A toothless Tiger caught in an aviation duel

Tiger Airways' Australian quarterly figures show just how canny Singapore Airlines was to put the discount carrier under Virgin's wing as it uses both airlines to fight a proxy war with Qantas.

Tiger Airways’ third quarter results help explain why its shareholders were so keen to sell control of the group’s Australian operation to Virgin Australia in what was analogous to a vendor-financed deal.

Last October Virgin announced it had agreed to acquire 60 per cent of Tiger Airways Australia for $35 million, with the potential for an extra $5 million should the business meet performance targets over the next five years.

With that announcement (and a proposed $94 million cash and scrip acquisition of regional operator Skywest) Virgin Australia’s John Borghetti also announced that Singapore Airlines would take up 10 per cent of his airline through a $105 million placement. Singapore Airlines is the biggest shareholder in Tiger Airways, with a shareholding of almost 33 per cent.

Tiger Airways released its third quarter results in Singapore today, posting a $1.6 million profit for the quarter, a big improvement on the $13.5 million loss in the same quarter of 2011-12. For the nine months to end-December, the airline group lost $23 million, again a big improvement on the $68 million it lost in the previous corresponding period.

Within that result, however, Tiger Singapore produced a profit of $21 million for the quarter and a $28 million profit for the nine months (the December quarter is by far the strongest period for airlines).

Tiger’s Australian business, by contrast, lost $10 million in the December quarter and about $32 million for the nine months.

While the business is still rebuilding after its prolonged grounding in 2011 its parent attributed the losses (on revenue that increased 53 per cent relative to the same nine months of the previous financial year) to an 11.5 per cent decline in yield due to "stiff" competition in the domestic market and rising costs.

Reinforcing that conclusion was the fact that the business's load factors were stable despite a doubling of capacity – the domestic price and capacity war that has seen a double-digit increase in capacity in the market has seen Tiger caught in the crossfire between Qantas and Virgin Australia.

With the losses in Australia wiping out the profits from the Singapore-based regional discount carrier the parent, which was forced to raise capital in 2011 by the grounding of its Australian airline, is seeing its equity base eroding and its cash holdings dwindling.

Its equity was reduced from about $315 million to $236 million over the nine months to December and its cash reserves from $114 million to $29.3 million. If Tiger Airways Australia’s losses were to continue, its parent might have to raise more capital.

The problem for the Tiger group in Australia is that Tiger has no competitive weapon it can deploy against Qantas/Jetstar and Virgin other than price. If they keep adding capacity and discounting fares it will continue to be the incidental casualty of their hostilities – its fate is largely beyond its control.

If, and it is no certainty, the Australian Competition and Consumer Commission clears the proposal and the Tiger business in Australia is majority-owned by Virgin, it won’t be consolidated within the Singapore entity’s accounts and its share of any continuing losses would be greatly diminished.

Moreover, if Tiger becomes part of Virgin, Borghetti will be gradually able to withdraw the Virgin brands from the discount end of the market and complete his shift to become a fully-fledged competitor to the Qantas brand, competing for higher-yielding passengers.

Instead of a three-cornered contest on the leisure routes between Tiger, Virgin and Jetstar (and, in recent times, even Qantas) it would be Tiger and Jetstar going head-to-head in a somewhat less intense battle at that end of the market. (That potential diminution in the intensity of competition, if the effective number of competitors in that segment falls from three to two, represents the major threat to ACCC approval of the deal).

Some lessening of that intensity of competition and the synergies from bringing Tiger, already the low-cost operator in the market, into the fold would allow Borghetti a more focused attack on Qantas without quite the same potential for Qantas’ response to undermine his own earnings.

It would certainly create greater brand clarity if Virgin weren’t trying to present itself as both a discount carrier and a credible alternative to Qantas for business and other full fare travellers.

Singapore Airlines’ injection of capital into Virgin and the proposed Tiger Airways Australia deal means that it has switched its backing for a vehicle to create a beachhead within the Australian domestic aviation market from Tiger to Virgin.

Singapore (which very nearly acquired Ansett before Air New Zealand snatched that airline and then destroyed it) has long desired a slice of the Australian market and an ability to put some pressure on its regional rival within its core profit-centre.

If, in the process, it can also put the loss-making Australian arm of Tiger at arms-length from the profitable Singapore-based Tiger business, it would achieve two major objective in the one deal.