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Tigerair Australia Part 2: LCC looks to Value Alliance to drive near-term growth opportunities

Tigerair Australia has no immediate plans for expanding its international operation, which launched with three routes to Bali in Mar-2016. However, the Virgin Australia LCC subsidiary plans to expand its international network virtually by linking up with partners from the newly formed Value Alliance.

The Bali operation has been relatively successful, despite the use of aircraft wet-leased from its full service, higher-cost parent. However, for now Tigerair Australia is focused on transferring the three Bali routes to its own fleet as part of a transition from A320s to 737s, rather than pursuing growth.

The Virgin Australia LCC subsidiary could potentially pursue international growth once it secures regulatory approvals to operate international services with its own operator’s certificate. Some domestic growth is also possible once it completes the transition from A320s to 737s in 2019.

This is the second of two articles in a series of reports on the outlook for Tigerair Australia. The first analysed its transformation and profitability. In this article CAPA will focus on potential areas for future long-term growth, including in the international market and with partnerships.

See related report: Tigerair Australia Pt 1: Virgin Australia LCC subsidiary completes transformation with first profit

Tigerair Australia tests out the international market

Tigerair Australia commenced operations in Nov-2007 and was entirely a domestic competitor until late Mar-2016, when it launched three routes to Bali. As CAPA has previously highlighted, these flights are for now being operated with three 737-800s wet-leased from Virgin Australia. The aircraft have been retrofitted to 180-seat single class configuration and are crewed with Tigerair Australia flight attendants providing its normal no-frills product, but flown by Virgin Australia pilots.

See related report: Tigerair Australia goes international with 737-800s as Virgin Australia's group strategy evolves

Tigerair Australia currently offers 19 weekly flights to Bali – being five from Adelaide, seven from Melbourne and seven from Perth. These three routes were previously operated by Virgin Australia, which continues to serve Bali from Brisbane, Sydney and Port Headland.

Tigerair Australia international routes ranked by weekly seat capacity: 15-Aug-2016 to 21-Aug-2016

Rank Origin Destination Total seats
1 DPS Bali Denpasar Ngurah Rai Airport PER Perth Airport 2,520
2 DPS Bali Denpasar Ngurah Rai Airport MEL Melbourne Tullamarine Airport 2,520
3 DPS Bali Denpasar Ngurah Rai Airport ADL Adelaide Airport 1,800

Tigerair Australia currently accounts for a 10% share of seat capacity in the Australia-Bali market. Virgin Australia’s share shrank from approximately 20% to 10% as it transferred half of its Bali routes to its LCC subsidiary.

The Qantas LCC subsidiary Jetstar Airways, which has grown rapidly in the Bali market over the past few years, currently has a leading 38% share of Australia-Bali seat capacity. The AirAsia Group accounts for 25% and Garuda has the remaining 17% share, based on CAPA and OAG data for the week commencing 15-Aug-2016.

Australia to Bali one-way capacity share (% of seats) by airline: Sep-2011 to Jan-2017

Tigerair Australia benefits from Indonesia AirAsia X withdrawal from Australia

AirAsia’s share is dropping to 16% at the end of Aug-2016, when Indonesia AirAsia X pulls out of the Bali to Melbourne and Sydney markets. Indonesia AirAsia will continue to operate from Bali to Darwin and Perth.

See related report: Lion Group and Turkish Airlines could fill the void in Australia-Bali market as AirAsia X withdraws

Tigerair Australia expects to benefit from AirAsia X’s withdrawal from Melbourne-Bali. However, Jetstar and Garuda stand to benefit even more as they have more capacity than Tigerair Australia in this market. Jetstar currently operates nine weekly 787-8 flights on Melbourne-Bali while Garuda operates one daily A330-300 frequency.

Tigerair Australia also competes against Jetstar on its two other Bali routes. However, Jetstar has only slightly more capacity than Tigerair Australia on Adelaide-Bali as Jetstar uses A320s on its daily Adelaide-Bali service.

