerair Philippines incurred a loss in the quarter of SGD23 million (USD19 million). The carrier has been operating as a Tigerair partner since late 2010 and has not yet posted a profit.

Tigerair Australia continues to struggle

Tigerair Australia is significantly older but also has been consistently unprofitable since launching in 2007. The carrier, which currently operates 11 A320s on 16 domestic routes, incurred an operating loss of SGD18 million (USD15 million) in 2QFY2013. Tigerair Australia has been conducting a deep strategic review since Virgin Australia took control in Jul-2013.

The two shareholders are confident the network and commercial changes which result from this ongoing review will improve Tigerair Australia's profitability. But market conditions in Australia's domestic market remain challenging and Tigerair Australia so far remains focused on fixing its domestic operation rather than pursuing international opportunities.

Tigerair Australia has been allocated two of the five additional A320s to be delivered to the group in 2HFY2014, which will give the Melbourne-based carrier a fleet of 13 aircraft by the end of Mar-2014. The other three aircraft that the group is committed to taking over the next six months have been allocated to Tigerair Singapore, which will give Tigerair Singapore a fleet of 26 A320s by the end of its fiscal year.

Tigerair Singapore pursues rapid expansion

The additional aircraft at Tigerair Singapore are being used to launch several new routes from Singapore and add capacity on several existing routes. Tigerair Singapore launched service to Yangon in Myanmar on 1-Oct-2013 and has unveiled plans to add five more destinations in 3QFY2014 - Chiang Mai in Thailand, Langkawi in Malaysia, Lijiang in China, and Lombok and Surabaya in Indonesia. The carrier says it is also increasing frequencies during the quarter to Bangkok, Chennai, Dhaka, Hong Kong, Jakarta, Perth, Phnom Penh, Phuket, and Tiruchirapalli.

With the new wave of additional flights, Tigerair Singapore will continue to grow at a clip well exceeding 20%. The carrier expects ASKs for the full fiscal year to end 25% to 26% higher compared to the year ending 31-Mar-2013. (This figure does not take into account the flights which have been added over the past year to Singapore by Tigerair Mandala and Tigerair Philippines.)

The forthcoming network expansion will give Tigerair Singapore 35 destinations. When including flights operated by Tigerair Philippines and Tigerair Mandala, by the end of the current quarter the group will have 39 destinations from Singapore and over 900 weekly frequencies in Singapore, or the equivalent of about 130 daily flights, according to Innovata data.

As CAPA reported in Sep-2013, the Tigerair Group will account for just under 11% of seat capacity at Singapore Changi in Dec-2013, compared to about 8% for the Jetstar and AirAsia groups. The three groups had equal 6.5% capacity shares in Singapore in 2010 but Tigerair has since pursued faster expansion than its competitors.

Tigerair Singapore ASKs were up 27.5% in 2QFY2014 on a year-over-year basis and 25.9% for 1HFY2014. But the extra capacity was not entirely absorbed as RPKs were up only 21.9% for the quarter, resulting in a 3.6ppt drop in load factor to 78.5%.

Tigerair Singapore operating highlights: 2QFY2014 vs 2QFY2013

Tigerair Singapore financial highlights: 2QFY2014 vs 2QFY2013

Yield slipped 5.6% in the quarter as the average fare dropped 6.6% to SGD96.40 (USD77.74). Tigerair Singapore's yield and load factor were the lowest levels in at least six quarters.

Tigerair Singapore quarterly yield and load factor: 1QFY2013 to 2QFY2014

Tigerair blames PSC increases for yield erosion but over-capacity has also had an impact

Tigerair blames the drop in average fares and yield on the higher airport tax that its passenger have had to pay since the carrier was forced to move to Changi's Terminal 2 from the Budget Terminal at the end of 2QFY2013 (25-Sep-2012), when the Budget Terminal was closed. The Passenger Service Charge (PSC) at the BT was only SGD18 (USD15) compared to SGD34 (USD27) currently in the main terminals. The difference in PSCs at the time the BT was in operation was SGD10 (USD8) as the current PSC of SGD34 was raised from SGD28 in Apr-2013.

