24-Jan-2014 9:00 AM

Tigerair 2014 outlook gloomy following 3QFY2014 loss. Is there a silver lining in 2015?

Analysis

Tigerair has reported net and operating losses for the quarter ending 31-Dec-2013 (3QFY2014) as all four of its subsidiaries or affiliates were in the red. The group's core operation in Singapore, which operates half of the group's fleet, was unprofitable for the second consecutive quarter as overcapacity led to a significant drop in both yields and load factors.

The outlook for Tigerair Singapore for 2014 is bleak as market conditions remain unfavourable. The group will be adding several more aircraft into the Singapore market, exacerbating the overcapacity situation.

If Tigerair can weather the current storm, the outlook for 2015 is brighter. Tigerair Taiwan is expected to launch in late 2014, absorbing some of the group's excess aircraft, while Tigerair Australia and Indonesian affiliate Tigerair Mandala should be in a better position following restructurings. The group is also now in the process of divesting its stake in Tigerair Philippines, a positive move but creating a short-term headache as the group will need to redeploy aircraft exiting the Philippines into markets which are already suffering from overcapacity.

Summary

Tigerair Group reported net and operating losses for the quarter ending 31-Dec-2013 (3QFY2014) due to overcapacity and a drop in yields and load factors.
Tigerair Singapore, the group's core operation, was unprofitable for the second consecutive quarter.
The outlook for Tigerair Singapore in 2014 is bleak due to overcapacity and the addition of more aircraft into the Singapore market.
Tigerair Taiwan is expected to launch in late 2014, absorbing some of the group's excess aircraft.
Tigerair Australia and Indonesian affiliate Tigerair Mandala are expected to be in a better position following restructurings.
Tigerair is in the process of divesting its stake in Tigerair Philippines, which will create a short-term headache as the group will need to redeploy aircraft exiting the Philippines into markets already suffering from overcapacity.

Tigerair incurs fiscal third quarter losses at group level, reversing profits from year prior

The Singapore-listed Tigerair Group (also known as Tiger Airways Holdings) reported on 23-Jan-2014 a group net loss of SGD119 million (USD93 million) and a group operating loss of SGD9 million (USD7 million) for the quarter ending 31-Dec-2013 (3QFY2014). Excluding SGD88 million (USD69 million) in exceptional charges the net loss was a more moderate SGD30 million (USD23 million). In 3QFY2013 the group eked out a net profit of SGD2 million (USD1.56 million) and a net operating profit of SGD18 million (USD14 million).

Group revenues were down 31% year-over-year driven mainly by the partial disposal of its Australian affiliate. The Tigerair Group sold 60% of Tigerair Australia to Virgin Australia in Jul-2013.

Tigerair Group financial highlights: 3QFY2014 vs 3QFY2013 and 9MFY2014 vs 9MFY2013

The exceptional charges in 3QFY2014 included SGD30 million (USD23 million) covering its loss related to its planned disposal of Tigerair Philippines and SGD58 million (USD45 million) covering impairment charges related to the continued losses at its associate carriers. Leading Philippine LCC group Cebu Pacific is in the process of acquiring Tigerair Philippines for USD15 million, with the proceeds split between Tigerair Group and the Filipino owners who now own a majority 60% stake. Tigerair says it expects the transaction, which is subject to regulatory approvals, to close by the end of 4QFY2014 (31-Mar-2014).

Tigerair Philippines incurs USD9 million loss in 3QFY2014

As CAPA reported on 14-Jan-2014, Tigerair Philippines has been consistently unprofitable since the Tigerair Group acquired its 40% stake in Aug-2012 with the carrier losing on average approximately USD1 million per month per aircraft. The Tigerair Group reported a loss of SGD4.5 million (USD3.5 million) in 3QFY2014 related to its share of Tigerair Philippines. That equates to a loss of SGD11 million (USD9 million) for Tigerair Philippines, which is the equivalent of about USD600,000 per aircraft per month.

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While the purchase price only covers a small fraction of the capital Tigerair has invested in its Philippine affiliate, the decision to divest improves the group's long-term position as it can focus more on markets of higher strategic importance such as Indonesia. Tigerair could not afford to continue covering hefty losses in the Philippines, where it will continue to maintain a presence without any investment or risk through its new alliance with Cebu Pacific.

