10-Nov-2015 1:49 PM

Singapore Airlines proposed takeover of Tigerair a scene changing strategic move for the SIA Group

Analysis

The Singapore Airlines (SIA) Group plans to advance its multi-brand strategy by fully taking over and integrating short-haul LCC Tigerair. The proposed acquisition of the remaining 44% stake in Tigerair is a long overdue move which will improve the group's overall position, in particular the outlook for long-haul LCC subsidiary Scoot.

SIA should have opted for a bigger role in Tigerair when the LCC was established in 2003, to fly in the following year. SIA also repeatedly opted against taking over Tigerair in recent years although such a move became increasingly inevitable as Tigerair struggled and the launch of Scoot meant that strategically SIA could no longer afford to continue playing a passive role. Better late than never. And it is not too late. The amalgam will give SIA far cleaner operating and partnership options than it had previously.

SIA still faces challenges as competition continues to intensify, both regionally and in key long haul markets. The 6-Nov-2015 offer to take over the remaining stake in Tigerair is just one of several components in a still evolving group strategy aimed at improving SIA's long-term outlook.

Summary

Singapore Airlines (SIA) plans to fully acquire and integrate short-haul LCC Tigerair, improving the group's overall position and outlook for long-haul LCC subsidiary Scoot.
SIA initially had a passive role in Tigerair, but the proposed acquisition is a long overdue move that will provide cleaner operating and partnership options for SIA.
SIA still faces competition challenges, but the acquisition of Tigerair is part of a larger strategy to improve the group's long-term outlook.
The integration of Tigerair with SIA's other airline brands will likely result in several network adjustments, including Scoot taking over some Tigerair flights and Tigerair taking over some SilkAir routes.
For now, SIA plans to operate Scoot and Tigerair as separate entities, but a future combination or unification of their brands is logical.
Tigerair Australia and Tigerair Taiwan are likely to rebrand regardless of the acquisition, and Tigerair's other affiliates have already undergone rebranding or shut down.

SIA initially had a passive role in Tigerair - a mistake in hindsight

SIA announced on 6-Nov-2015 an offer to buy the 44.2% shares of Tiger Airways Holdings it does not already own and delist the LCC. If accepted, the transaction will close in late Dec-2015 and bring to a conclusion an important chapter in Singapore's aviation evolution.

Tigerair launched operations in 2004 at almost the same time as Jetstar Asia and Valuair, two other Singapore-based LCCs which subsequently merged in 2005. SIA at the time opted against establishing a fully owned LCC subsidiary or even taking a majority stake in Tiger, instead acquiring a 49% stake and pursuing a passive role. At that stage SIA remained deeply sceptical about LCCs prospects in Asia, but hedged its bets by taking a minority share.

Despite the scepticism within SIA, Singapore's short-haul sector was quickly transformed with the new wave of LCCs driving rapid growth. The LCC penetration rate in Singapore blossomed over the next decade from virtually zero in 2003 to more than 30% in 2013, quite an accomplishment for a country that does not have a domestic market. Outside Asia, no markets in the world have these levels of LCC penetration in genuinely international conditions. During this period passenger traffic at Changi nearly doubled but SIA traffic was flat.

Singapore LCC penetration rate: 2003 to 11M2015

Tigerair's expansion accelerated after a Jan-2010 initial public offering which saw SIA's stake reduced to about 33%. Tigerair used the proceeds to continue growing in its home market of Singapore and pursue joint ventures overseas, resulting in the launch of affiliates in Indonesia and Philippines to supplement a subsidiary in Australia which commenced operations in 2007.

