Jan 08, 2014

    Better for Tigerair to exit the Philippines

    BUDGET carrier Tigerair has finally come out to announce what many in the market had long suspected it would: That it was considering cutting its losses in the Philippines.

    Last week, the carrier confirmed that it was in the midst of negotiating a deal involving Tigerair Philippines, without revealing the interested party.

    Tigerair had invested US$2.5 million (S$3.2 million) to acquire 40 per cent of Tigerair Philippines, which was previously the privately owned SEAir. Former group chief executive Tony Davis had decided to buy into the company in the belief that the move would help Tigerair expand its "paw print" across the vast island nation and beyond.

    After building up Tigerair Philippines' fleet to five single-aisle aircraft, Tigerair now appears to have decided that the associate is unlikely to turn the corner in the short term.

    Cebu Pacific is said to be in talks to acquire Tigerair's stake in a bid to grow market share, according to media reports citing the Civil Aeronautics Board of the Philippines. However, the sale will likely be subject to scrutiny from competition regulators, given that Cebu Pacific is already the largest budget carrier in the Philippines, and is giving state-run Philippine Airlines a run for its money.

    But the sale of Tigerair Philippines would signal something of a departure from the management's stance that it was in for the long haul.

    Tigerair has said the same of its Indonesian investment, where it owns nearly 36 per cent of Tigerair Mandala. It first acquired a 33 per cent stake for a token US$1 in January 2012, before pumping in 104 billion rupiah (S$10.9 million) to raise its stake.

    So what changed in the Philippines - which is (at least on paper) a growth market? There has been no clear answer yet from Tigerair.

    Analysts such as OCBC's Sarah Ong see the sale of Tigerair Philippines as being positive for the group, given that the associate's losses widened to S$9 million in Q2 FY2014, the most recently reported financial quarter, from S$6 million in the previous quarter.

    In addition, Tigerair Philippines remains a relatively small player with a domestic market share of around 5.5 per cent last July, according to data from the Centre for Aviation (Capa) and Innovata. In Q2 FY2014, Tigerair Philippines had just five aircraft - versus a fleet of nine planes in Indonesia - having maintained its fleet size for the last 11/2 years or so without adding more planes.

    But don't expect Tigerair to do an about-turn where Indonesia is concerned.

    Indonesia is seen as a more promising market, with Tigerair's management having said in the past that Tigerair Mandala stood a better chance of swinging into the black before Tigerair Philippines.

    Besides, with Tigerair Philippines continuing to bleed red ink, it is likely that the struggling carrier would have needed a cash infusion down the line.

    If the sale goes through, the Philippines would not be the only ground that Tigerair has conceded of late, having pared its stake in its operations Down Under - where it also suffered losses - to Virgin Australia.

    But what of Tigerair's strategy for a pan-Asian business - part of the reason that it bought the stake in Tigerair Philippines in the first place?

    Capa analyst Brendan Sobie reckoned that the budget carrier appeared more inclined to prowl selectively for opportunities in markets where it can be a niche player - such as its low-risk stake in Tigerair Taiwan - rather than rush into highly competitive territory, given that it has fallen behind regional budget carriers such as AirAsia, Lion Air and Jetstar in terms of overall size.

    Last month, Tigerair announced a slew of strategic alliances to grow its footprint, including a joint venture with China Airlines to set up Tigerair Taiwan. With Tigerair picking up a 10 per cent stake, the move is not expected to contribute heavily to the bottom line, even though it enables the carrier to expand in an asset-lighter way.

    So with the Philippines not exactly being a critical part of Tigerair's portfolio at this juncture, bowing out to focus its attention elsewhere in Asia's fast-growing aviation industry may be a good idea. Perhaps the venture might be a ride better suited to short haul than long haul after all.