Friday 20 May 2016
Tigerair’s promising new role as Scoot feeder
After a difficult few years of losses and unsustainable operations, Ishka believes Tigerair has found a reasonable and effective business niche within the Singapore Airlines portfolio. In addition, the airline also managed to post a net profit, albeit just marginally, during the financial year ending 2015/16 as a result of the restructuring and reorganising programme undertaken in the past few years. Ishka believes that the biggest challenge facing the airline is capacity management as several additional aircraft will enter the fleet in the coming two to three years. If it manages to do that successfully the airline could cement a successful niche position within the highly competitive Southeast Asian market.
Better suited being part of SIA Group
Tigerair is now (since May 2016) a wholly owned subsidiary of the Singapore Airlines Group (SIA Group) and has been positioned as a short-haul no-frills carrier within the SIA portfolio, that primarily consists of Singapore Airlines (SIA) as the full-service premium airline, SilkAir as the regional full-service premium airline and Scoot as the long-haul LCC, among other airlines. Tigerair is increasingly acting as a feeder carrier to the long-haul destinations of Scoot. With both Scoot and Tigerair being placed under a new single holding company, Budget Aviation Holdings, there can be greater synergies and cost savings as common functions such as marketing, sales, IT, operations and planning will be integrated. In addition, a common management team will ensure congruence in commercial objectives resulting in better network planning and capacity utilisation for both the airlines. Ishka believes there is merit in this strategy as Scoot can leverage Tigerair’s short-haul network served by A320s, complimenting its own long-haul LCC network served by B787s.
Reasonable fundamentals just got better
The majority of Tigerair’s recent problems were as a result of its ventures in Australia, the Philippines and Indonesia. During FYs 2013-15, around SGD384m of losses that Tigerair incurred were related to associates alone (either as Tigerair’s share of losses or shut-down costs associated with these ventures), a significant portion considering Tigerair’s net loss during that period was SGD533m. Discounting these losses and the losses that Tigerair has been incurring on aircraft (loss on disposal of aircraft & provisions on onerous leases), Tigerair’s fundamentals appear to be have been decent all along and they have improved following the restructuring.
Surplus aircraft still a concern
Ishka sees fleet management as the biggest challenge for Tigerair. Following the reorganisation of the business, Tigerair had to deal with surplus fleet capacity which it managed through sale leasebacks or leasing aircraft out to other airlines. As a result, it had to recognise substantial losses on the disposal of these aircraft. In October 2014, it entered into an arrangement with IndiGo, an Indian LCC, under which 12 of the surplus aircraft were subleased to the Indian carrier. These aircraft will remain with IndiGo until 2018 when they will be returned to Tigerair. In addition, Tigerair also has around 10 A320neos scheduled for delivery between 2017-2019 (it has 39 A320neos on order in total). Ishka anticipates that Tigerair may defer some of its new aircraft deliveries and/or terminate several leases as, barring a significant economic improvement in the region, there would simply not be enough demand for additional aircraft in what is, and will be, a near term saturated market. Any kind of deal like the one with IndiGo would help limit the extent of any potential losses.
What if Tigerair cannot effectively manage its future fleet and oil prices also go up?
As of now, Tigerair’s fundamentals (liquidity, operating margins, leverage) have improved considerably and its placement within the SIA group puts the airline in a relatively stable position, however, future profitability also depends on getting those benefits of integration and capacity management in-line with Scoot. Ishka sees Tigerair’s fortunes being increasingly dependent on the success and growth of Scoot and therefore it would not be a surprise for the Tiger brand to be killed in the future to make way for a single common airline operating as Scoot. In either case, Ishka sees Tigerair operating today in a healthier position than it has ever been in the last 5 years.
The Ishka View
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Tigerair now operating a more sustainable business model.
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Support from the parent SIA should be of significant help during any difficult times ahead.
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Being part of a common holding company should help in better alignment of commercial objectives with Scoot.
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Managing capacity will be biggest challenge going ahead, but Tigerair has already demonstrated it can be done.
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