Launch of Scoot marked shift in SIA Group's LCC strategy

SIA's low-cost strategy shifted significantly after Goh Choon Phong took over as group CEO at the beginning of 2011. One of Mr Goh's first move was to decide to establish a long-haul LCC subsidiary. As CAPA highlighted in a May-2011 report:

The surprising, but also potentially far reaching, announcement could signal much more than merely another example of an Asia Pacific long-haul low-cost operation. For Singapore Airlines it marks a major refocus of its long term strategy - restoring growth and catering more effectively for the burgeoning leisure market. Over the last several years SIA has seen its share of its home market steadily drop as low-cost carriers have rapidly expanded. This trend accelerated in recent months as SIA's traffic has shrunk and load factors dropped, while low-cost carriers continued to expand rapidly and improve their load factors.

… The flag carrier's strategy over [the last decade] has clearly been to prioritise profitability over expansion, often a sound approach. But in the fast growing Asian market this can be a risky long term option, leaving the way for other competitors to expand and grow their network strength. The new measure also appears to be a recognition that the flag carrier's longstanding focus on premium traffic (which must in turn mutually subsidise lower priced leisure travellers) is not in itself a formula for the future. The rapid growth is in leisure markets, while business travel - today somewhat uncertain - is expanding at a more leisurely pace.

But after Scoot commenced operations in mid-2012 it quickly became clear a lack of alignment with Tigerair was a major weakness for the SIA Group.

Scoot needed feed to be sustainable but Tigerair was a reluctant partner as it was focused on internal issues, particularly dealing with heavy losses in Australia, Indonesia and the Philippines. Its Singapore operation also became lossmaking in 2H2013 and 2014 due to overcapacity and irrational competition driven primarily by its own overly ambitious expansion.

SIA could not compel Tigerair to make strategic adjustments in the interest of the SIA Group as it only had a 30% stake and a passive role. A takeover of Tigerair seemed inevitable but the group repeatedly rejected the idea of an acquisition. As CAPA stated in a May-2014 report:

Changi Airport, which has seen traffic growth moderate significantly over the last year, and the SIA Group need Tigerair to take on more of a network role. For SIA, Tigerair is an essential component of its brand matrix in competing in a new Asian market profile as it fills the short-haul LCC role alongside long-haul LCC Scoot.

… SIA has so far preferred to wait patiently for Tigerair as it attempts to recover from its challenges. However, SIA ultimately may have little choice but to take over the LCC group. This would have made a lot of sense from Tigerair's beginnings but policy timidity prevented it occurring. The time is fast approaching where that timidity needs to be replaced by a much more forthright and forward looking approach.

Majority stake in Tigerair has not done enough

SIA did gradually increase its stake in Tigerair as part of a series of rights issues which were required to give the struggling LCC the capital necessary to stay afloat. SIA's stake increased to 40% in late 2013 and subsequently to the current level of about 56% in late 2014.

Taking a majority stake enabled SIA to increase its involvement in Tigerair following approval from competition authorities and resulted in an improved relationship between Scoot and Tigerair. But it did not entirely resolve all the issues and Tigerair has still not been completely aligned with the group's other airline brands.

SIA clearly needed to take the final step of acquiring the remaining 44% stake. As CAPA highlighted in a 28-Oct-2015 report on SIA's still evolving multi-brand strategy:

Tigerair is also still not entirely aligned with Scoot when it comes to network development. The two carriers were not on the same page during Scoot's first three years and there was little Scoot (or SIA) could do about it, as SIA at the time did not have a majority stake or control of Tigerair. The situation has improved since SIA increased its stake in Tigerair to about 56% in Dec-2014 but there is still not complete alignment.

Tigerair has since begun participating in SIA Group network planning meetings but any decisions that involve Tigerair are not binding. Tigerair's independent board members still must agree that any suggested route changes are also in the interest of its minority shareholders. This not an easy sell as the minority shareholders are not exactly the happiest bunch, having seen Tigerair's stock price drop by 80% over the last five years as a hoped for takeover by SIA never materialised.

Only a Scoot-Tigerair merger can fully resolve this weakness, a fact Tigerair's minority shareholders may be keen to leverage. A merger would clearly provide improved flexibility to better match capacity with demand.