But the divestment will be painful from a fleet standpoint as the two A319s and three A320s now operated by Tigerair Philippines will be returned to the group. The two A319s will be returned as soon as the transaction closes. A date for the return of the three A320s has not yet been set but Cebu Pacific says it plans to return the aircraft by the end of 2014, most likely during calendar 3Q2014 (Tigerair's 2QFY2015).

Tigerair Australia and Tigerair Mandala remain highly unprofitable

The Tigerair Group also recorded a SGD7.4 million (USD6 million) loss in 3QFY2014 related to its share of Tigerair Australia, which equates to a total loss of USD14 million for the carrier or slightly over USD400,000 per aircraft per month. Tigerair Australia has been restructuring its network to improve profitability and alignment with new majority shareholder Virgin Australia. While the carrier continues to bleed and also faces challenging market conditions, the shareholders remain confident in Tigerair Australia's prospects for a successful turnaround.

In addition, the Tigerair Group recorded a SGD11.2 million (USD8.75 million) loss in 3QFY2014 related to its share of Tigerair Mandala, which equates to a loss for the carrier of about USD22 million or approximately USD800,000 per month per aircraft. As CAPA reported on 15-Jan-2014, Tigerair Mandala is now in the process of restructuring its network, starting with the 8-Jan-2014 suspension of services between Jakarta and Medan, and is slowing down expansion in a bid to reduce losses.

Market conditions in Indonesia are unfavourable with intense competition, overcapacity on some routes and the sudden depreciation of the Indonesian rupiah in 2H2013 driving up costs. Tigerair Mandala currently only has commitments to add three aircraft in 2014, all of which are being sourced outside the Tigerair Group order book, giving it a fleet of 12 A320s. The carrier's original fleet plan envisioned 18 A320s by the end of 2014.

Tigerair Group CEO Koay Peng Yen said during a 23-Jan-2014 media call to discuss 3QFY2014 results that turnaround efforts at Mandala include focus on improving revenue management and reducing costs. Tigerair Singapore and Tigerair Mandala are also working on a plan to re-time and better spread out flights on Jakarta-Singapore, which is the group's largest route with nine daily flights but has been under-performing.

Mr Koay acknowledged the Singapore-Indonesia market has become challenging, with overcapacity following the signing of a new air services agreement in early 2013. The Singapore-Indonesia market has seen almost a 50% increase in seat capacity since mid-2013, based on CAPA and OAG data. The Tigerair Group currently has 18% of capacity between Singapore and Indonesia and Singapore is Tigerair Mandala's biggest market, accounting for almost 40% of its total capacity.

Tigerair Singapore reports second consecutive quarterly loss

Overcapacity between Singapore and Indonesia also was one of the drivers in the "disappointing" 3QFY2014 result for Tigerair Singapore, which recorded an operating loss of SGD17 million (USD13 million) compared to a SGD27 million (USD21 million) profit in 3QFY2013. Revenues slipped 3% to SGD168 million despite a 9% jump in RPKs.

3QFY2014 marked the second consecutive quarter Tigerair Singapore was in the red. Prior to 2QFY2014 the carrier had been profitable for five consecutive quarters.

Tigerair Singapore financial highlights: 3QFY2014 vs 3QFY2013 and 9MFY2014 vs 9MFY2013

Mr Koay blamed overcapacity for the "double whammy" of lower load factors and lower yields. Tigerair Singapore's load factor dropped by 9.8ppt in the quarter to 75.8% while its average fare per passenger slipped 16% to SGD100 (USD78). Ancillaries per passenger were only up 4% to SGD26 (USD20).

Tigerair Singapore operating highlights: 3QFY2014 vs 3QFY2013 and 9MFY2014 vs 9MFY2013

Tigerair had recorded yield drops in its previous quarters in FY2014 but blamed them on higher airport taxes which resulted when the carrier was forced to move to Singapore Changi Terminal 2 after the Budget Terminal closed in Sep-2012. In discussing its 2QFY2014 results in Oct-2013, Tigerair reckoned it had to drop its fares to make up for the higher passenger service charge at Terminal 2 as its passengers take into account the total cost of tickets, including taxes, when making their purchase decisions. CAPA reported at the time: "But in reality the large influx of capacity and increased competition on several of its routes has impacted Tigerair Singapore's pricing power."