Bali-Perth is an extremely competitive market, with Indonesia AirAsia operating 24 weekly A320 flights, Jetstar operating 20 weekly A320 flights and Garuda operating seven weekly A330-300 frequencies.

Tigerair Australia’s Bali load factor was 76% in May-2016

Tigerair Australia has quickly gained traction in the Australia-Bali market. In May-2016 Tigerair Australia carried 23,000 passengers to and from Bali, equalling the 23,000 passengers carried by Virgin Australia.

Tigerair Australia and Virgin Australia each captured a 10% share of the total Australia-Bali passenger traffic in May-2016, based on Australia BITRE data. Jetstar captured a leading 45% share, while the AirAsia Group accounted for 22% and Garuda the remaining 13%.

Tigerair Australia had an average load factor of 76% on its Bali routes in May-2016, while Virgin Australia had an average load factor of 74%, based on Australia BITRE data. (BITRE data is not yet available for Jun-2016 or Jul-2016.)

Tigerair Australia brand is a better fit than Virgin Australia for the Bali market

The Virgin Australia Group has not grown its traffic or share of the Australia-Bali market by transferring half of its capacity to Virgin Australia. However, profitability has improved while traffic has been flat because Tigerair Australia has a lower cost base.

As Bali is a price-sensitive market Virgin Australia has historically struggled to secure sufficient yields to cover its higher cost structure. Tigerair Australia has proven to be a better fit for the Bali market, enabling Virgin Australia to compete more effectively against Jetstar and AirAsia.

“We are really pleased with how Bali is performing,” Tigerair CEO Rob Sharp told CAPA TV on the sidelines of the 4-Aug-2016 CAPA Asia Pacific Aviation Summit in Brisbane. “There is a lot of Australians that love going up there and that is proving to be the case.”

He added that “ancillary revenues are ahead of expectations and the loads are building”.

Tigerair Australia CEO Rob Sharp discussed the airline’s initial performance in the Bali market, fleet plans and partnerships

Tigerair Australia is not yet able to sell international flights in Indonesia

Mr Sharp said that it typically takes 18 to 24 months to build a brand in a new market and Tigerair Australia expects a similar ramp-up period with Bali. The fact that Bali is almost entirely an inbound market should make it easier for Tigerair Australia as Australians are already familiar with the Tigerair brand.

In fact, Tigerair Australia has been entirely relying on Australia point of sale as it not yet secured approval to sell Bali-Australia flights in Indonesia. So far the airline has only been able to sell one-way and return flights from Australia.

Not being even able to offer Australians one-way flights from Bali – for example to passengers travelling up to Bali on a different airline – has resulted in a directional imbalance. For example, in May-2016 Tigerair Australia had a 83.5% average load factor outbound from Australia to Bali but only a 68.3% average load factor inbound from Bali back to Australia.

Mr Sharp told the CAPA summit that Tigerair Australia is now working on securing Indonesian regulatory approval, which would enable it to begin sales ex-Indonesia. But he said that the current limitation has only had a small impact on its initial performance, pointing out that the outbound load factor would be higher, regardless, in the initial months.

Tigerair Australia applies for upgraded international AOC

While Tigerair Australia is encouraged by its performance in Bali, it has no near-term intentions of adding more flights to Bali or launching other international routes. Tigerair Australia instead plans to wait until it has secured approval from Australian regulators to launch international services under its own operator’s certificate.

Tigerair Australia views the current Bali operation as a test bed, using the Virgin Australia AOC while experimenting with an international product before transitioning the international operation to its own AOC.

Tigerair Australia has applied to Australia’s Civil Aviation Safety Authority (CASA) to upgrade its AOC for international operations. The airline initially secured a domestic-only AOC prior to launching in 2007, and until now never sought an international AOC.

Until 2013 Tigerair Australia was unable even to apply for an international AOC because it was 100% owned by the Singapore-listed Tiger Airways Holdings. Australian regulations allow foreign-owned airlines to operate domestically but require Australian majority ownership for international operations. Virgin Australia acquired an initial 60% stake in Tigerair Australia in 2014 and the remaining 40% in 2015.

