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Tiger Airways Holdings Limited Has Managed To Stave Off Trouble For Now – But What’s Next?

Low-cost carrier Tiger Airways Holdings Limited (SGX: J7X) has officially completed its rights issue, in the process raising the much-needed cash it needs to continue running its business smoothly. Prior to the rights issue, Tigerair’s latest financials (as of 30 September 2014), showed that it had just S$22.6 million in shareholder’s equity with nearly S$210 million in net-borrowings (total borrowings minus cash).

The rights issue, which was oversubscribed by 56.7%, would see the carrier issue a total of 1.147 billion new shares and raise S$230 million in proceeds. For some perspective, the carrier had 987.6 million shares outstanding before the completion of the exercise.

As the rights shares are allocated to shareholders in proportion to their stake in Tigerair, the low-cost carrier’s largest shareholder, Singapore Airlines Ltd (SGX: C6L), will continue to hold a 55.8% stake in it.

Now that I’m done with a quick run through of the rights issue, it’s time to focus on a more important subject – what’s next for the struggling Tigerair?

Tigerair had a cash balance of S$135 million back in 30 September 2014 – with the infusion of cash from the right issues, the carrier should be able to boost its cash balance above S$300 million. This would give it some cushion to run its business without worrying about a lack of cash.

But that said, the company has a history of generating negative operating cash flow – it had burned through S$83 million in cash from its operating activities in FY2014 (financial year ended 31 March 2014).

So far, the first half of FY2015 has seen Tigerair make some improvements as its operating cash flow has come in at S$18.9 million, up from S$0.1 million seen a year ago. But if Tigerair relapses into its old cash-burning ways,  the company might yet again be facing a need to raise cash in the next few years. Thus, the most important objective for Tigerair’s management now is to improve the carrier’s ability to produce cash.

Tigerair has been scaling down its operations for a while now – it’s now operating mainly out of Singapore instead of its previous regional strategy. This seems like a good move by the company’s management as Tigerair can now focus on its core competency in the local market instead of trying to replicate the business models of other budget airlines around the region.

But that said, Tigerair is still facing some strong risks. The string of air travel accidents in the region in 2014 might have dampened consumers’ desire to fly in the short term. If true, it would have arrived at a horrible time for the company as it needs strong market demand to sustain its turnaround strategy.

Foolish Summary

For investors interested in a possible turnaround of this budget airline, the key information to watch is the cash flow the firm may or may not produce over the next few years. It is extremely important for Tigerair that it is able to generate positive operational cash flow – If Tigerair is unable to to generate sustainable positive cash flow in the future, the carrier will have to again ask for investors or lenders sometime down the road to pony up the cash to keep its business going.

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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.