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Tigerair Mandala slows 2014 expansion, perhaps giving the lead for Indonesia's other LCCs

Tigerair Mandala has decided to slow its rate of expansion in response to less favourable market conditions in Indonesia. All of Indonesia’s carriers have been impacted by a rapid decline in the Indonesian rupiah, leading to rising costs, while fares remain low with increases difficult to pursue given the competitive landscape.

Tigerair’s Indonesian affiliate ended 2013 with only nine A320s and currently has commitments to add only three additional aircraft in 2014. Tigerair Mandala’s original fleet plan envisioned 12 aircraft by the end of 2013, increasing to 18 by the end of 2014. The carrier could re-look at acquiring more aircraft in 2H2014 but for now is taking a wait-and-see attitude and will fall well short of the original 18-aircraft plan.

As it restructures its network and significantly slows expansion, Tigerair Mandala risks seeing the gap widen with Indonesia’s larger low-cost carriers – Lion, Citilink and AirAsia. Its two main shareholders are unwilling at this point to continue pursuing market share gains at the expense of losses. But neither shareholder is expected to exit with Tiger Airways Holdings remaining committed to the dynamic Indonesian market – despite the planned divestment of its Philippine affiliate.

Tigerair increases stake in Mandala

Mandala Airlines resumed services in Apr-2012 under new ownership with Tiger Airways Holdings acquiring a 33% stake and Indonesian investment group Saratoga acquiring 51.3%. The carrier has since re-branded as Tigerair Indonesia while Tiger Airways Holdings has gradually increased its stake to slightly over 40% as loans have been turned into additional equity.

Creditors to the original Mandala, which suspended services and entered bankruptcy protection in Jan-2011, initially owned a 15.7% stake. Creditors now own about 8% as their shares have diluted while Tigerair gained slightly more than 7% as its loans have turned into additional equity.

Mandala initially re-launched with a fleet of three new A320s sourced from Singapore-based Tigerair. After a slow start, hampered by challenges in re-securing slots at Jakarta, expansion accelerated at the end of 2012 following the delivery of three more A320s from Tigerair’s order book in 4Q2012. This gave the carrier a fleet of six A320s at the start of 2013.

See related reports:

Fleet expansion started to slow in 2H2013

Tigerair Mandala initially planned to double its fleet in 2013 to 12 aircraft with a mix of new A320s from Tigerair and second hand aircraft from leasing companies. But Mandala has not added any aircraft since Jul-2013, when it placed into service its ninth Tigerair-sourced A320 and its third aircraft for 2013.

Mandala initially planned to add three second-hand A320s in 2H2013. But this was revised downward to only one additional aircraft as market conditions soured following the sudden depreciation of the Indonesian rupiah in Aug-2013.

Mandala had expected the one additional aircraft to be delivered in late Nov-2013 but the delivery has been held up by an issue with the leasing company. The aircraft is now sitting at Singapore secondary airport Seletar and should finally be delivered within the next couple of months. According to the CAPA Fleet Database, it is an eight-year old aircraft owned by SMBC Aviation Capital which was previously operated by Jetstar.

SMBC in Nov-2013 announced it had signed lease agreements with Tigerair Mandala for two A320s, including one from the lessor’s own order book with Airbus. The new aircraft is slated to be delivered to SMBC in Apr-2014, according to the CAPA Fleet Database. Tigerair Mandala tells CAPA that it expects to place into service this aircraft in mid-2014 and that it has also committed to leasing a third aircraft from the same leasing company for delivery in late 2014. The third aircraft has not yet been identified but is likely to be new.

Tigerair Mandala fleet summary: as of 15-Jan-2014

Aircraft In Service In Storage On Order*
Total: 9 1 1
Airbus A320-200 9 1 1

Tigerair Mandala takes a break from committing to additional aircraft

Tigerair Mandala is not currently in the market for additional aircraft beyond the three it has already committed to. It now plans to take a wait-and-see approach and monitor market conditions before deciding on whether to lease more aircraft in 2H2014.