Tigerair could not again make this excuse for 3QFY2014 as the carrier had already moved to Terminal 2 just before the start of the comparison period, 3QFY2013. The 16% drop in yields in 3QFY2014 compared to 3QFY2013 and 9.8ppt slide in load factor provides a stark indication of the serious overcapacity situation in the Singapore short-haul market.

Tigerair Singapore considers redeploying capacity as Indonesia and Thailand struggle

Mr Koay acknowledges Tigerair has been a contributor to the overcapacity situation. Tigerair Singapore's ASKs were up 23% in 3QFY2014 and 25% for the first nine months of the fiscal year. The carrier ended calendar 2013 with 25 A320s, up from 20 aircraft the prior year.

Mr Koay says Tigerair Singapore is now looking at redeploying capacity from markets which are challenging to markets where conditions are more favourable. In addition to Indonesia, Thailand has become a particularly challenging market due to the political crisis in Bangkok. So far Tigerair has only cancelled a total of 10 flights for Jan/Feb-2014 but is looking at implementing additional cancellations.

Thailand and Indonesia are Tigerair Singapore's largest markets, accounting for 35% of the carrier's total seat capacity. Therefore the challenges there pose serious problems for the group.

Tigerair Singapore capacity share (% of seats) by country: 20-Jan-2014 to 26-Jan-2014

Mr Koay says the carrier is considering redeploying capacity to India and China. But while conditions in these two markets may not be as bad they are not great.

The Singapore-India market has also been suffering from overcapacity on some routes, resulting in low load factors. Singaporean carriers also have limited options for expanding in India as most of the routes which are relatively underserved are currently capped by the Singapore-India bilateral.

There are opportunities in the Singapore-China market which Tigerair has been targeting in recent months as it has grown its mainland China network from three to five destinations. But this is a market that has generally been unprofitable for LCCs, resulting in a major pullback by Tigerair rival Jetstar Asia. Competition with Chinese carriers, which compete on price and work closely with the agents that control a large portion of the Singapore-China market, is fierce.

Reducing aircraft utilisation is also an option as three more aircraft are added

Shifting capacity between markets could help slightly but does not eliminate Tigerair Singapore's biggest short-term challenge - its commitment to further increase the size of its fleet. Tigerair Singapore plans to add another three aircraft in 4QFY2014, including one aircraft directly from Airbus and the two A319s coming out of Tigerair Philippines.

Mr Koay says the carrier may reduce average aircraft utilisation rates, which were 12.9 hours in 3QFY2014, during off-peak periods. This would partially mitigate the overcapacity situation but drive up costs, making it challenging for the carrier to return to profitability.

Tigerair essentially finds itself between a rock and a hard place. The group has no choice but to expand the Singapore-based fleet as there are no other options for placing additional aircraft in the group. This is the same predicament the group found itself in during 2013, leading to the 20% plus increase in capacity and contributing to the current overcapacity predicament. Now it has to make the difficult choice of reducing utilisation - a move LCCs generally try to avoid - or further increasing capacity in a market that is already plagued by overcapacity.

The group acknowledges 4QFY2014 will again be challenging stating: "Tigerair Singapore continues to face near-term pressure on yield and load factors in the current seasonally quiet quarter amid an overcapacity situation in the industry."

Tigerair faces more challenging capacity decisions in FY2015

Unfortunately the situation will get worse before it gets better. The Tigerair Group is committed to taking another 10 A320s in FY2015 and has no leases on existing aircraft expiring for the year. The group will also have to take back the last three A320s at Tigerair Philippines during FY2015, giving it 13 additional aircraft.

The group at this point has little choice but to put about another seven A320s into the Singapore market, giving Tigerair Singapore a potential fleet of 35 aircraft at the end of FY2015 on 31-Mar-2015 (assumes three additional aircraft for Tigerair Australia and three aircraft for start-up Tigerair Taiwan). Such a capacity increase could have disastrous consequences. Tigerair should be looking to defer deliveries or offload some aircraft outside the group.