Several network adjustments are likely to result from Tigerair takeover

If the proposed transaction is completed, the group will finally be able to integrate Tigerair fully with its three other airline brands - Scoot, SIA and regional full-service subsidiary SilkAir. 2016 could deliver several major SIA Group network adjustments involving Tigerair, similar to the recent decision to use Scoot to take over flights to Hangzhou from SilkAir and to Jeddah from SIA.

For example Scoot could take over some Tigerair flights to India - which Tigerair's independent board members had been reluctant to approve. Scoot could also potentially take over peak hour or peak season Tigerair flights to short-haul destinations where slots are at premium such as Hong Kong, Phuket and Jakarta.

Tigerair in turn could takeover Scoot's Singapore-Kaohsiung-Osaka route and some SilkAir routes to China. The possibilities and opportunities are myriad as SIA seeks to maximise the value of each airline subsidiary.

SIA Group to keep Tigerair and Scoot as separate entities - for now

For now the group does not plan to combine Scoot and Tigerair but instead operate the two LCCs in tandem, matching its successful strategy with closely integrated FSC brands SilkAir and SIA. But ultimately combining the two LCCs - or at least unifying their brands - would be logical.

With Asia's other long-haul LCC operations there is a unified brand and a single website with its short haul sister, providing marketing synergies and making it easier from a customer interface perspective.

AirAsia X is a separate company form AirAsia but the two groups have the same brand, website and distribution network. At Cebu Pacific and Jetstar, the long-haul operations are part of the same company and under the same operators' certificate.

It is too early to speculate if it will be the TIgerair or Scoot brand that ultimately survives or if a new brand is created for the duo. There is certainly no need to rush into a decision. But it is a question the SIA Group will be repeatedly asked - likely until there is a positive answer, similar to the finally now answered question on if SIA will fully take over Tigerair.

Tigerair Australia and Tigerair Taiwan are not critical to TIgerair's overall strategy

A new brand for Tigerair would likely necessitate new brands for Tigerair Australia and Tigerair Taiwan. But Tigreair Australia and Tigerair Taiwan are likely to rebrand regardless.

Tigerair Australia is now 100% owned by Virgin Australia. While SIA owns about a 20% stake in Virgin Australia and the two carriers are close partners, Tigerair Australia could be better off adopting a new brand that reflects its independence from the Tigerair group. Tiger Airways Holdings initially sold a 60% stake in Tigerair Australia to Virgin Australia in mid-2013 and sold the remaining 40% stake in late 2014.

Tiger Airways Holdings only owns a 10% stake in Tigerair Taiwan, with the remaining 90% held by China Airlines, which is not a partner of SIA. In fact SIA is a partner with China Airlines rival EVA Air. Tigerair Taiwan is now competing with Scoot in the Singapore-Taipei market and with NokScoot, which is 49% owned by SIA, in the Bangkok-Taipei market.

China Airlines remains committed to its LCC subsidiary, which launched services in Sep-2014, but is expected to ultimately take over a 100% stake in the carrier. Under such a scenario Tigerair Taiwan would likely rebrand and stop using the Tigerair website and distribution system. As Tigerair and Scoot transition to a single reservation system in 2016, and potentially a single website in future, continuing to host Tigerair Taiwan and Tigerair Australia on the Tigerair domain could prove to be a distraction.

Tigerair Philippines already rebranded in Mar-2015, becoming Cebgo and transitioning to the Cebu Pacific distribution network. Cebu Pacific acquired Tigerair Philippines in early 2014, buying out the 40% stake that was held by Tiger Airways Holdings along with the 60% stake held by Filipino investors.

The other Tigerair affiliate, Indonesia's Tigerair Mandala, shut down in mid-2014. The two main shareholders - Tiger Airways Holdings and Indonesian investment firm Saratoga - were not interested in recapitalising the struggling carrier and decided to pull the plug as new investors could not be secured. (Note: All Tiger carriers took on the new Tigerair name in mid-2013 but the parent company is still known as Tiger Airways Holdings.)