The carrier also has decided to not pursue any network expansion – both domestic and international – until there is an improvement in market conditions. Tigerair Mandala is now considering cutting some of its unprofitable routes and rationalising its network to focus on markets where it has a significant presence.

Tigerair Mandala currently operates six domestic and 12 international routes. The carrier could expand in Singapore, particularly on the Singapore-Jakarta route, to further strengthen its position in a market which is strategically important to the group.

Tigerair Mandala could pursue further expansion in Singapore and Hong Kong

Tigerair Mandala currently operates up to 10 daily flights to Singapore, including five from Jakarta, while Tigerair Singapore operates up to nine flights to Indonesia, including four on Jakarta-Singapore. The Singapore-Indonesia market has become intensely competitive as total capacity has increased by nearly 50% since mid-2013, with several carriers including Tigerair Mandala and Tigerair Singapore taking advantage of newly available traffic rights following the signing of an extended bilateral between the two countries.

Despite the market seeing in some cases an irrational level of capacity, Tigerair Mandala is keen to continue expanding on Jakarta-Singapore as the route is strategically more important and seems to be performing relatively better than others.

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Tigerair Mandala could also potentially add capacity to Hong Kong, where the carrier has succeeded at building up a niche in an under-served market. The carrier launched a daily flight from Jakarta to Hong Kong in Jul-2013. It added daily flights from Bali and Surabaya to Hong Kong in mid Dec-2013.

See related report: Indonesia AirAsia and Tigerair Mandala pursue international expansion with new Hong Kong routes

Hong Kong has quickly emerged as Tigerair Mandala’s second largest international market after Singapore and gives the carrier a meaningful 15% share of total capacity between Indonesia and Hong Kong, according to CAPA and OAG data. Tigerair Mandala currently has about a 10% share of total seat capacity in the much larger Indonesia-Singapore market while the Tigerair Group has an 18% share when also including flights operated by its Singapore-based subsidiary.

Tigerair Mandala international capacity share (% of seats) by country: 13-Jan-2014 to 19-Jan-2014

Tigerair Mandala could pull off large domestic trunk routes

In several of Tigerair Mandala’s markets its share is clearly less meaningful. For example the carrier operates just one daily flight on Jakarta-Surabaya, which is Indonesia’s largest domestic route with over 70,000 weekly one-way seats. It also operates only one daily flight on Jakarta-Bali, which is Indonesia’s second largest domestic route with about 60,000 weekly one-way seats.

Tigerair Mandala currently has approximately a 2% share of total capacity on both Jakarta-Surabaya and Jakarta-Bali. It also has one daily flight and about a 3% share of capacity in the fifth largest market, Jakarta-Yogyakarta.

Tigerair Mandala already cut on 8-Jan-2014 services between Jakarta and Medan, which is Indonesia’s fourth largest domestic market. Jakarta-Medan was Mandala’s first route when re-launching in Apr-2012 and had been served with two daily frequencies. Several months ago two other domestic routes which are among Indonesia’s top 20, Jakarta-Padang and Bali-Surabaya, were also cut.

As it currently does not have the capacity to invest in high frequency operations on trunk routes, Tigerair Mandala could be better off withdrawing from larger markets and focusing on routes where it does have a meaningful presence.

Tigerair Mandala competes with six other carriers on Jakarta-Surabaya and Jakarta-Bali. It competed with five other carriers on Jakarta-Medan. Tigerair Mandala's load factor on the route was relatively high but yields were very low, making it impossible to be profitable given the competitive landscape. To effectively compete in these types of markets, several daily frequencies are generally required, allowing carriers to target higher yielding business passengers.

