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Tigerair cancels nine A320s - averting excessive capacity in the Singapore market

Tigerair’s decision to cancel nine A320 aircraft that were to be delivered in 2014 and 2015 will provide some much needed relief in the Southeast Asian market, where there are increasing signs of overcapacity. Tigerair should be able to avert a potential bloodbath in Singapore, where its initial fleet plan envisioned an extraordinary nine additional aircraft over the next 13 months.

The cancellations, which were part of a deal with Airbus that includes orders for at least 37 A320neos for delivery from 2018, also give Tigerair more flexibility as it reviews options for its currently unprofitable affiliate in Indonesia. But while the revised fleet strategy improves the group’s outlook, Tigerair still has a host of challenges to overcome.

Tigerair follows larger LCC group AirAsia in slowing down growth for 2014. More adjustments are likely as Southeast Asia’s LCC fleet is still expected to grow by about 17% in 2014.

Tigerair orders A320neos while cancelling remaining A320ceos

Tigerair announced on 24-Mar-2014 the cancellation of its last nine outstanding orders for current generation A320 aircraft (also known as A320ceos) with IAE V2500 engines. At the same time the group has committed to ordering 37 new-generation A320neos with Pratt &Whitney PW1100 engines. Tigerair also gained options for 13 A320neos – for a potential total of 50 aircraft – as well as the flexibility to later switch some of its A320neo orders to the larger A321neo.

The deal with Airbus is essentially a deferral of nine deliveries by at least four years plus 28 new orders. But the transaction will go on the books as nine cancellations for the A320ceo plus 37 new orders for the A320neo. (Airbus has not yet booked the order as for now it is only an MOU.)

As CAPA previously reported, Tigerair has been looking at fleet renewal options over the last several months and was expected to make a decision in 2014. While Boeing was keen to woo Tigerair, following its 2012 victory at another Singapore-based A320 operator, SilkAir, Airbus had a huge advantage in the Tigerair campaign as Tigerair was keen to reduce its near-term commitment for A320ceos.

Cancellation of A320ceo order gets Tigerair out of a vulnerable position

Tigerair was in a vulnerable position for the fiscal year beginning 1-Apr 2014 (FY2015) as the group had several additional aircraft on order and no good options for placing most of them.

Exacerbating the situation, Tigerair agreed to take back during calendar 2014 the five aircraft (two A319s and three A320s) operated by Tigerair Philippines as part of the recent sale of its former Philippine affiliate to Cebu Pacific. With Indonesian JV Tigerair Mandala delaying fleet expansion and with Tigerair Taiwan not expected to launch until late 2014, the group faced a dilemma with no alternative but to add capacity into the struggling Singapore market.

Prior to the nine cancellations, Tigerair Singapore was planning to grow its fleet from 25 to 34 aircraft in a span of just over 12 months (mid Mar-2014 to end Mar-2015). The consequences would have been dire as Tigerair Singapore has already slipped back into the red after adding more capacity than its home market could absorb in calendar 2013.

As CAPA reported on 24-Jan-2014, Tigerair Singapore incurred a SGD17 million (USD13 million) loss in the quarter ending 31-Dec-2013 (3QFY2014) as its load factor dropped by 9.8ppt to 75.8% and its average fare per passenger declined by 16% to SGD100 (USD78). ASKs were up 23% for the quarter and 25% for the nine months ending 31-Dec-2013, outstripping 11% and 16% increases in RPKs respectively.

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

The situation has not improved in early 2014 with Tigerair Singapore reporting an 8.8ppt drop in load factor in the most recent month, Feb-2014, to 74.6% as RPKs were up 14% on a 27% surge in ASKs. For the 12 months ending Feb-2014 Tigerair Singapore's load factor was down 5.8ppt to 78.6% on an 18% increase in RPKs and 26% increase in ASKs.

The airline’s load factor has been down on a year-over-year basis for 11 out of the last 12 months (the only exception was Jun-2013, when Tigerair Singapore’s load factor was up a marginal 0.5ppt).

Tigerair Singapore monthly load factor: Jan-2012 to Feb-2014

Singapore short-haul LCC market will still struggle in 2014, with improvement in 2015

Even with the nine cancellations Tigerair Singapore is likely to struggle in 2014. The carrier is still expected to add capacity at a high double digit rate in 2014 as aircraft are shifted over from Tigerair Philippines and due to the full year impact of the aircraft added in 2H2013.