While the PSC is separate from the fare, Tigerair believes consumers take into the account the total cost including taxes when making their purchase decisions and the carrier has had to lower fares to make up for the higher tax. While the average fare was down by about SGD14 in the quarter on a round-trip basis, the tax has increased by SGD16, with SGD10 coming as a result of the move from the BT and another SGD6 coming as a result of the rise in the PSC earlier this year.

But in reality the large influx of capacity and increased competition on several of its routes has impacted Tigerair Singapore's pricing power. Tigerair Group CEO Koay Peng Yen warned in a call with media to discuss the group's 2QFY2014 results that "near term pressure" on yields and load factor in Singapore are expected to continue as it will take time for the capacity the carrier has been added to be fully absorbed.

Tigerair Singapore should look to slow down growth

The group is committed to another 10 A320 deliveries in FY2015. Tigerair has not yet decided on an allocation between the four carriers but the group will likely try to slow down growth in Singapore if there are opportunities to deploy the aircraft at its affiliates. Again placing a majority of the additional aircraft in Singapore would result in further 20% plus increases in capacity, exacerbating the current situation.

While Tigerair has succeeded in increasing its share of the Singapore market and cementing its position as Singapore's largest LCC group, it should start to focus more on improving yields and profitability. But ultimately its affiliates need to be performing well enough to justify allocating the affiliates additional aircraft. Some of Tigerair's growth in Singapore since 2010 has been driven by an over ambitious aircraft order from 2007 and problems encountered in launching and growing affiliates in other Asian markets.

In FY2012 Tigerair Singapore expanded capacity by about 50% as the group had no options for additional aircraft following the grounding and subsequent regulator-enforced capacity limits on Tigerair Australia and delays in completing investments in the Philippines and Indonesia. The Singapore short-haul market quickly became flooded with too much LCC capacity and Tigerair Singapore incurred operating losses in the last three quarters of FY2012 (1-Jul-2011 to 31-Mar-2012).

The carrier swung back into the black in 1QFY2013 and remained profitable for five consecutive quarters until the recently completed quarter. Capacity expansion in FY2013 was a much more modest 16%, allowing for the excess capacity from FY2012 to finally be absorbed.

Tigerair's management team is confident there is still room for significant growth in the Singapore market. But the lesson from FY2012, which is now being repeated in FY2014, is that the market is too small to quickly absorb a large surge. Other Southeast Asian markets have a different dynamic, particularly Indonesia, which has a population of almost 250 million, compared to just over five million for Singapore along with a new middle class.

Mr Koay still sees opportunities to grow the Singapore short-haul market, pointing out there is still a "nice segment that are non-users of the budget sector". Tigerair Singapore believes it can stimulate new demand as well as persuade more full-service passengers to start taking low-cost carriers. Mr Koay does not believe the current LCC penetration rate in the Singapore-Southeast Asia short-haul market, which is currently 51%, has yet hit a ceiling.

The Tigerair Group currently accounts for 16% of total capacity in the Singapore-Southeast Asia market. The AirAsia Group has an LCC leading 17% share while the Jetstar Group has about an 11% share and other LCCs account for about 7%. AirAsia has a higher share of the short-haul market while Tigerair is overall the larger LCC brand because AirAsia only links Singapore with other Southeast Asian markets. About 35% of Tigerair Singapore's seats are currently allocated to medium-haul markets in South Asia, North Asia and Australia, according to CAPA and Innovata data.

LCC capacity between Singapore and other Southeast Asian countries by carrier: 28-Oct-2013 to 3-Nov-2013

Rank	Airline		Total Seats
1	TR	Tigerair	80,640
2	3K	Jetstar Asia	56,520
3	AK	AirAsia	46,800
4	QZ	Indonesia AirAsia	43,920
5	JT	Lion Air	23,856
6	RI	Tigerair Mandala	21,600
7	VF	Valuair	17,640
8	FD	Thai AirAsia	17,640
9	5J	Cebu Pacific Air	16,854
10	TZ	Scoot	5,628
11	Y5	Golden Myanmar Airlines	4,680
12	DG	Tigerair Philippines	3,600
13	JQ	Jetstar Airways	3,204

Tigerair focuses more on corporate market with high frequency offering

Tigerair in particular sees opportunities to grow in the relatively mature Singapore market by starting to target the corporate sector. The group believes small and medium-size companies can be attracted away from full-service carriers on short-haul routes.

