Tiger Airways returns to fundamentals after reprieve in Australia

Tiger restricted to 18 sectors a day for August

The Civil Aviation Safety Authority lifted Tiger's grounding on Wednesday with a number of conditions on the carrier's air operator's certificate. The most restricting operationally is CASA limiting Tiger to operating a maximum of 18 sectors a day for the duration of the month. If Tiger were to operate to that threshold, it would only be able to offer 26% of its pre-grounding number of flights. Increased operations after August will be subject to CASA approval.

CASA is requiring Tiger pilots to undergo additional ground and simulator training. The carrier's 1-Jul-2011 grounding was immediately preceded by two incidents in Jun-2011 where Tiger Australia aircraft flew below the minimum safe altitude. Tiger had also been issued a show cause notice in Mar-2011 focusing on oversight of maintenance and pilot training. CASA is also requiring Tiger to comply with conditions surrounding pilot rostering and fatigue management, keeping manuals up to date, change-management processes, additional local staff in "key positions", and changes to the airline's safety management system. CASA will also conduct heightened scheduled and spot checks in the air and on the ground as well as in-flight cockpit observations.

Re-launching with Melbourne-Sydney service only; no low fares

On Friday 12-Aug-2011 Tiger will re-launch services with what it calls a "simplified flight programme in order to focus on flying popular and profitable routes". Tiger will offer three return flights between Melbourne and Sydney, increasing to four daily returns on Saturday and then five daily returns from 18-Aug-2011. Tiger said in a statement it would shortly announce services to other destinations.

Prior to grounding, the Melbourne-Sydney service was Tiger's most popular route by frequency and second largest by available seats. The route accounts for the largest number of passengers of any route in Australia and is the fourth most popular in the world.

In selecting Melbourne-Sydney as its inaugural re-launch route, Tiger is banking on the route's existing high demand, often last minute, to compensate for short lead-in sale times. Until the ban was lifted on Wednesday and Tiger reopened its website for sales, the carrier had not sold any tickets since early Jul-2011.

While industry watchers expected Tiger to offer free tickets or very low fares, Tiger's lowest fare is $49.95 one-way. This is significantly higher than the regular $29.95 one-way sale fares, and even higher than the pre-grounding lead-in $39 fares for Tiger's nearest competitor, Jetstar, the wholly-owned subsidiary of the Qantas Group (although last minute fares were generally considerably higher than that).

Immediately following Tiger's grounding in Jul-2011 fares on the Melbourne-Sydney route experienced a sustained increase in price, according to ITA data, which tracks the fare movements of airlines. Tiger Airways Australia fares are not included, but the role of Tiger in influencing other fares is immediately obvious. A sustained increase occurred, rather than the usual brief rise and fall during the July holiday period. The high fares also carried over into Aug-2011 up until approximately the time of Tiger's return. Tiger's discount, while not as generous as in the past, will still bring lower fares to the market - and, in turn, low fare-seeking passengers to Tiger's flights.

Assuming a take-up, higher than normal lead-in fares will help Tiger begin to turn around its financial situation; the carrier said each week of the grounding would cost it SGD2.1 million (AUD1.64 million). As of last week the carrier refunded SGD19.4 million of revenue ticket and ancillary sales. The carrier expects Tiger to post a loss for the (Singapore) financial year ending 31-Mar-2012 and warned the losses in Australia may not offset profits elsewhere.

Tiger's grounding pushes Australian domestic discount fares to record highs

Tiger may also be capitalising on the upward fare pressure its rivals created after its grounding. Australia's Bureau of Infrastructure, Transport and Regional Economics (BITRE), in its Domestic Air Fare Index for Aug-2011, stated the Best Discount Fare Index (Jul-2003=100) for domestic air travel is still at a record high in recent years despite a 2% drop from levels in Jul-2011 during the popular month-long travelling season. The best discount fares are up 20% from Aug-2010 levels and 11% from Aug-2009 levels.