Tigerair Mandala also serves two smaller domestic niche routes, Yogyakarta to Palembang and Pekanbaru, which could be worth retaining as the carrier is able to have a meaningful presence without investing in a lot of frequencies. Both of these secondary routes are served with one daily flight. Mandala is the only carrier currently operating non-stop services between Yogyakarta and Palembang while Yogyakarta-Pekanbaru is also served by Lion Air, which also has just one daily frequency in the market.

From Jakarta Tigerair Mandala also operates two daily flights to Pekanbaru, a smaller trunk route where it is able to capture about a 12% share of total capacity. Jakarta-Pekanbaru is the 13th largest domestic route in Indonesia based on current capacity data from CAPA and OAG.

Network expansion put on hold despite opportunities

Tigerair Mandala has identified several potential new domestic and international markets. Domestically the carrier has been looking at expanding to eastern Indonesia to cities such as Jayapura. Eastern Indonesia is a booming relatively under-served market being targeted by most Indonesian carriers but Tigerair Mandala currently does not have any destinations east of Bali.

Internationally, Tigerair Mandala has been looking at adding more destinations which are now served by the Tigerair Group from Singapore but not yet Jakarta. Tigerair Mandala’s international network strategy of leveraging group network synergies by focusing on Tigerair Singapore destinations – including Bangkok, Hong Kong and Kuala Lumpur – has so far been relatively successful.

But Tigerair Mandala is not prepared right now to invest in any new domestic or international destination. The focus is instead on rationalising the network to focus on building up its strongest existing markets. The new destinations in the pipeline will be re-examined in 2H2014 if market conditions improve.

Tigerair shareholders are committed but don’t want to write a blank cheque

Tigerair Mandala’s shareholders are clearly not in the mood to cover the costs of new markets or rapid expansion. In the first 18 months of operations (Apr-2012 to Sep-2013) Tigerair Mandala incurred losses of approximately USD100 million. While it does not seem that Tigerair or Saratoga are looking to exit or reduce their stakes, there is a desire to keep new capital infusions to a minimum amount. As a result Tigerair Mandala is looking to cut costs, rationalise its network and delay expansion.

After deciding recently to sell its 40% stake in Tigerair Philippines to Cebu Pacific, the Tigerair Group reiterated that it remains committed to Tigerair Mandala. As CAPA recently reported, Indonesia is a more critical market for the group. Indonesia is the largest market in Southeast Asia and has closer ties to Singapore than the Philippines.

See related reports:

With the divestment of Tigerair Philippines and the sale in 2013 of a 60% stake in Tigerair Australia to Virgin Australia, the group’s stake in Tigerair Mandala is now larger than its stake in any other affiliate. In establishing Tigerair Taiwan, which is expected to launch in 2H2014, the group has only taken a 10% stake. This is in line with the group’s new “asset-light strategy,” which favours partnerships with other LCCs and limited rather than big equity stakes. Prior to the deal with Virgin Australia, Tigerair owned 100% of Tigerair Australia.

While Tiger Airways Holdings seems content with continuing to own just over 40% of Tigerair Mandala as Indonesia is an important strategic market, the group is seemingly not willing – for one reason or another – to cover large re-capitalisations. Tigerair and Saratoga are not currently considering bringing in new investors and prefer to maintain the status quo.

While the status quo is being preserved, relations between the two shareholders have not been entirely solid. There have been shareholder issues, some of which remain unresolved.

Saratoga it seems has been particularly reluctant to source additional aircraft from Tigerair’s order book. Tigerair has been keen to place its excess aircraft in Indonesia although with Taiwan launching this need should become less pressing in 2014.

Tigerair Mandala’s management team prefers to source aircraft from leasing companies. Second hand aircraft are cheaper and allow the carrier to diversify its otherwise very young fleet, which has an average age of only one year. But its decision also to source new A320s from leasing companies suggests the deals available on the open market are much better than the rate available when sourcing from Tigerair’s order book

Tigerair Mandala risks further falling behind Indonesia’s other LCCs

With shareholders eager to stop the bleeding, Tigerair Mandala has little choice but to try to control costs and not pursue expansion for the sake of market share gains. But as Tigerair Mandala takes a break from expansion it risks being potentially squeezed out of a competitive market.

