Singapore Airlines (SIA) has moved one step closer to merging short haul LCC Tigerair and medium/long haul LCC Scoot by creating a new holding company for its two budget airline subsidiaries. Scoot and Tigerair will remain separate airlines for now, with their own operator certificates, but will have a new joint management team led by the Tigerair CEO, Lee Lik Hsin.
The establishment of Budget Aviation Holdings facilitates further integration and will unlock more synergies, particularly on the cost side, as overlapping functions are eliminated. The outlook for Tigerair and Scoot, both of which are now profitable, further brightens as the two integrate but there are still challenges to overcome – including potential overcapacity.
A merger is likely to eventuate but is difficult to implement at this juncture. The anticipated rebranding of Tigerair Australia by Virgin Australia and Tigerair Taiwan by China Airlines should make it easier for the SIA Group to transition to a single LCC brand, with Scoot the likely surviving brand.
On 18-May-2016 the SIA Group announced the creation of a new holding company for Scoot and Tigerair. The group stated that the new structure will allow the two airlines to integrate and share functions such as sales, marketing, IT, planning and operations.
Lee Lik Hsin has been appointed as CEO of Budget Aviation Holdings and Leslie Thng has been appointed as the chief commercial officer. Mr Lee and Mr Thng are long-standing SIA Group executives, Mr Lee having been seconded to Tigerair as CEO for the last two years, and Mr Thng having served the last four years as chief executive (CE) of the SIA full service regional subsidiary SilkAir.
Scoot commenced operations in Jun-2012 as an independent fully owned subsidiary. The group stated that Campbell Wilson, who was seconded from SIA to Scoot and has served as Scoot’s CEO since the start of the pre-launch phase, will return to the parent airline as acting senior vice president sales and marketing.
SIA completes takeover of Tigerair
The establishment of a new holding company is made possible by SIA’s recent takeover of Tigerair. Tigerair launched operations in 2004 with a minority and passive stake from SIA. As Scoot was launched and expanded it became clear that a closer relationship with Tigerair was necessary for Scoot’s long-term success, and that the much-needed alignment between the budget brands could only be fully realised with a takeover.
See related reports:
- Singapore Airlines proposed takeover of Tigerair a scene changing strategic move for the SIA Group
- Singapore Airlines multi-brand strategy evolves with Scoot, Tigerair interlines and loyalty tie-ups
- Tigerair restructures after recording a FY2014 loss. A Singapore Airlines takeover seems sensible
In 2014 SIA increased its stake in Tigerair to a majority 56% but the desired level of integration between Tigerair and Scoot could still not be implemented – in part due to resistance from some independent shareholders and board members.
SIA finally made a move to buy the remaining 44% in Nov-2015, and to delist Tigerair. Some shareholders initially resisted but after a prolonged battle SIA was able to secure the 90% required to delist Tigerair in early Feb-2016.
SIA has since been able to increase its share in Tigerair to 100%. Tigerair was formally delisted on 11-May-2016.
Tigerair takeover was the precursor to the Tigerair-Scoot merger
The takeover of Tigerair unlocks new synergies, some of which will be further facilitated with the new corporate structure. The takeover, and now the new structure, are both precursors to an eventual merger. As CAPA highlighted in the last analysis report on Scoot-Tigerair, in early Feb-2016:
Tigerair and Scoot now have several overlapping functions. A merger would result in synergies on the cost side, as well as better alignment of commercial activities.
Without a merger Tigerair will have its own commercial objectives, which typically favour point to point over network traffic. This is a natural consequence of separately managed LCC subsidiaries.
From the perspective of its own P&L, Tigerair is better off filling up its aircraft with local passengers. This is particularly the case on routes where Tigerair already enjoys high load factors and is unable to expand because of bilateral or slot constraints. Setting aside seats for large groups of passengers connecting from a Scoot flight is not commercially in Tigerair’s interest as it results in a lower yield. However, for the SIA Group overall Tigerair is better off accommodating these passengers.
Scoot particularly needs access to seats beyond Singapore for large tour groups from China, and soon India and Saudi Arabia, in order to fill up its 787s in these markets. A large portion of passengers, or potential passengers, from these markets are not heading to Singapore but to other markets in Southeast Asia that are not served by Scoot.