However, there is a silver lining. The group's current commitment with Airbus ends in fiscal year starting 1-Apr-2015 (FY2016), when the last five A320s from its current order book are delivered. At that point Tigerair Taiwan will be up and running and should be able to absorb the aircraft, expanding its fleet from an estimated three to eight aircraft. The group could even look at moving aircraft from Singapore to Taiwan in FY2016, assuming the new carrier is performing well.

The long-term outlook for Tigerair is brighter. The group will have more flexibility to adjust capacity to market conditions from 2015. Tigerair Taiwan represents a smart and low-risk investment in a market underpenetrated by LCCs. Turnaround efforts at Tigerair Australia and Tigerair Mandala should eventually bear fruit. Tigerair has a strong position in its home market of Singapore which should again prove profitable once the current overcapacity situation is resolved.

But Tigerair first needs to survive 2014. Its outlook for 2014 is stormy and the near-term challenges it faces should not be underestimated.

Background information: Tigerair fleet

The Tigerair Group currently operates 51 aircraft, 49 A320s and two A319s, and has 17 remaining A320s on order with Airbus, according to the CAPA Fleet Database. Tigerair Singapore currently operates 25 A320s, Tigerair Australia 12 A320s, Tigerair Mandala nine A320s and Tigerair Philippines three A320s and two A319s.

Of the 17 remaining orders, the group's current fleet plan envisions two deliveries by the end of the current quarter (31-Mar-2014), 10 deliveries in the fiscal year ending 31-Mar-2015 (FY2015) and a final five deliveries in the fiscal year ending 31-Mar-2016 (FY2016). Airbus data lists 10 of these orders at Tigerair Singapore and seven at Tigerair Australia. But some of the orders listed under Tigerair Singapore, as well as some of the aircraft now at Tigerair Philippines, are expected to end up at Tigerair Taiwan. None of these aircraft have been allocated to Tigerair Mandala as Mandala is now sourcing additional aircraft from outside the group, starting with three A320s from SMBC which are slated to be delivered in 2014. (Tigerair Mandala's current fleet of nine A320s were all sourced from the Tigerair Group but the carrier's Indonesian majority owner prefers at this point to lease additional aircraft from outside the group.)

Mr Koay expects the new Taiwanese affiliate, which plans to launch in late calendar 2014, to operate a fleet of three A320s within the first few months and 12 A320s within two to three years. As the group has 13 additional aircraft to place in FY2015, including 10 from Airbus and three from Tigerair Philippines, the anticipated allocation of three aircraft for Tigerair Taiwan would leave the group with 10 additional aircraft for Tigerair Singapore and Tigerair Australia. The most likely breakdown for Singapore and Australia would be seven and three respectively, giving Tigerair Singapore a fleet of 35 aircraft at the end of its fiscal year ending 31-Mar-2015. Based on these projections, Tigerair Australia would have 16 aircraft at the end of FY2015, Tigerair Taiwan three aircraft and Tigerair Mandala 12 aircraft but the Indonesian carrier could potentially source a couple of more aircraft from outside the Tigerair order book.

Tigerair Australia has not provided a specific fleet plan for 2014 beyond the delivery of its 13th aircraft, which is expected in the current quarter, but has said it aims to have 23 aircraft by 2018. Of the seven orders Airbus lists for Tigerair Australia, the CAPA Fleet Database estimates one will be delivered in the 4QFY2014, three will be delivered in FY2015 and three will be delivered in FY2016. That would leave four more deliveries in FY2017 and FY2018 to meet the 23-aircraft goal. These aircraft could potentially be sourced from Virgin Australia or from a new order or new lease commitment.

The Tigerair Group currently has no aircraft commitments beyond FY2015. It has been evaluating new types, including the A320neo. Acquiring used aircraft is also under consideration, potentially some of the A320s coming out of sister carrier SilkAir. A larger order is unlikely given the challenges the group has had in recent years finding markets for the aircraft from its last order, which in hindsight was too big. But there will also be a need to renew the fleet and transition to new-generation narrowbody aircraft, which have already been ordered by Asia's other major LCC groups.