Mandala is already by far the smallest of Indonesia’s four LCCs, accounting for less than 4% of total LCC capacity in Indonesia. The Tigerair Group currently accounts for about 5% of LCC capacity in Indonesia compared to about 65% for Lion and 18% for the AirAsia Group.

Indonesia LCC capacity share (% of seats) by carrier: 13-Jan-2014 to 19-Jan-2014

Tigerair Mandala only transported 1.9 million passengers in 2013 compared to an estimated 36 million passengers for the privately held Lion Group. Indonesia AirAsia and Garuda budget subsidiary Citilink have not yet reported traffic figures for the full year but Indonesia AirAsia transported 5.7 million through the first nine months of 2013 while Citilink transported 4.8 million through the first 11 months.

Tigerair Mandala had the highest passenger growth, 454%, but on a very low base with an average load factor of 75.4%. Indonesia AirAsia’s passenger growth was 35% in 9M2013 while Citilink’s passenger growth was 92% for 11M2013. Lion’s passenger traffic grew roughly 10% on a much higher base.

The best Tigerair could hope for is that Indonesia’s other LCCs also slow the pace of expansion and focus less on market share and more on bringing rationality to the market. But this is unlikely given the battles being waged between Indonesian market leader Lion and Asia’s largest LCC group AirAsia as well as between Lion and Citilink.

With Lion, Indonesia AirAsia and Citilink all planning more expansion for 2014, Tigerair will likely see its already small share of the Indonesian market slip further. While unfavourable market conditions have prompted AirAsia and Citilink to cut some unprofitable routes they will almost certainly again add more aircraft than Tigerair Mandala in 2014. Lion, which is a fierce competitor, is even less likely to blink.

Tigerair Mandala’s hopes for more rational behaviour could be dashed

Tigerair Mandala is trying to lead a movement to increase rationality in the Indonesian market but as the smallest of the LCCs its example is less likely to be followed. Since the devaluation of the Indonesian rupiah in Aug-2013 and Sep-2013, the carrier has attempted to raise fares but has had to pull back as other LCCs failed to match the increases.

The rupiah quickly depreciated by about 15% between mid Aug-2013 early Sep-2013 from about 10,000 to about 11,500 per USD. It is currently trading at about 12,000 per USD. As the bulk of their costs are in USD, Indonesian carriers have all seen their costs skyrocket. As fares have not increased and in some cases have decreased, average yield in USD terms have plummeted in excess of 20%.

Tigerair Mandala is now hoping that efforts to add a surcharge for domestic flights will succeed. Currently Indonesian carriers are prohibited from adding any surcharges to domestic tickets, including for fuel, although surcharges are allowed for international flights.

A proposed surcharge of IDR50,000 to IDR60,000 (USD4 to USD5) per hour of flying is likely to be implemented. The surcharge – which would be general and is not specifically for fuel – should help carriers recover some of the extra costs driven by the rupiah depreciation without having to increase fares. While carriers would be free to lower fares to offset the new surcharge this is not as likely as carriers deciding not to match a competitor’s fare increase.

If the surcharge is successful and market conditions improve, Tigerair Mandala could re-look at accelerating expansion for 2H2014. But in the meantime its much larger competitors will continue to expand while also reaping the benefits from any improvement in market conditions.

The reality is Tigerair has an uphill battle if the group is to carve out a meaningful slice of Indonesia’s huge and fast-growing market.

Slowing expansion may be the smart financial move, particularly as the Tigerair Group does not have the deep pockets of Lion or AirAsia. But strategically it could further weaken Tigerair’s already relatively weak position in Indonesia, Southeast Asia’s largest market.

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