Tigerair and Scoot losses narrow in fiscal 2Q

Net losses at Tiger Airways Holdings have reduced significantly since the group sold or shut down its struggling overseas affiliates. Losses at Tigerair Singapore have also narrowed significantly following a restructuring in 2014 which resulted in the LCC suspending several routes and reducing capacity across most markets

Tigerair reported an operating loss of SGD10.4 million (USD7.5 million) in the quarter ending 30-Sep-2015 (2QFY2016) compared to a loss of SGD25.3 million (USD20.2 million) in 2QFY2015. ASKs were down 1% but RPKs increased by 1% and passenger numbers increased by 3% to 1.284 million.

Tigerair financial highlights: 2QFY2016 vs 2QFY2015

Scoot also has been able to narrow its losses significantly in FY2016 driven partially by the efficiency improvements from its new fleet of 787s. Scoot's incurred an operating loss of only SGD2 million (USD1.4 million) in 2QFY2016 compared to a loss of SGD19 million (USD15 million) in 2QFY2015. Scoot's ASKs increased by 13% while RPKs increased by 17% and passenger numbers increased 20% to 572,000.

All of SIA Group's airline subsidiaries except the parent airline saw improvements in profitability at the operating level in 1HFY2016. The decline in profitability at the parent airline was driven by a 5% reduction in passenger yields and resulted in a 2% drop in the group's operating profit to SGD129 million (USD93 million).

SIA Group subsidiaries operating profit contributions: 2QFY2016 vs 2QFY2015

SIA is hoping premium economy and other initiatives will improve its profitability

SIA executives stated during the group's 1HFY2016 results briefing that yields to Europe have particularly been under pressure as competition in the Europe-Asia market has intensified. Gulf carriers have been ambitiously adding capacity in Southeast Asia, including Singapore, driving down yields to Europe as most of their Southeast Asian passengers connect beyond the Middle East to Europe.

See related reports:

SIA reported that yields in the Australian market have been relatively strong despite the weaker Australian dollar while yields in Asia have been relatively stable. SIA likely has benefitted from capacity reductions to Australia by other Southeast Asian carriers and the reduction in short-haul LCC capacity from Singapore. Full-service regional subsidiary SilkAir saw its yields improve slightly in 1HFY2015 which the group credited to the pullback in LCC capacity and a better supply-demand balance in the short-haul sector.

SIA is hoping the introduction of premium economy will eventually lead to an improvement in average yields at the parent airline, which have been steadily declining for four consecutive years. SIA introduced premium economy in early Aug-2015 and has so far seen average load factors in the mid 80s for the premium economy cabin, putting it slightly ahead of its average overall load factor.

SIA executives have also so far been pleased with the yields generated from premium economy, particularly in the Australia and London markets.

But as SIA has only just begun retrofitting its A380 and 777-300ER fleets, premium economy did not have a meaningful impact on yields in 2QFY2016. As the project is extended to more aircraft and routes overall yields should start to improve - even if economy yields continue to be under pressure as SIA is reducing economy seat capacity as it adds premium economy.

SIA will have 19 A380s and 19 777-300ERs retrofitted with premium economy by the end of FY2016. Its first batch of A350-900s - which will be in three-class configuration with 24 premium economy, 187 economy and 42 business class seats - will also be delivered in 4QFY2016.

SIA sees opportunities to resume long haul network growth with A350s

SIA is using its initial A350-900s to replace 777-200ERs on thinner long haul routes, starting with Amsterdam. It also plans to use the new type to open new secondary destinations in Europe, starting with Dusseldorf, which will be launched in Jul-2016 with three weekly flights.

SIA currently has 67 A350-900s on order, but a portion of the fleet will be configured for regional services and used to replace A330s. It will have a third configuration for its seven A350-900ULRs, all of which will be delivered in 2018 and be used to resume non-stop flights to North America. SIA plans to re-launch non-stops to Los Angeles and New York, which are now served with one-stop products, and is also looking at one or two new non-stop destinations.

