SIA Tightens Bond with Tigerair

Singapore’s flagship full-service carrier Singapore Airlines (SGX: C6L) announced last Friday that it would be purchasing 72.33m and 1,800 shares of low-cost carrier Tigerair (SGX: J7X) from Dahlia Investments Pte. Ltd. and Aranda Investments Pte. Ltd., respectively, for S$49m in total.

Dahlia and Aranda are both wholly-owned subsidiaries of Temasek Holdings, one of the major investment arms of the government of Singapore. Temasek itself is also a majority shareholder of Singapore Airlines, holding around 56% of the full-service carrier’s shares as of 20 Dec 2013.

SIA’s current purchase of Tigerair’s shares would bring the former’s stake in the latter to around 40% from 32.7% previously. This would normally trigger a mandatory general offer by SIA for the remaining portion of Tigerair’s shares (which would see SIA offering to buy up shares of Tigerair from all other shareholders besides itself) as defined by local regulations.

But in this instance, SIA would not be required to make the offer after being excused from doing so by the Securities Industry Council.

The purchase of Tigerair’s shares by SIA would be funded by “internal cash resources” and it’s worthwhile to note that the latter has a net-cash balance (total cash minus total debt) of S$4.23b from its last-reported financials. So, the S$49m that SIA has to cough up for Tigerair’s shares would very likely not pose any major strain at all on its finances.

In recent years, it’s perhaps not a surprise to learn that low-cost carriers have been taking away market share from full-service carriers.

Despite being one of the most well-run airlines in the world, SIA’s profits have dipped significantly from S$2.13b in the 12 months ended 31 March 2007 to S$493m over the past 12 months. As a result, its stock has lost some 42% of its value since the start of 2007. That’s certainly a major disappointment when compared with the Straits Times Index’s (SGX: ^STI) slight 3.6% gain in the same period.

SIA’s stake in Tigerair, as well as the establishment of its wholly-owned no-frills airline Scoot, is likely part of the full-service carrier’s way of making sure it can still profit even as low-cost carriers erode the profitability of other full-service carriers.

But that said, Tigerair has also suffered significant losses – totalling some S$150m over its last two completed financial years – and its stock has lost 65% of its market value since the start of Feb 2010 till today (Tigerair got listed only in late Jan 2010).

Tigerair’s latest second quarter results still sees it experiencing great operational difficulties with a quarterly operating loss of S$12.8m so things aren’t turning around for the low-cost carrier yet.

It remains to be seen if SIA’s investment in Tigerair would eventually prove to be a worthwhile use of capital.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.