Chin Yau Seng, CEO of problem plagued budget carrier Tiger Airways Holdings, must have heaved a great sigh of relief on the evening of Nov 15 after receiving permission from Australia's Civil Aviation Safety Authority (Casa) to add more flights and take on a maximum of 32 sectors a day. On the morning of that same day, he had just admitted to reporters that the group's Australian operations have continued to be loss making owing to restrictions following a suspension by Australian aviation authorities over safety concerns in July and August. 'At 22 sectors a day, there is no way we can make money.' Indeed, the green light to bump up the number of flights could not have come at a better time for the carrier. Its Australian services, launched in November 2007, had yet to turn a profit, although it had quickly expanded to three bases ' two in Melbourne and one in Adelaide.

In fact, in early 2011, Tiger Australia reportedly had been scoping out a location for a fourth base Down Under, as the carrier operated 10 aircraft with 21 routes crisis crossing the country. But the six week suspension, at a cost of $2 million a week, effectively sank any hopes of the unit swinging into the black. After negotiations with Casa (led by former group CEO Tony Davis, who was moved to Melbourne to take charge), the suspension was lifted but with strict restrictions. Tiger was forced to cut back to 18 flights and could only operate out of Tullamarine airport in Melbourne. With limited flights, and only operating eight out of its 10 aircraft that are based in Australia, Tiger was also unable to take advantage of the Qantas Airways fracas last month, when thousands of passengers in Australia were stranded following a stand off between the flag carrier's management and employees. The curtailed capacity and under utilisation of its fleet, compounded by consistently high jet fuel prices of about US$130 per barrel, has led Tiger Australia to post a $27.2 million operating loss for the three months to September.

However, Chin remains optimistic. 'Demand wise, we are quite encouraged by the resumption of services by Tiger Australia. Load factors have been picking up on a month-to-month basis; we think that demand is still holding [up] especially for our segment of the market,' says Chin. 'What we see is that an LCC (low-cost carrier) operating point-to-point can actually do decent business. Unfortunately, we've been hit by quite a number of events, some out of our control.' Is the worst over for Tiger?  How can it catch up with its fast-growing regional LCC competitors? Can the new management win back the confidence of investors? With all the focus on Tiger Australia, it may have come as a surprise to some in the market that Tiger Singapore had been struggling as well with high fuel prices and slack demand.

The local carrier posted $12 million in operating losses, which it attributed to fuel costs, lower passenger yields and lower load factors. Despite tough operating conditions, Tiger Singapore had increased its capacity by 64% with the addition of six aircraft in 2H of its financial year, bringing its fleet size to 20 airplanes. Passenger load factors were just 76% in August, below the 80% breakeven mark, and 78% in September. Tiger has also increased frequencies on a number of routes and introduced new services, such as to Cebu and Davao in the Philippines and to Bangalore in India.

'Demand on new routes and increased frequencies did not catch up with Tiger's new capacity,' write CIMB Research analysts Daniel Lau and Raymond Yap in a Nov 16 note. (See report 1 and report 2) In 2Q 2012, Tiger saw overall passenger numbers decline more than 23% y-o-y to about 1.1 million. Load factors were down 7.3 percentage points to 80%. While the average passenger fare held steady from the year before at $80 per passenger, the cost per seat jumped nearly 35% to $110. As a result, Tiger's cost per available seat kilometre rose 20% to 6.87 cents, from 5.72 cents in 2Q 2011. 'We don't really operate a very high margin business,'Chin adds. 'The margins were also chiselled away by the high fuel prices.' The group's total revenue for the quarter fell 23.4% y-o-y to $109.9 million, resulting in a net loss of $49.9 million in 2Q2012, compared with earnings of $14.1 million the year before. There were exceptional losses of $8.4 million, including a loss on sale of aircraft, as well as foreign exchange losses of $7 million. Tiger has also cautioned that it expects to make a significant net loss for the full financial year that ends in March 2012.

Its latest quarterly result reported that operating statistics for Asia and Australia, which showed that marginally more passengers flew Tiger for the 12 months to Oct 31, compared with the same period the year before. On a monthly basis however, passenger numbers fell 10% to 408,000 compared with October 2010, while load factors also declined, falling 10 percentage points y-o-y to 77%. Still, the carrier says its Australian operations are seeing improving load factors compared with those in August and September. Chin acknowledges that the airline's continued aggressive capacity expansion is probably ill-timed, but says Tiger will still take delivery of aircraft that have been committed to. Four jets will be delivered this financial year, although one plane will be returned to the lessor. That makes a fleet of 35, but Chin says the airline is gradually building up demand. 'We're entering the third quarter of the financial year, which is running into the year-end peak period,' Chin says. 'So, we are hopeful that we'll do better.'