It also will take its first batch of 30 787-10s in 2018; they will be used on regional routes and feature the same new regional cabin products being developed for the medium haul version of the A350-900. SIA is also now in the process of developing a new generation of cabin products for its future long haul fleet which will initially debut on the five A380s that are slated to be delivered from 2017. These aircraft will replace its five oldest A380s.

SIA expects the new aircraft, the launch of premium economy and the introduction of new cabin products for both its long haul and regional fleet will improve its long term position in the increasingly competitive top end of the market. Several new long haul routes to Europe and North America are envisioned, providing modest capacity expansion for the parent airline after several years of roughly flat capacity.

Meanwhile SilkAir is expected to continue pursuing rapid growth in the regional market. SIA's ASKs were down 2% in 2QFY2016 while SilkAir's ASKs were up by about 10%.

Scoot and a more aligned Tigerair are critical components of the new SIA Group strategy

But much faster growth is expected at the bottom end of the market, particularly at Scoot and its Thai joint venture NokScoot. The resumption of growth at Tigerair is also feasible as Tigerair becomes fully aligned under the SIA Group, unlocking opportunities to leverage the Tigerair network to accelerate growth at the group's Singapore hub.

Tigerair currently accounts for about an 8% share of seat capacity in Singapore. Combined the SIA Group's four airline brands account for 51% of total capacity in its home market.

Without close integration between all four airline brands and full exploitation of network synergies the group could risk seeing its market share slip below 50%.

Singapore top 10 carriers ranked by seat capacity: 9-Nov-2015 to 15-Nov-2015

Rank	Airline		Total Seats	Percentage Capacity Share
1	SQ	Singapore Airlines	460,922	32%
2	TR	Tigerair	116,064	8%
3	MI	SilkAir	110,572	8%
4	3K	Jetstar Asia	91,440	6%
5	AK	AirAsia	48,600	3%
6	TZ	Scoot	48,274	3%
7	CX	Cathay Pacific	40,296	3%
8	EK	Emirates Airline	38,150	3%
9	GA	Garuda Indonesia	29,620	2%
10	QZ	Indonesia AirAsia	29,160	2%

Closer collaboration between Scoot and Tigerair will improve the outlook for both LCCs. Both carriers could potentially be profitable in the fiscal year starting 1-Apr-2016, particularly if they are able to quickly succeed at generated enhanced synergies from the full integration of Tigerair into the SIA Group.

Since the beginning of the current fiscal year SIA has already started to include Tigerair and Scoot in its KrisFlyer frequent flyer programme and begun selling Scoot-operated flights. SIA sees opportunities to expand cross selling to include Tigerair, provide an integrated network and pursue more shared services.

SIA Group's portfolio strategy

Taking over Tigerair represents a small but necessary investment for SIA

The SIA Group should easily be able to generate sufficient synergies to offset the SGD453 million (USD318 million) being offered for the remaining 44.2% of Tigerair. SGD453 million is practically pocket change for cash-rich SIA.

SIA is offering Tigerair shareholders SGD41 cents (USD29 cents) per share, which represents a 32% premium compared to the SGD31cents (USD22 cents) trading price prior to the 6-Nov-2015 announcement and a 33% premium compared to the average trading price over the last year.

The Tigerair share price has been been stable over the last year with low volumes of trading.

But the share price plummeted by over 60% in 2011 and dropped again in 2013 and most of 2014. Its IPO price in early 2010 was SGD1.50 (USD1.07), or nearly four times the price SIA is now offering.

Delisting Tigerair and fully integrating it into SIA is an important step towards a coherent group strategy.

Tigerair has had a turbulent journey since its IPO and would not be still in business if it was not for SIA stepping in to back multiple rights issues. It is time to move on and close the chapter on Tigerair as an independent - or semi-independent - entity.