Tigerair Australia also needs approval to transition its AOC to 737s

Tigerair Australia has also submitted an application to CASA for transitioning its AOC from A320s to 737s. This is normally fairly straightforward, but as Tigerair Australia is simultaneously pursuing an upgrade of its AOC to international operations the processing of both requests could take time.

As CAPA highlighted in the last instalment, Tigerair Australia plans to replace its fleet of 14 A320s and three wet-leased 737-800s with 17 737-800s over the next three years. The airline is not planning any growth, but simply to replace its A320s gradually with 737-800s on a one-for-one basis.

Tigerair Australia will therefore not have the capacity to expand in the international market unless it reallocates domestic capacity to new international routes. Such a reallocation is not currently on the cards as the airline is focused only on bringing the three 737-800s and three Bali routes onto its own AOC. This will reduce the cost of its international operation, enabling it to improve profitability and potentially to pursue international expansion at a later stage.

Tigerair Australia could potentially serve New Zealand and South Pacific markets

Once Tigerair Australia is ready to pursue international expansion, taking over Virgin Australia’s three remaining Bali-Australia routes would be sensible given that Bali-Australia is a price-sensitive leisure market. Perth-Phuket, which Virgin Australia dropped in early 2016, would also be a sensible leisure route for Tigerair Australia.

New Zealand and South Pacific routes would be the other logical option. Virgin Australia currently operates more than 20 routes to New Zealand and the South Pacific, using almost entirely 737-800s. Several of the smaller leisure-focused routes could potentially be more profitable under Tigerair Australia.

Virgin Australia’s New Zealand and South Pacific routes ranked by weekly seat capacity: 15-Aug-2016 to 21-Aug-2016

Rank Origin Destination

Weekly

seats

1 BNE Brisbane Airport WLG Wellington International Airport 4,576
2 AKL Auckland International Airport BNE Brisbane Airport 4,224
3 AKL Auckland International Airport MEL Melbourne Tullamarine Airport 3,168
4 BNE Brisbane Airport ZQN Queenstown Airport 3,168
5 AKL Auckland International Airport SYD Sydney Kingsford Smith Airport 3,168
6 SYD Sydney Kingsford Smith Airport NAN Nadi International Airport 3,014
7 BNE Brisbane Airport NAN Nadi International Airport 2,662
8 MEL Melbourne Tullamarine Airport NAN Nadi International Airport 2,662
9 AKL Auckland International Airport OOL Gold Coast Airport 2,464
10 BNE Brisbane Airport CHC Christchurch International Airport 2,464
11 AKL Auckland International Airport APW Apia Faleolo Airport 2,112
12 SYD Sydney Kingsford Smith Airport CHC Christchurch International Airport 1,760
13 SYD Sydney Kingsford Smith Airport ZQN Queenstown Airport 1,760
14 BNE Brisbane Airport VLI Port Vila Bauerfield Airport 1,408
15 BNE Brisbane Airport DUD Dunedin Airport 1,408
16 AKL Auckland International Airport RAR Rarotonga Airport 1,408
17 MEL Melbourne Tullamarine Airport CHC Christchurch International Airport 1,408
18 SYD Sydney Kingsford Smith Airport APW Apia Faleolo Airport 704
19 AKL Auckland International Airport TBU Nuku'alofa Fua'Amotu International Airport 704
20 SYD Sydney Kingsford Smith Airport TBU Nuku'alofa Fua'Amotu International Airport 704
21 BNE Brisbane Airport HIR Honiara Henderson International Airport 704
22 CHC Christchurch International Airport RAR Rarotonga Airport 352
23 BNE Brisbane Airport APW Apia Faleolo Airport 352

Tigerair Australia has no intentions to acquire longer-range aircraft

However Tigerair Australia has relatively limited international opportunities, given its fleet. Tigerair Australia plans only to operate older model 737-800s being transferred over from its parent. It has no plans to operate new generation 737 MAX aircraft or any widebody aircraft.