Ideally Tigerair Singapore should be suspending fleet expansion entirely in 2014, matching the decision by rival Singapore-based LCC Jetstar Asia which is keeping its fleet flat this year at 19 aircraft (includes Jetstar Asia sister carrier Valuair).

A no growth scenario in 2014 for all three of Singapore’s main short-haul LCC players would have enabled the capacity added in 2013 to be absorbed, improving market conditions. (AirAsia is the third main short-haul LCC player in Singapore and has about a 7% share of total capacity at Changi Airport despite not having a local affiliate, compared to about 8% for the Jetstar Group and about 11% for the Tigerair Group, according to CAPA and OAG data.)

But there is now a light at the end of the tunnel. While the Singapore short-haul market will almost certainly continue to suffer from overcapacity for the next several months, Tigerair will finally be able to halt fleet growth and potentially even reduce capacity starting in late 2014.

The hiatus from growth could continue until 2018, when Tigerair is slated to take its first A320neo. This should be more than sufficient time for the market to recover. While Singapore’s short-haul market is relatively mature given the already large LCC penetration rate (over 50%) and small size of the country’s population (about 5 million), there are still growth opportunities in the medium to long term, particularly as LCCs continue to develop connection products that leverage Singapore’s position as a leading transit hub. But the growth in demand has not kept up with the increase in capacity over the last year.

The short-term situation will remain challenging as Tigerair Singapore is now in the process of adding three more aircraft for a total of 28 A320 family aircraft. The three additional aircraft includes two A319s which were returned from Tigerair Philippines to Tigerair Singapore within the last week and one new A320 which had its first flight in Toulouse in late Feb-2014 and is expected to be delivered in late Mar-2014 or early Apr-2014.

Tigerair Singapore

As a result Tigerair Singapore will be operating a fleet of 26 A320s and two A319s at the end of FY2014 on 31-Mar-2014, up 33% from a fleet of 21 A320s at the end of FY2013.

Tigerair Singapore fleet: expected as of 31-Mar-2014

Aircraft In Service In Storage On Order*
Total: 28 0 37
Airbus A319-100 2 0 0
Airbus A320-200 26 0 0
Airbus A320-200NEO 0 0 37

Tigerair Mandala

Tigerair Mandala will end FY2014 with nine A320s and Tigerair Australia will end FY2014 with 13 A320s. The group will also have three remaining A320s in the Philippines for a total group fleet of 53 aircraft.

Tigerair Australia

Tigerair Australia still has six A320ceos on order. Airbus has listed the Tigerair Australia order separately from Singapore-based Tiger Airways Holdings since mid-2013, when Virgin Australia acquired a 60% stake in the carrier.

Previously the entire Tigerair order was combined as one, with 10 additional aircraft due in FY2015 and the final five aircraft from the original 2007 order due in FY2016. The 15 aircraft for FY2015 and FY2016 include the now nine cancelled aircraft at Tiger Airways Holdings, leaving the six for Tigerair Australia still intact.    

Tigerair Australia fleet: as of 24-Mar-2014

Aircraft In Service In Storage On Order*
Total: 13 0 6
Airbus A320-200 13 0 6

Tiger Airways Holdings

With the nine cancellations, Tiger Airways Holdings in FY2015 only now needs to find homes for the three A320s returning from the Philippines. The sale of Tigerair Philippines to Cebu Pacific closed on 20-Mar-2014. While Tigerair Philippines will continue to operate under the Tigerair brand, it is now 100% owned by Cebu Pacific. Cebu Pacific plans to return the remaining three Tigerair-sourced A320s at Tigerair Philippines in 2H2014 as it moves over four of its own A320s to the new subsidiary. (Cebu Pacific operates CFM56-powered A320s family aircraft while Tigerair’s A320 fleet is powered by V2500s).

See related report: Cebu Pacific reports a loss for 4Q2013 but strengthens its position in domestic Philippines market

Launch of Tigerair Taiwan gives Tigerair Group more options

Two of the three A320s now at Tigerair Philippines could end up at Tigerair Taiwan. Tigerair Taiwan is now preparing to launch in 2H2014 with an initial fleet of two A320s. Assuming Tigerair Taiwan is ready to take two aircraft as they come out of the Philippines that would leave just one additional A320 for Tigerair Singapore in FY2015 for a total of 29 aircraft.

Tigerair Singapore could have the opportunity to reduce its fleet in calendar 2015 as Tigerair Taiwan expands beyond its initial fleet of two aircraft. In announcing the establishment of Tigerair Taiwan in early Jan-2014, Tigerair said it expected the new carrier to have a fleet of 12 aircraft within two to three years.