Mr Koay says the carrier is particularly focused on securing more corporate business on the Singapore to Bangkok, Hong Kong, Jakarta and Kuala Lumpur routes - where it has a high frequency schedule that is attractive to business passengers. The group is increasing its Singapore-Jakarta schedule on 27-Oct-2013 to nine daily frequencies, which includes four flights operated by Tigerair Singapore and five by Tigerair Mandala.

Singapore-Bangkok is the group's second largest route with up to eight daily frequencies. Kuala Lumpur is currently served with four daily flights while Tigerair Singapore is increasing Hong Kong over the next few weeks from up to three to up to four daily flights.

Mr Koay acknowledges load factors on some of these routes, particularly Jakarta, are below average but Tigerair believes it is strategically important to have a high frequency operation. Jakarta has seen an increase in capacity of about 25% in recent months, with carriers using traffic rights made available from a new bilateral agreement between Indonesia and Singapore, which was signed early this year.

Tigerair has expanded the most aggressively, adding seven daily flights since the beginning of 2013, increasing its total share of capacity on the route from about 5% to 16%. Mr Koay says the additional capacity had a short-term impact on load factors but it is an important market and "it's a segment we want to continue to invest in".

Jakarta is now the largest destination from Singapore Changi, with over 65,000 weekly one-way seats in Nov-2013. Jakarta-Singapore has become the second largest international route in the world and the largest LCC route.

Tigerair sees long-term upside to recent developments

Tigerair seems to be sacrificing short-term profitability to bolster its position in the highly competitive Southeast Asian market. Its investments in Indonesia and the Philippines are long-term plays that the group hopes will eventually become profitable. But Tigerair does not have first mover advantage in either market and could struggle to carve out a profitable niche.

Tigerair Philippines has been stuck at five aircraft since mid-2012. The group is confident market conditions will improve and Tigerair Philippines will benefit from recent consolidation, including the AirAsia-Zest virtual merger and the transition of AirPhil Express from LCC to full-service regional subsidiary. Tigerair Philippines is also hoping to benefit from the recent opening of the Philippines-Japan market and expects the Philippines-Korea market to also open up soon.

Tigerair Philippines was one of several carriers which filed for new routes to Japan following the signing of a new bilateral agreement between the Philippines and Japan. As CAPA previously reported, Tigerair Philippines is seeking rights to serve Tokyo Narita from Cebu, Clark, Kalibo, Manila and to Osaka Kansai from Clark and Manila.

Mr Koay expects Philippine authorities to decide on the requested routes in Nov-2013. Tigerair Philippines will likely look to launch some of the routes within the next few months as well as potential new services to Korea. An expansion of the fleet beyond five aircraft is likely as Tigerair does not want to reduce its current domestic operation in the Philippines, where it sees improved conditions following the recent consolidation. Tigerair Philippines plans to launch in Dec-2013 flights between Manila and Davao, which is the second largest domestic route in the Philippines, giving the carrier eight domestic and five international scheduled routes.

Tigerair Mandala also has been looking to bolster its fleet by acquiring second-hand aircraft from leasing companies. So far all nine of the carrier's aircraft were sourced from the Tigerair Group order book.

Tigerair Mandala's original fleet plan was to end 2013 with 12 aircraft, which would require three leased aircraft to be added over the next two months. Tigerair Mandala may end up pushing back some of this expansion until 2014 but overall the carrier remains upbeat about its prospects of expanding in both the domestic and international markets. The carrier recently announced plans to launch services to Hong Kong from Bali and Surabaya from Dec-2013. Tigerair will be the first LCC brand on both these routes and is also currently the only LCC brand in the Jakarta-Hong Kong market, which it entered earlier this year.

For the short to medium term, pressure on profits will continue

Tigerair Mandala, Tigerair Philippines and Tigerair Australia could all be allocated some of the 10 additional aircraft the group is slated to receive in FY2015. All three carriers are also now looking at taking aircraft directly from leasing companies. All the affiliates have expansion needs and ambitions, but the group wants to make sure the expansion does not result in even higher losses.

The continued losses of all three affiliates and Tigerair Singapore's swing back into the red are discouraging. There are still huge opportunities for further growth in Southeast Asia but LCC competition continues to intensify, pressuring profitability.