A new chapter for Tiger Airways

TWELVE years after its launch, Tiger Airways is coming home as it becomes a fully owned subsidiary of parent group, Singapore Airlines (SIA).

When the budget airline took to the skies in 2004 - with a list of shareholders that included SIA and Ryanair's parent company, Irelandia Investments - SIA kept at arms length. But as Tiger scaled up its presence in the region and found itself stumbling under the weight of loss-making ventures overseas and a capacity overhang at home, SIA had no choice but to step in to save its floundering cub.

When it threw down a general offer for Tiger in November last year, SIA was already a majority shareholder with a stake of nearly 56 per cent. This had enabled it to roll out some initiatives aimed at greater co-operation across its carriers, such as boosting connecting traffic between Tiger and Scoot as well as allowing the redemption of KrisFlyer miles on the two budget carriers.

But strategic decisions made by Tiger could only be approved by its independent directors with the budget carrier's best interests at heart, even if it clearly benefited the SIA group.

Recognising that full control was required in order for Tiger to be fully integrated, SIA launched a take-over bid for the budget carrier.

After some resistance from Tiger's minority shareholders - and lobbying from the Securities Investors Association (Singapore) on their behalf - SIA had to up its offer price following a couple of extensions to the offer deadline. In a calculated move, SIA raised its offer price by four cents to 45 Singapore cents, declaring its offer final and signalling it wouldn't make any more revisions. (Tiger was listed at S$1.50 in 2010, although its share price had more or less languished under the S$1 threshold since 2011)

The end outcome was probably better than what SIA anticipated too, as it is now able to scoop up all the remaining shares in Tiger having crossed the compulsory acquisition threshold. This was no doubt a far more welcoming prospect for the group than owning a delisted company with a small group of minority shareholders clinging on.

So with Tiger now officially part of the fold, what is the next step for the budget carrier?

It is no secret that a key part of the strategy will be the ongoing push for stronger collaboration between Tiger and SIA's medium/long-haul budget subsidiary Scoot.

This is crucial, given that connecting traffic across Scoot and Tiger's networks currently stands at over five per cent (at last update). This suggests that Scoot is not seeing as much connecting traffic as AirAsia X is with the AirAsia group's short-haul units.

With a fleet of 10 Boeing 787s currently and ten more to come progressively, Scoot will need Tiger's help to fill seats as it continues to grow its network with new destinations such as India.

One factor that could propel this will be the transition to a joint reservation system for the two budget carriers in April making it easier to sell connecting itineraries, says Centre for Aviation (CAPA) analyst Brendan Sobie. While the two airlines currently use the same service provider, they operate different versions which results in limitations such as the inability to sell ancillaries.

But this alone might not be enough, he adds, as a Scoot/Tiger merger - with common goals and key performance indicators - is what is really needed to lift connecting traffic to the kind of levels the SIA group would want. In fact, some analysts believe it's just a matter of time before Scoot and Tiger are merged, while others have even mooted the idea of a single budget brand at some point.

Meanwhile, in line with the group's portfolio strategy, another initiative being studied is connecting traffic from SIA itself onto Tiger. The group has already started tag-teaming SIA and Silkair with Scoot by selling onto select destinations in Scoot's China network.

But roping Tiger in is trickier, since this could dilute SIA's premium branding and/or cause brand confusion. Unlike Scoot, which operates widebody Dreamliners, Tiger uses narrowbody Airbus A320 family aircraft.

Such a move has to be rolled out gradually - and in specific markets - to make sure passengers understand they are connecting onto a budget product, SIA chief Goh Choon Phong told reporters recently. To raise awareness, SIA would also likely have lean on partners such as agents on the ground so passengers know what to expect.

Separately, the group has already started "mixing-and-matching" demand to different airline vehicles in the group, with Scoot taking over the Hangzhou route from SilkAir, as well as taking over Jeddah from SIA. And this could continue with Tiger, now that it is a full subsidiary, if there are suitable routes.

Financially speaking, the take-over comes at an inflection point. Tiger is on the road to recovery following a drastic restructuring where it hived off overseas units, leased out excess planes and slashed network capacity. In Q3FY16, Tiger's operating profit widened from around S$4 million to S$10 million and some analysts think a full-year profit could be imminent. The huge drop in jet fuel prices should also provide a boost by reducing fuel costs, a major operating expense.

But perhaps more importantly, integrating Tiger within the group doesn't just benefit the budget carrier. A stronger Tiger/Scoot combo is just as important for the SIA group - which is facing its own threats in the form of the Gulf carriers and regional budget airlines - and for Changi Airport.

This is not to say that it will be smooth sailing ahead for Tiger either. The region's LCCs are seeing yields eroded by overcapacity and cut-throat competition, while macroeconomic uncertainties could hamper travel demand going forward.

Farther out, the budget carrier will have to progressively start taking delivery of 37 Airbus A320neo aircraft from 2018 onwards, which will mean more capacity for Tiger's network.

Still, in the near-term, the delisting of Tiger from the Singapore Exchange is the beginning of an important new chapter for the budget carrier, one which starts on a more promising note.

And after suffering turbulence for so long, it must be a welcome relief.

nishar@sph.com.sg

This article was first published on March 15, 2016.
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