See related report: Tigerair Taiwan and NokScoot usher in more change and growth for Asia’s dynamic low-cost sector

With Tiger Airways Holdings no longer committed to taking any additional aircraft for four years (this excludes the separate commitment at Tigerair Australia), the group will have the option of moving over aircraft to Taiwan from existing affiliates or having Tigerair Taiwan source additional aircraft on the open market. Tigerair Singapore could benefit from a slight reduction but the more likely option would be some or potentially all of Tigerair Mandala’s aircraft being shifted to Taiwan.

Adjustment in fleet strategy gives Tigerair more flexibility in resolving Mandala

Tigerair Mandala is currently under-utilising its fleet of nine A320s, having cut 10 of its 19 routes over the last three months, resulting in about a 40% capacity reduction. While Tigerair Mandala has cancelled a commitment with leasing company SMBC for three additional A320s that were to be delivered in 2014, it has not cut its fleet despite the capacity reduction. (All of Mandala’s nine existing A320s were sourced as new aircraft from the Tiger Airways Holdings order book but its commitment with SMBC was separate and consisted of a mix of new and used aircraft.)  

See related report: Tigerair Mandala slashes capacity and aircraft utilisation levels. Will other Asian LCCs follow?

Tigerair Mandala looks certain to undergo change as the carrier has been unprofitable and both its shareholders, Tiger Airway Holdings and Indonesian investment group Saratoga, are reluctant to put in more capital.

Tiger Airways Holdings has reportedly been looking to reduce or sell its approximately 40% stake in Mandala. The group now favours a new asset light approach to affiliates, which explains its decision to only take a 10% stake in Tigerair Taiwan and sell its entire stake in Tigerair Philippines.

The cancellation of the nine orders with Airbus gives the group more flexibility in reviewing options for Mandala as previously it would have been impossible to take back the nine A320s now operating in Indonesia. While it is still highly improbable that it would take the aircraft back in 2014 – as the Singapore market cannot absorb such a large influx of capacity – such a scenario is now feasible in 2015 and beyond. Several additional aircraft will be needed at Tigerair Taiwan in the 2015 to 2017 timeframe as well as potentially a couple more in Singapore.

Tigerair finally has flexibility with its fleet

Tigerair’s biggest weakness in recent years has been its overambitious order from 2007. As the group initially failed to launch affiliates in other Asian countries and struggled in Australia, including the 2011 grounding of the entire Tigerair Australia fleet, it was forced to add more aircraft into Singapore.

The adjustment in the group’s fleet strategy announced on 24-Mar-2014 finally eliminates this weakness and instead gives Tigerair a potential advantage over Asia’s larger LCC groups – fleet flexibility.

Tigerair now has the flexibility to take a four-year break from fleet expansion but also has the option to lease additional aircraft in 2015, 2016 or 2017 should market conditions warrant. With Airbus starting A320neo deliveries in late 2015, there will likely be attractive lease rates on end of the line A320ceo aircraft should Tigerair find itself again in the position of needing more aircraft. For at least the next year, it will happily take a breather.

Tigerair joins rivals in renewing fleet with new generation narrowbodies

The new commitment for A320neos is also significant for Tigerair as it will enable the group to catch up with its competitors. Tigerair becomes the last of the five LCC groups serving the Southeast Asian LCC market to order new-generation narrowbody aircraft. AirAsia, Lion, Jetstar and VietJet all previously ordered the A320neo while Lion also has ordered the 737 MAX.

Southeast Asia’s three largest LCCs which are not part of LCC groups have also placed orders for new generation narrowbody aircraft – Cebu Pacific (A320neo), Citilink (A320neo) and Nok Air (737 MAX). Tigerair needed to place an order for A320neo or 737 MAX aircraft, which are significantly more fuel efficient and have more range than current models, in order to stay competitive. Of the 23 LCCs operating in Southeast Asia (soon to be 27), Tigerair Singapore, Tigerair Mandala and tiny Golden Myanmar were the only carriers whose parents have not yet ordered new-generation aircraft (the A320neo or 737 MAX and, in the case of the long-haul LCCs, the 787 or A350).

AirAsia, Lion, Jetstar, Tigerair and VietJet now have a combined order book of nearly 1,100 narrowbody jets, according to the CAPA Fleet Database. AirAsia, Lion, Jetstar and Tigerair all have affiliates in multiple Southeast Asian markets.

VietJet will become a group in mid-2014, when it plans to launch its first overseas affiliate in Thailand.