Meanwhile, Chin has the twin tasks of getting enough people to fly Tiger Singapore and Australia again, as well as expanding into the region against rivals Malaysia's AirAsia and Qantas' Jetstar Asia. Tiger is finalising its acquisition of a 33% stake in Indonesia's Mandala Airlines, which is being restructured for a relaunch early next year. Analysts note that Tiger plans to transfer three or four aircraft to be based in Indonesia for the launch; however all Indonesian airlines are required to operate 10 planes and own at least five in order to maintain their Air Operating Certificates (AOC). Still, Chin says Mandala is on track to obtain its AOC in time for its launch.

In the Philippines, Tiger cleared a major hurdle in its domestic flight partnership with Southeast Asian Airlines (SEAir), after the Civil Aeronautics Board lifted the cease-and-desist order that prohibited SEAir from using jets leased from Tiger for flights out of Manila to Cebu and Davao, which would be sold on Tiger's website. The aviation regulator's order had come after complaints that the partnership would violate cabotage restrictions applied to foreign firms. As CIMB Research notes, Tiger is now likely to proceed with its 32.5% stake acquisition of SEAir, although it could be some time more before it is finalised. 'Tiger is only interested in SEAir's A320 fleet operations. SEAir will have to carve out its twin turbo-prop fleet from existing operations before Tiger is willing to invest,' Lau and Yap say. (See Report 1)

'In addition, Tiger's acquisition is still subject to regulatory approval and fierce opposition from incumbents can be expected.' Indeed, Tiger has had problems with domestic carriers fighting its expansion onto their turf. At end 2008 for instance, plans for an Incheon based joint-venture carrier were abandoned following moves to block it by South Korean airlines, although at the time, the carrier said that the worsening global economic situation was 'not conducive' for the venture.

More recently, Tiger has been struggling with efforts to set up a joint venture with Thai Airways. Thai Tiger was to have been launched in January, but the proposal has yet to get the stamp of approval by the Thai government. While Tiger says it is still in talks with the authorities, some industry observer shave given it up for lost. Thai Airways said in August it will start flying its own budget carrier, Thai Smile, next July. And last month, it announced plans for an additional, even lower-cost carrier as it fights to regain market share lost to LCCs.

Whatever the case, Chin clearly has his workcut out for him. The former CEO of Singapore Airlines' regional subsidiary, Silkair, was first appointed to head the group as interim CEO in July. His appointment from the SIA group had been seen as the national carrier, which had the single largest stake of 33% in Tiger, taking an active role in the LCC's management. But Chin soon took over completely when Davis, the brash self-confessed 'LCC purist' wholed the carrier from the start-up phase to its regional expansion, left to join airline investment firm Irelandia Aviation, one of Tiger's original shareholders.

Over the past six months, shares in Tiger have taken a severe beating (see chart left), trading at a low of 63 cents on Oct 18, as the airline struggled with one setback after another. While the counter gained some ground last week, following the increase in the number of Australian sectors it can operate in, it is still trading at less than half of its $1.50 listing price. However, analysts note that initiatives to improve its balance sheet are in place, including a rights issue last month with $155 million in proceeds. Furthermore, Tiger will enter into12 year operating leases for eight of the 10 new aircraft being delivered in FY2012, which analysts note will improve the group's cash flow and help finance future commitments. In Australia, Tiger beefed up its management team including hiring Andrew David to head the relaunched unit. David was formerly chief operating officer at rival Virgin Blue, but it will still be some time before Tiger Australia becomes profitable. 

DBS Vickers analysts Suvro Sarkar and Paul Yong expect five out of the 10 aircraft stationed in Australia to be idle as the removal of sector limits will take time. In addition, given the sale-and-lease back arrangements, aircraft expenses would increase. The brokerage has cut FY2013 earnings estimates by 42% but maintains its 'hold' call on the stock, with a price target of 71 cents. 

CIMB Research expects losses to persist, although not as severe as in 2Q 2012. 'Tiger Australia will only be able to break even if it resumes full operations of 66 sectors a day,' say Lau and Yap. Given lower aircraft utilisation and passenger yields, they are expecting losses of $88 million on the back of $731 million in revenue in FY2012, before a reversal in FY2013 with $13.99 million in net profit after $1.1 billion in turnover. 'Though news flow could be incrementally positive, we continue to see operational risks. (See report 2)

In view of uncertainties on the macro front, this is certainly not a time to make bets on a loss-making airline.' The brokerage has an 'underperform' call on the stock with a lowered price target of 50 cents, based on eight times CY2013 price-to-earnings ratio, or the industry's four-year historical forward average.

Source : TheEdge Singapore

Other Analyst report; Phillip Capital - Tiger Airways Holdings Ltd ' Deeper losses than expected (Maintained HOLD)