Tigerair buck has to stop sometime

HUGE LOSS: For FY2014, Tigerair posted a group net loss of $223 million, almost five times the previous year's loss of $45.4 million.


    May 09, 2014

    Tigerair buck has to stop sometime

    THE speculation over whether Tigerair CEO Koay Peng Yen jumped or was pushed is irrelevant. The real issue is, after four CEOs and three years of widening losses, how much longer 40 per cent stakeholder Singapore Airlines (SIA) will stomach the red ink.

    To be fair, Mr Koay came with strong credentials from the maritime sector. And he did all the right things. He oversaw the reduction of Tigerair's presence in Australia where the business was facing unprecedented competition and institutionalised hostility.

    The almost $300 million in funds raised following the sale of a majority stake in Tigerair Australia to Virgin Australia and the subsequent restructuring were directed towards potential growth markets in Indonesia, the Philippines and Taiwan.

    More single-aisle planes were ordered, while a sale-and-leaseback strategy helped the company maintain a light balance sheet. Costs were trimmed and more routes were added judiciously, as loads and ancillary income were boosted.

    The "turnaround plan" announced then seemed to be well designed, at least on paper. Alas, the planners did not foresee the devastating financial impact of underwriting not just the leases but also the fuel uptake in Indonesia and the Philippines, where Mandala and SEAir did not have sufficient scale, and were struggling against cut-throat competition and rising costs.

    Meanwhile, overcapacity was hitting the regional low-cost aviation sector. Also, Tigerair still had to account for its 40 per cent share of the continuing losses in Australia.

    Despite being among the biggest operators at Changi, Tigerair Singapore's operation was suffering a combination of overcapacity and sharply declining yields, thanks to competition from AirAsia and a resurgent Jetstar group.

    The dire state of affairs was apparent in recent days when Tigerair announced that it was mothballing eight planes from its Indonesian and Philippine outfits.

    This came as it also unveiled a Q4 FY2014 loss of $95.5 million, caused largely by $52.4 million in exceptional charges and $21.5 million in share of losses of associate and joint ventures.

    For the full year ended March 31, Tigerair posted a group net loss of $223 million, almost five times the previous year's loss of $45.4 million.

    Its latest "turnaround plan" comprised selling a 40 per cent stake in loss-making Tigerair Philippines, making provisions for losses in Tigerair Mandala, where losses over the last two years totalled US$180 million (S$225 million), and rationalising routes. It also cancelled nine aircraft ordered in 2007 and due for delivery in 2014-2015.

    Tigerair now has 44 planes: 27 with Tigerair Singapore, 13 with Tigerair Australia, and four with Tigerair Mandala.

    But is this enough to heal the wounded Tigerair? Has anything changed in the operating environment which provides cause for optimism after a decade of largely losses? Is Mr Koay's departure an ominous indication of Tigerair's fate? Or is the appointment of 20-year SIA veteran Lee Lik Hsin a sign of impending change in strategy and direction?

    Speculation among industry watchers is rampant, as expected under the circumstances.

    Mr Lee has held various appointments in SIA, including senior vice-president of corporate planning, regional vice-president (North Asia), regional vice-president (West Asia & Africa), vice-president of company planning & fuel. Most interestingly, perhaps, he has been a director at Scoot Pte Ltd.

    Could his appointment herald a closer relationship between Tigerair and SIA-owned Scoot?

    The two airlines began offering joint itineraries and seamless transfers at Changi in late 2012, but have yet to generate meaningful volumes.

    Could Mr Lee push this more forcefully? SIA CEO Goh Choon Phong has himself expressed desire to see Tigerair and Scoot working hand in glove.

    Could such a move also require a potential restructuring of Tigerair? A delisting and subsequent operational merger with Scoot, perhaps?

    With a net asset value of 28 cents as at March 31 this year versus a share price of 40.5 cents, a delisting might not go down well with shareholders who have held on since the initial public offering launch at $1.50 in January 2010, and have even seen their stock rise to as high as $2.25 in June 2010.

    But a merger with Scoot and more support from SIA could be a good thing for Tigerair. The formula worked for the Qantas-Jetstar group.

    Currently, Tigerair finds itself neither embraced nor ignored by its "parent". Some reckon that SIA should just give up on the venture and offer up its stake in Tigerair via an "in-specie" distribution to its shareholders, just as it did with SATS Ltd. But that could lead to Tigerair's shares ending up largely in the hands of non-Singaporeans, thus endangering its air operator certificate status as a Singapore carrier.

    There are no easy options for Tigerair - and SIA. Tigerair was envisaged as an integral part of SIA's "portfolio" approach to its airline business. But while the full-service long-haul (SIA) and regional (SilkAir) parts of this portfolio seem to be holding up in the face of competition, the budget segments - and especially the short-haul leg - remain weak.

    Tigerair, in its current state, is proving to be a heavy drag - and a distraction - on the overall business. The buck has to stop somewhere, sometime.