The 737 MAX offers improved range, which would enable Tigerair Australia to operate deeper into Southeast Asia. The 737 MAX would also be more efficient for longer Australia-Bali routes, enabling a denser configuration without any payload limitations.

Widebody aircraft would be needed for even longer routes and would allow Tigerair Australia to compete more effectively against Jetstar, which has a fleet of 787-8s. Tigerair Australia evaluated various fleet options as part of its transformation project but ultimately decided against widebody aircraft and new generation narrowbody aircraft.

“There are no plans at all for widebody aircraft. We are very much focused on small narrrowbody aircraft”, Mr Sharp told CAPA TV.

He added that the platform for any future growth would be the 737-800s. But growth – in either the domestic or international market – is not expected in the near to medium term as the focus is now on transitioning the fleet to 737s.

Partnerships offer a near-term growth opportunity for Tigerair Australia

However, Tigerair Australia is keen to pursue international growth opportunities with partnerships in the near term. Tigerair Australia is one of the eight launch members of the Value Alliance, which was established in May-2016.

See related report: Asian LCC Value Alliance establishes a new direction, using a new connectivity technology platform

Tigerair Australia has not yet begun cross-selling with any of the other seven Value Alliance members. But the LCC is working on implementing the technology that enables the sale of joint itineraries with ancillaries. The first links with Value Alliance members should be activated within the next few months, with Cebu Pacific and Scoot being the initial priority.

Mr Sharp said that the alliance and the associated technology from Air Black Box would essentially open up distribution channels for Tigerair Australia across Southeast Asia that it would not have otherwise been able to add. “It’s quite unique”, Mr Sharp told CAPA TV. “We believe it will be a good value proposition for a lot of Australians who want to travel up to secondary cities in Asia which historically have been a little bit complex to get to.”

The Value Alliance will essentially extend the Tigerair Australia network without the normal complexities of interlines or codeshares. Tigerair Australia has no interest in pursuing interlines or codeshares – and that includes any with its full service parent. Tigerair Australia also has no interest in frequent flier links with Virgin Australia or any potential partner, believing that it is best to stay true to the LCC model and avoid any complexities.

Partnerships to boost domestic profitability as well

Tigerair Australia also expects the Value Alliance to  impact its domestic performance positively as the two Value Alliance members that serve Australia – Cebu Pacific and Scoot – start to offer connections on Tigerair Australia.

Australia’s other three main airlines (Jetstar, Qantas and Virgin Australia) now enjoy carrying passengers that connect from international flights on their domestic networks, including passengers from flights operated by foreign airlines. Mr Sharp estimates that this traffic accounts for 10% to 15% of Tigerair's domestic traffic.

If Tigerair Australia can attract even a modest number of passengers from Cebu Pacific and Scoot it will be able to improve its domestic performance as the inventory it sells in the local market shrinks. The implications from a revenue management, yield, and load factor perspective are significant.

Growth will come to Tigerair Australia – eventually

For now, partnerships represent the low-hanging fruit. Partnerships are a no-brainer, as they enable Tigerair Australia to improve its domestic traffic base and 'virtually' expand its international network without adding cost or diluting its pure LCC model.

While Tigerair Australia is not for the moment focused on organic growth, it is confident that it will be able to pursue expansion opportunities in the medium to long term. The fact that the airline is now profitable, and will have an even leaner cost base once it completes the transition to 737s, should provide a platform for growth from 2019.

“Clearly there will be growth over time. At the moment our focus really is on getting the AOC approvals in place. Without those there will be no growth,” Mr Sharp said. “However we are well on track with that programme and then we can sit back and look where’s next for Tigerair.”

The current conservative strategy is prudent, given that Tigerair Australia has just completed a turnaround and has a complex fleet transition ahead. There is no point risking newfound profitability with ambitious international expansion.

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