Singapore Airlines signals budget determination with Tiger takeover

[SINGAPORE] Singapore Airlines Ltd (SIA) is injecting cash into money-losing Tiger Airways Ltd , signalling its resolve to persevere in the low-cost segment even after the budget affiliate bowed out of three regional markets.

The flag carrier plans to have Tiger cooperate more closely with its similarly loss-making medium- and long-haul budget airline Scoot, people familiar with the company's strategy said. The aim is for a resource-sharing relationship akin to that SIA has with premium regional subsidiary SilkAir, they said.

Bringing Tiger under its control is a gamble for SIA because the budget carrier has a tiny passenger base in Singapore following its withdrawal from other markets. But the budget sector is growing quickly as rising incomes mean low-cost travel is becoming increasingly affordable in Southeast Asia's highly populous countries. "Tiger and Scoot are just distinguished by the type of aircraft and how far they fly. Essentially, they are low cost in model," said one of the people, who were not authorised to speak to the media and so declined to be identified. "The key is operational efficiency - ticketing, check-in, luggage routing." SIA said last week it would raise its stake in Tiger to about 55 per cent from 40 per cent. It would also buy up to S$140 million (US$110 million) of a S$234 million rights issue, taking its stake as high as 71 per cent.

Tiger expanded over the past seven years from its island home into surrounding markets, with the archipelagos of Indonesia and the Philippines offering particular opportunities for growth.

But it lost out to competition from the likes of AirAsia Bhd as well as Lion Air in Indonesia and Cebu Air Inc in the Philippines. It has since exited ventures in those two countries as well as in Australia, leased out excess aircraft and deferred orders to buy more - leaving it once again Singapore-focused. "If you look at the results over the last one to two years, the primary drain has been from most of these overseas ventures," Tiger Chief Executive Lee Lik Hsin said in a conference call after the company released earnings last week. "So that (past restructuring) would certainly put us in a very good position to improve our future performance," said Lee, CEO since May.

Tiger's shares have plunged 40 per cent over the past three months, and its return on equity was negative 93 per cent last year. That makes the stock the worst performer among 34 airline peers across Asia, data from Thomson Reuters StarMine shows.

Tiger has booked a loss in each of the past three years, including a record S$223 million in the year ended March. Including its planned rights issue, Tiger will have raised about S$900 million in less than five years. "If ever there was proof that Singapore Airlines has no business straying from its full service business model, it has been provided by Tiger Airways," Credit Suisse analyst Timothy Ross said in a research report this week. "What continues to bewilder us is why it continues to pump in more cash." A spokesman for SIA said exposure to the low-cost market ensures the group is present in all major passenger segments and provides an additional engine of growth.

SIA's shuffle, however, still leaves Tiger up against competition such as AirAsia. Tiger's 25 planes and Scoot's six pale in comparison to the 160 aircraft across AirAsia brands plus 20 at long-haul arm AirAsia X Bhd. "There is little point in going in and trying to take them on," said one of the people familiar with SIA's strategy. "The question then is where the growth will come from." "Singapore has only a small base. That is arguably the biggest challenge facing Tiger in the coming months and years, and they still don't have an answer for that."


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