The new structure essentially ensures that Scoot and Tigerair have common commercial objectives and eliminates the unnecessary overlapping functions. A merger would still be ideal but is not critical, since the new structure and other already ongoing initiatives to align Tigerair better with Scoot will enable the group to unlock most of the potential synergies.
Scoot and Tigerair is interline expected to generate significantly higher traffic volumes
Tigerair completed a transition to Scoot’s reservation system in early May-2016 – a key milestone in the integration efforts. Only approximately 5% of Scoot traffic now connects with Tigerair, although the two airlines have had an interline arrangement since Oct-2012.
The current transfer traffic volumes are insufficient, given Scoot’s network model and commitment to rapid expansion. Scoot is planning to expand capacity (ASKs) by 51% in its current fiscal year ending Mar-2017 (FY2017), resulting in a much bigger operation that may only be viable with more feed from Tigerair.
As CAPA highlighted in a 26-Apr-2016 report, new routes to the secondary Indian destinations of Amritsar and Jaipur will particularly require a high volume of transit traffic as these are very small local markets from Singapore. Scoot is also relying heavily on transit traffic for its new Singapore-Jeddah route, which it took over from SIA on 2-May-2016.
Scoot expands rapidly with 11 new routes in 15 months
Scoot is in the middle of an ambitious network expansion that includes a staggering 11 new routes in only 15 months. The expansion began in Jul-2015 with the launch of Singapore-Kaohsiung-Osaka and Singapore-Bangkok-Osaka, after Scoot added its seventh aircraft.
Scoot’s fleet has since expanded by another four aircraft, enabling the launch of services from Singapore to Hangzhou, Melbourne, Guangzhou and Jeddah. The recently delivered eleventh 787 will also support the launch of services from Singapore to Chennai and Amritsar on 24-May-2016. To Chennai and Guangzhou Scoot has taken over flights from Tigerair, and to Hangzhou it has taken over from SilkAir.
On 17-May-2016 Scoot unveiled plans to launch daily services from Bangkok Don Mueang to Tokyo Narita, from 20-Jul-2016. This new route supplements Scoot’s existing daily Singapore-Taipei-Tokyo Narita service and is made possible by extending Scoot’s daily Singapore-Bangkok turnaround flight, which was initially launched in 2012. Scoot is able to launch Bangkok-Tokyo using its existing fleet by improving aircraft utilisation rates, which have been lower than initially planned in 1H2016, mainly due to delays in securing approvals for Amritsar and Chennai.
In Apr-2016 Scoot had also already announced plans to launch three weekly Singapore-Taipei-Sapporo flights from 1-Oct-2016. Along with Singapore-Jaipur, which is launching on 2-Oct-2016 and will initially be served with four weekly flights, this new route is made possible by the delivery of Scoot’s twelfth 787.
Once the two new routes are launched in early Oct-2016 Scoot will have expanded its network from 10 to 21 routes in less than 15 months, while doubling its fleet. Scoot has not suspended a single route in its almost four years of operations – an impressive achievement.
Scoot network: as of Oct-2016
|Singapore-Gold Coast||12-Jun-2012||5x weekly||4x weekly|
|Singapore-Tianjin||23-Aug-2012||3x weekly||4x weekly|
|Singapore-Qingdao-Shenyang*||11-Jan-2013||4x weekly||5x weekly|
|Singapore-Taipei-Seoul||29-May-2013||3x weekly||3x weekly|
|Singapore-Hong Kong||15-Nov-2013||Daily||5x weekly|
|Singapore-Bangkok-Osaka||8-Jul-2015||3x weekly||3x weekly|
|Singapore-Kaohsiung-Osaka||9-Jul-2015||3x weekly||3x weekly|
|Singapore-Hangzhou||25-Oct-2015||4x weekly||5x weekly|
|Singapore-Melbourne||1-Nov-2015||5x weekly||5x weekly|
|Singapore-Jeddah||2-May-2016||3x weekly||3x weekly|
|Singapore-Amritsar||24-May-2016||3x weekly||4x weekly|
|Singapore-Taipei-Sapporo||1-Oct-2016||3x weekly||3x weekly|
|Singapore-Jaipur||2-Oct-2016||4x weekly||4x weekly|
Scoot to capture nearly 5% share of Singapore market in Oct-2016
Scoot currently operates six 787-9s and five 787-8s. Only one additional 787-8 is now slated to enter service in the fiscal year ending Mar-2017 (FY2017), giving Scoot a fleet of six 375-seat 787-9s and six 335-seat 787-8s. No network changes are planned for the last five months of FY2017 but there is a possibility that Scoot and Tigerair could swap routes to match demand more efficiently.
