Does Tigerair’s Business Have Any Competitive Advantages?

Tiger Airways Holdings (SGX: J7X), popularly known as Tigerair, has been making headlines in the past few weeks. The no-frills carrier had appointed a new Chief Executive Officer on 12 May 2014 after its then-CEO Koay Peng Yen had resigned.

The new CEO, Lee Kik Hsin, is the former president of Singapore Airlines Cargo, a division of the full-service carrier Singapore Airlines (SGX: C6L). Singapore Airlines also happens to be the single largest shareholder of Tigerair with a one-third stake.

The economics of Tigerair’s business

It has been a tough few years for Tigerair with it clocking cumulative losses of S$373 million in the three years ended 31 March 2014. With those figures, it’s perhaps easy to draw some form of connection between them and Koay’s resignation. But, is management the main culprit for Tigerair’s poor performance or is there something else?

Let’s take a closer look into the economics of Tigerair’s business to find out. The study of the economics of a business would often deal with the presence or absence of an economic moat. Some of the more common economic moats include: 1) Having economies of scale; 2) being a low-cost producer; and 3) selling a product or service that has a high switching cost for customers.

As of its financial year ended 31 March 2014 (FY2014), Tigerair has a fleet of 43 planes under its banner (including those of its associates and joint ventures). Meanwhile, regional leaders in the no-frills segment of air transport often have a fleet of around 200 aircrafts each. This makes Tigerair one of the smaller no-frills carriers in the region and as such, it clearly can’t count economies of scale as one of its strengths. In addition, Tigerair’s much larger competitors are also aggressively expanding their fleet, making it tough for the airline to play catch up.

The no-frills carrier business is also largely peddling a commodity product with each airline providing a service that is relatively similar. Therefore, having the lowest costs will be a great advantage for an airline over its competition. In the industry, the “Cost per Available seat-kilometers (ASK)” is a metric that’s commonly used to measure the operational costs for airlines. In FY2014, Tigerair had a cost per ASK of around S$0.067. Unfortunately, some of the airline’s regional competitors have a cost per ASK of only S$0.04 to S$0.05. With operational costs that are some 34% higher than its peers, Tigerair is again clearly not the lowest cost producer. For a quick aside, there’s clearly a lot to be done for the new CEO in terms of bringing down Tigerair’s costs.

Lastly, as mentioned earlier, airlines are in a commodity-like business. Such businesses present very low switching costs for customers as it is easy for a traveller to switch between airlines.

From all the above, it’s easy to see that no real competitive advantage, or economic moat,  exists for Tigerair.

Foolish bottom Line

A business without any economic moat will forever be at the mercy of the general economy. Management, for all their talent and effort, might only be able to influence the fortunes of their company to a very small extent if they accept the company’s fate of being in a commodity-like business with no discernable competitive advantages.

For managements who gradually try to position their moat-less companies toward a niche from which they can prosper, there is perhaps still a chance for success.

In the case of Tigerair, management could perhaps opt to only focus on certain routes in which it can operate with sustainable profitability. If management chooses to build scale to compete directly with the largest low-cost carriers in the region at the same time as the large carriers are also trying to grow their scale, shareholders of Tigerair might need to prepare themselves for a turbulent ride ahead.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.