Australia domestic air fares (best discount): Aug-2006 to Aug-2011

Source: Australia's Bureau of Infrastructure, Transport and Regional Economics

Combined with the small dip, it is evident airlines are holding on to pricing advantages started during Tiger's grounding but were prepared to relinquish it this month when Tiger had been expected to return to service - previously at the beginning of Aug-2011.

Discount fares this month are also higher than in Jun-2011, despite fares traditionally making a significant drop in August from June levels, as has occurred since Tiger's Nov-2007 entry into the market. However, this month's fares are still 25% lower than Aug-2007 levels, prior to Tiger's launch, giving credence to Tiger's claim that its entry has lowered fares and its grounding prompted increased fares.

Australia domestic air fares (best discount) typically dip in August compared to June

Index: July 2003 = 100. Source: Centre for Asia Pacific Aviation and Australia's Bureau of Infrastructure, Transport and Regional Economics

Tiger Australia has distributed "an open letter to all Australians" in which it cites a Goldman Sachs report finding competitors have raised fares by "upwards of 30%".

These higher fares naturally correspond to higher yields, and as Tiger returns to the market and brings back competition and lower fares, other airlines should be prepared for their yields to once again come under pressure, although Tiger's temporarily limited route structure will limit that impact.

Focus on Melbourne Tullamarine as Adelaide and Melbourne Avalon bases cut

Tiger will initially only operate at and have crew at its home base of Melbourne Tullamarine, closing its Adelaide base and "temporarily suspending" services from nearby Melbourne Avalon. In doing so Tiger continues to undo much of the past three years' high growth, although that growth did not always come with positive returns or strong operating performance.

Previously Tiger's strategy had been to launch new bases with at least two aircraft and grow the base to five aircraft, the number a low cost operator would need to achieve effective unit costs. Focussing on a single, Melbourne Tullamarine, base should allow Tiger to regain control on costs.

Prior to its grounding Tiger announced it would close its virtual base at Sydney. These supported services to Brisbane and the Sunshine Coast, with flights operated via aircraft rotations from other bases. They consequently became exposed to rolling delays, leading to considerable passenger dissatisfaction and bad press. Operating those flights punctually "proved more challenging than anticipated" Tiger said in a statement at the time.

Tiger Airways Australia pre-grounding route network in Jun-2011

Source: Tiger Airways Australia

Prior to Tiger's grounding Tiger was expected to close its Adelaide base. Last week Tiger confirmed it initiated discussions with the South Australian government over the state's AUD2.25 million grant to Tiger for establishing a base in the state "on condition that certain terms of the grant are met", Tiger said. "These discussions are ongoing and a conclusion has yet to be reached."

Suspending Avalon services, and not closing the base outright, leaves open the possibility for Tiger to resume services or delay talks with Avalon Airport about refunding grants and incentives, similar to those with the South Australian government.

While Tiger had boasted of Avalon's lower operating cost and lower passenger vehicle parking costs, actual operations were more difficult. The lack of fuel pumped at Avalon airport required it to be trucked in to the airport at an additional charge of 7-8 cents a litre, Avalon chief executive Justin Giddings has said. Tiger acknowledged at the Avalon base's Nov-2010 opening that fuel costs there were affecting the carrier. "It is quite serious an issue for us. The cost of fuel delivery is very high here," then-managing director Crawford Rix said.

Additionally, Avalon was due to enhance in the short-term ground transportation links beyond the limited bus service from the Melbourne CBD, 50km away, but the enhancements have not yet materialised.

Tiger capacity at Perth and Queensland cut back most and axed routes return to monopolies and duopolies

The biggest losses for Tiger as measured by the proportion individual routes accounted for of overall ASKs in Jun-2011 are flights from Melbourne to Perth (13%), Brisbane (10%), Gold Coast (6%), and Cairns (6%). Tiger's Melbourne-Sydney service in June accounted for 12% of ASKs.

Of the routes Tiger will not currently serve this month, only one (Avalon-Perth) will now have no carrier flying the route, although alternative flights depart from Melbourne Tullamarine.