With the 12 aircraft fleet Scoot will offer approximately 88,000 weekly seats in early Oct-2016. This includes approximately 70,000 weekly seats in the Singapore market – up from approximately 52,000 weekly seats currently – and approximately 18,000 weekly seats on fifth freedom routes.
Following the launch of Bangkok-Tokyo Scoot will have two fifth freedom routes from Bangkok (Osaka and Tokyo), generating 6,700 weekly seats. Following the launch of Taipei-Sapporo Scoot will have four fifth freedom routes from Taiwan (Kaohsiung to Osaka and Taipei to Sapporo, Seoul and Tokyo), generating 11,520 seats.
In Singapore Scoot’s share of seat capacity will increase from 3.5% currently to 4.6% in early Oct-2016, based on CAPA and OAG data. Combined, Scoot and Tigerair will account for a 12.3% share of Singapore seat capacity in early Oct-2016, and the SIA Group will account for a 51.5% share.
In terms of LCC seat capacity in the home market, Scoot and Tigerair will account for approximately a 42% share in early Oct-2016. The Jetstar Group is the second largest player in the Singapore LCC market and will account for almost a 24% share. The AirAsia Group is the third largest player and will account for a 21% share – almost exactly half the capacity of Scoot/Tigerair.
Singapore LCC capacity share (% of seats) by airline: 3-Oct-2016 to 9-Oct-2016
Scoot is now profitable
Along with the one additional 787-8 for 2016, Scoot has commitments for eight more 787s (four -8s and four -9s) for delivery in 2017 to 2019. Its thirteenth 787 is now slated to enter service in Apr-2017 (early FY2018).
Scoot has opted to include cabin crew bunks for some of its FY2018 aircraft, which will give it the option of launching long haul routes to Europe. Leisure destinations such as Athens and Istanbul would be logical.
Scoot posted its first annual profit in FY2016, aided by lower fuel costs and the transition from 777s to the more efficient 787s. Scoot turned an operating profit of SGD28 million (USD20 million) in FY2016, compared with an operating loss of SGD67 million (USD52 million) in FY2015.
Maintaining profitability could be challenging in FY2017 given the rapid capacity expansion. Scoot plans to launch six routes in FY2017 – all in the first seven months of the fiscal year. It will take time for these new routes to mature, particularly as some will rely heavily on transfer traffic. The five routes launched in FY2016 have also not yet reached full maturity.
Tigerair returns to profitability
Tigerair is not in an expansion phase, which should make it slightly easier for the new management team at Budget Aviation Holdings to manage the additional capacity generated by Scoot. Tigerair’s ASKs are expected to be flat in FY2017 as its current fleet of 23 aircraft is maintained.
Tigerair cut capacity (ASKs) by 3% in FY2016. Tigerair ASKs were also lower by 1% in FY2015 as the LCC began restructuring following three years of rapid and overambitious capacity growth.
Tigerair returned to profitability in FY2016, after four years in the red driven by losses at overseas affiliates and overcapacity in Singapore. Tigerair Singapore turned an operating profit of SGD14 million (USD10 million) in FY2016 compared with an operating loss of SGD20 million (USD16 million) in FY2015.
SIA Group operating results by subsidiary: FY2016 vs FY2015
Overcapacity could become a challenge for SIA’s LCC subsidiaries
The outlook for Tigerair should improve further in FY2017; it will benefit from integration with Scoot as overlapping functions are eliminated, and from an increase in transit traffic with Scoot. However, the Budget Aviation Holdings management team will need to address potential overcapacity concerns from FY2018, when excess A320s that were subleased to IndiGo in FY2015 are returned.
IndiGo is currently subleasing 12 Tigerair A320s and only one of these aircraft is due to be returned to their lessor when the three-year sublease contracts expire, while Tigerair is responsible for taking back the other 11 aircraft. Tigerair also has commitments for 39 A320neos for delivery from 2018.
