Virgin Australia's proposed acquisition of a majority stake in Tiger Airways Australia spells good news for the budget carrier's parent in more ways than one.
At one stroke, the move allows Singapore's Tiger Airways to reduce its exposure to a unit that has struggled to make money and lets it focus on the potentially lucrative Southeast Asian markets.
The company has been kept busy with troubles at Tiger Australia since its six week grounding by the country's civil aviation regulator over safety concerns in July 2011. Subsequently, the capacity restrictions that Australian regulators imposed put a serious dent on revenues and led to several quarters of losses.
Restrictions were finally lifted last week and by December, Tiger Australia will fly 64 sectors a day.
Virgin said on Wednesday, 30 October 2012 that it will buy a 60% stake in Tiger Australia and it is likely to take responsibility for the day-to-day operations. That can only benefit Tiger's "competitive position".
"Now Tiger can expend more time and resources in Southeast Asia, where the market dynamics are changing very quickly. In the low-cost business, it's been who moves first wins and unfortunately, it hasn't been Tiger," says K Ajith, airline analyst at brokerage UOB Kay Hian.
Of high priority for Tiger is to bring its Indonesian and Philippine associates Mandala Airlines and SEAir, respectively, to profitability as soon as possible.
Tiger has already warned, however, that both carriers are expected to continue bleeding for the rest of the financial year, although it remains optimistic about their long-term growth potential.
Tiger completed a deal for a 33% stake in Mandala in January and also increased its stake in Seair from 32.5% to 40% in August.
The group's second quarter results show that Tiger has accounted for its share of Mandala's pre-operating loss of $1 million, which is the cost of its investment in the airline, but has yet to recognise its share of the carrier's cumulative losses of S$9.2 million. On Seair, it has recorded losses of S$3.8 million.
"We will certainly be working on turning Seair and Mandala around," said a spokeswoman, when asked about Tiger's future plans. It will also seek ways to "derive greater synergies" from these partnerships.
Mandala has a fleet of three aircraft and plans to begin operations on its fourth Airbus A320 on new domestic and international routes in December. Seair operates five aircraft and Tiger plans to progressively add new routes to its network.
Getting the duo to turn a profit will be an uphill task, however. The Indonesian market is largely dominated by Lion Air, which has ambitious growth plans, while the Philippines is facing a case of overcapacity with five low-cost carriers in the market.
"The Indonesian market is so competitive and even local carriers like Citilink are losing money. Seair, meanwhile, is a new player on the international scene and the low-cost business is very tough because the dominant players are reaping the benefits," says Ajith.
Tiger could also potentially relook plans to start operations in neighbouring countries.
It had previously announced plans to start carriers in South Korea and Thailand, both of which were eventually dropped because of the economic slowdown and domestic opposition respectively.
"Tiger has done the right thing to partially dump Tiger Australia. Now it must focus on branding and managing its yields," says Ajith.
Source: Air Transport Intelligence news