Two routes will default to monopolies, with only Jetstar serving Avalon-Sydney and only Qantas serving Melbourne-Alice Springs. The fallout is likely to be higher on the Alice Springs route since there are again numerous alternative flights to Sydney from Tullamarine.

Four routes will revert to duopolies (Melbourne to Canberra, Gold Coast, and Sunshine Coast and Sydney to the Gold Coast) while the remaining four axed routes (Melbourne to Adelaide, Brisbane, Cairns, and Hobart) will see service from Jetstar, Qantas, and Virgin Australia.

In early Jun-2011, Tiger announced its intention to suspend four services effective Aug-2011: Melbourne to Mackay and Rockhampton, and Sydney to Brisbane and Sunshine Coast. It also flagged it would move Adelaide, Brisbane, and Gold Coast flights from Melbourne Avalon to Melbourne Tullamarine. The Mackay and Rockhampton suspension saw Tiger completely withdraw from those two Queensland markets.

Carriers that will continue to serve recently suspended Tiger Australia routes

Source: Centre for Asia Pacific Aviation and Innovata

Tiger Australia fleet reduces as two A320s dispatched to Asia

As a result of operational restrictions, Tiger will reduce its Australian fleet of 10 A320s to eight. The two surplus aircraft will be "redeployed to other airline businesses in the Tiger Airways Group," Tiger said in a statement. This is a further shrinkage of Tiger Australia's fleet as the carrier had hoped to induct two A320s into service this autumn for a new Brisbane base but could not because CASA's Mar-2011 show cause notice restricted aircraft expansion. In May-2011 Tiger confirmed those two new A320s would be redeployed to Asia. Tiger Australia's fleet is now two-thirds of what it had planned it to be.

The additional aircraft in Asia may pose a burden for the Tiger group, which has not yet even allocated a base for three of the nine brand-new aircraft joining the company this financial year. With the two A320s from Australia, the Tiger Group will have five currently unallocated aircraft in Asia.

Although local press reports suggested the carrier would face contract difficulties with leasing companies to re-deploy Australian-based aircraft, Tiger Singapore's new interim group CEO, Chin Yau Seng, said last week there were no such restrictions.

Tiger Australia brand may change

Although Tiger Australia will re-launch with its full branding, when Mr Chin was asked last week if the Australian subsidiary could be re-branded, he only acknowledged Tiger was working on a "number of initiatives", which he declined to specify.

Tiger to stay in Australia - with "enhanced" punctuality and reliability

Since the Jul-2011 grounding Tiger has said it remains committed to the Australian domestic market, refuting industry views it will exit the market. Tiger reiterated this stance when announcing its resumption of services. "Tiger Airways Australia is committed to a safe, viable and long term future in Australia. The airline remains committed to regaining the confidence of its customers through an enhanced focus on punctuality and convenience, while continuing to offer Australia's most affordable air fares." Perhaps the biggest public concern with Tiger's previous operations was its poor on-time performance and generally unreliability. The new leadership in Singapore is clearly prepared to address this as a senior issue.

While Tiger may remain committed to the Australian market, the imposed limit of 18 sectors a day does not financially support a fleet of eight aircraft. Tiger must work to ensure CASA-imposed conditions on its AOC are met and the carrier conducts general safe operations not only to ensure a safe operation but for its unrestricted operating schedule to be restored. CASA Director of Aviation Safety John McCormick warned yesterday, "Any failure to comply with these conditions will be taken very seriously." Tiger will undoubtedly need to be on its best behaviour for coming months.

Regaining commercial viability must now be seen as a medium term goal at best for Tiger Australia. The very fact that it has not immediately pursued the course of extra deep discounts suggests a number of things: in addition to performing carefully for CASA's benefit, restoring popular confidence through the resultingly lighter loads is important to the newly metamorphosed operation; and importantly, it would appear to lend further credence to Tiger's long term role in Australia.

Tiger will have to work hard to re-gain the custom of passengers who may still hesitate either for safety reasons or for their treatment during the grounding. But it is hard to see the carrier attracting custom in the short term, other than through substantial discounting. This may be around the corner, as confidence returns to the market and as Tiger's network is gradually restored.