SIA Group Budget Aviation Holdings current fleet and order book: as of 18-May-2016
|Aircraft||In Service||On Order|
Singapore is a relatively mature and intensely competitive market. While there are growth opportunities for Scoot and Tigerair, particularly in the LCC transit space, there will be significant challenges to overcome. The new combined Scoot/Tigerair management team are experienced airline executives but they have limited LCC experience.
Single brand and single AOC will be future decisions
The new Scoot/Tigerair management team and the SIA Group board will also need to decide at some point whether to merge the two airlines formally and/or transition to a single brand.
A single brand would make sense from a marketing perspective and transitioning to a single operating certificate would generate additional synergies. However, neither is critical for the short term as most of the potential synergies can be unlocked through the new holding company and the other integration initiatives.
To transition to a single operating certificate the group would need to transfer slots and traffic rights, and secure approvals from several regulators. This is generally a long and tedious process.
For example, the Singapore-based LCC Jetstar Asia kept two operating certificates for nearly a decade after acquiring the independent Singapore-based LCC Valuair in 2005. It was only in late 2014 that Valuair stopped operating as a separate entity under a holding company structure set up by Jetstar Asia for the two airlines in 2005.
However Jetstar quickly transitioned to a single brand after the Jetstar Asia-Valuair merger, with Valuair adopting the Jetstar brand. The SIA Group could potentially also move to a single brand for Scoot and Tigerair while retaining both operating certificates. A full merger is not necessary to transition to a single brand, although there are some benefits in pursuing both simultaneously.
Tigerair Australia and Tigerair Taiwan rebranding could precede brand decision in Singapore
Scoot is considered the most likely surviving brand. Scoot has been successful at quickly building up its brand while Tigerair has faced brand issues over the years.
Eliminating the Tigerair brand makes sense but is probably not an option for the time being since the brand is also currently used by affiliates in Australia and Taiwan. This hurdle should be eliminated in the coming months as Tigerair Australia and Tigerair Taiwan are expected to be rebranded. (Tigerair Philippines was rebranded Cebgo in 2015 – one year after Cebu Pacific acquired a 100% stake in the airline – while the Indonesian affiliate Tigerair Mandala ceased operations in 2014.)
Virgin Australia now owns a 100% stake in Tigerair Australia and will likely select a new brand which better reflects its ownership structure. Tigerair Australia was initially 100% owned by Tigerair Group; Virgin Australia acquired a 40% stake in Tigerair Australia in 2013 and took over the remaining 60% stake in late 2014.
Tigerair Taiwan commenced operations in 2014 with a 90% stake owned by Taiwan’s China Airlines and only a 10% stake by the Tigerair Group. The relationship between Tigerair Taiwan and the SIA Group has been far from ideal, with Tigerair Taiwan now competing against Scoot and its Thai joint venture NokScoot on several routes. Tigerair Taiwan was notably absent from the Value Alliance, which Scoot launched on 16-May-2016 with seven other LCCs from throughout Asia Pacific, including Tigerair and Tigerair Australia.
China Airlines, which does not have a strong relationship with SIA, is expected to take over the remaining 10% stake in Tigerair Taiwan and rebrand the LCC. It is unlikely that the Tigerair brand will be maintained in Taiwan or Australia, making it easier for Tigerair to adopt the Scoot brand should the SIA Group be ready to make such a decision.
SIA continues to fine tune its LCC strategy; independence is a key ingredient
The takeover of Tigerair and establishment of a new holding company for Tigerair and Scoot marks a new chapter for the SIA Group. SIA is now finally able to pursue full integration between Tigerair and Scoot, resulting in an improved outlook for both LCCs and the group overall.
However this is not the final chapter in the evolution of SIA’s budget airline strategy. A transition to a single LCC brand and full merger are the likely outcome in the medium term.
In the meantime the new combined Tigerair-Scoot executive team will need to manage rapid capacity growth and make sure that an independent LCC culture is maintained, with sufficient separation from SIA.
This has been the cornerstone of Jetstar's success, the model in this region; it created ructions within Qantas when it was established, but the relationship has evolved, with extensive complementarity. For SIA, this degree of separation will not be easy, and any mistakes could quickly erase the achievements that Scoot has made in its highly successful initial four years.