Narrowbody jet current fleet and order book for Asia’s LCC groups

Group Current fleet On order
AirAsia 157 335
Lion 108 534
Jetstar 104 107
Tigerair 52 44
VietJet 11 64
TOTAL 432 1,085

Of the five main LCC groups in Asia-Pacific, Tigerair still has by far the smallest order book. The 37 firm orders for the A320neo, which are slated for delivery from 2018 to 2025, would entirely be for replacements as the group already has 39 aircraft operating in Southeast Asia with number 40 about to be delivered. The conservative approach by Tigerair, with growth aircraft covered only in the options, is in stark contrast to the extremely ambitious fleet plans at market leaders AirAsia and Lion.

There will plenty of opportunities for Tigerair to re-look at expansion later, but for now adjusting to the current market conditions need to take precedence.

More fleet adjustments are needed in Southeast Asia’s intensely competitive market

The recent moves by the Tigerair (including the cancellation of a three-aircraft lease deal at Tigerair Mandala) and AirAsia (which has deferred seven of its 2014 deliveries and is also selling six aircraft this year) groups removes over 20 aircraft that would have been added to the Southeast Asian LCC market in 2014. This is welcome but is not sufficient to stem the current bleeding.

Southeast Asia’s LCC fleet is still projected to grow by 17% in 2014 to about 570 aircraft (see background information). Without the Tigerair and AirAsia adjustments, the growth rate would have been 21% to about 590 aircraft.

There are still too many aircraft coming into the market to mitigate the current overcapacity situation, which has become the prevalent theme across most Southeast Asian domestic and short-haul international markets.

Several of the region’s LCCs have not yet made adjustments, including any of the Lion Air Group subsidiaries or affiliates. The Lion Group still plans to add 48 aircraft in 2014, including 38 in the LCC sector and 10 at its full-service subsidiary Batik Air. The Lion Group now accounts for nearly half of the total projected growth in Southeast Asia’s LCC sector for 2014.

See related report: Southeast Asia low-cost airline fleet to expand by almost 20% in 2014. Are more deferrals needed?

Tigerair desperately needed to wiggle out of its delivery commitment for 2014 as well as secure slots for new-generation aircraft. It has done both in a single deal, improving its still challenging outlook. But short-term obstacles remain for Tigerair and the overall Southeast Asian marketplace.

Background information: SE Asia's LCCs ranked by fleet size

Southeast Asia low-cost carriers ranked by fleet size: projection for end 2014 versus start of 2014

Rank

Carrier

Country

LCC Group

Projected

fleet as of

31-Dec-2014

Fleet as of

1-Jan-2014

1

JT

Lion Air

Indonesia

Lion

105

94

2

AK

AirAsia

Malaysia

AirAsia

76

72

3

5J

Cebu Pacific Air

Philippines

(independent)

48

48

4

FD

Thai AirAsia

Thailand

AirAsia

43

35

5

IW

Wings Air

Indonesia

Lion

34

27

6

QG

Citilink

Indonesia

(Garuda)

32

24

7

QZ

Indonesia AirAsia

Indonesia

AirAsia

30

30

8

TR

Tigerair

Singapore

Tigerair

29

25

9

DD

Nok Air*

Thailand

Nok

26

22

10

OD

Malindo Air

Malaysia

Lion

23

11

11

D7

AirAsia X

Malaysia

AirAsia X

21

18

12

3K

Jetstar Asia

Vietnam

Jetstar

19

19

13

VJ

VietJet Air

Vietnam

VietJet

18

10

14

Z2

Zest AirAsia

Philippines

AirAsia

12

15

15

SL

Thai Lion Air

Thailand

Lion

10

2

16

RI

Tigerair Mandala

Indonesia

Tigerair

9

9

17

TZ

Scoot

Singapore

(Singapore Airlines)

6

6

18

BL

Jetstar Pacific

Vietnam

Jetstar

6

5

19

DG

Tigerair Philippines

Philippines

Tigerair

4

5

20

Y5

Golden Myanmar Airlines

Myanmar

(independent)

4

2

21

OX

Orient Thai Airlines*

Thailand

(independent)

4

4

22

PQ

Philippines AirAsia

Philippines

AirAsia

2

2

23

VF

Valuair*

Singapore

Jetstar

0

0

24

 

Thai AirAsia X

Thailand

AirAsia

2

0

25

 

Thai VietJet Air

Thailand

VietJet

2

0

26

 

NokScoot

Thailand

Scoot and Nok

2

0

27

 

Indonesia AirAsia X

Indonesia

AirAsia

2

0

   

TOTAL

   

569

485

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