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Tug Of Fools: Tiger Airways Holdings Ltd – The Bear Argument

My name is Stanley Lim and this is my bear case for Tiger Airways Holdings Limited (SGX: J7X).

Although the world is fixated about the decline in the price of oil and how it might impact the greater economy, it’s easy to see how the oil-shock could be a pleasant surprise for Tiger Airways given that fuel is one of the largest costs for an airline.

Furthermore, Tiger Airways has been streamlining its business in recent years. Over the course of 2013 and 2014, the company had sold a majority-stake in its loss-making Australian business, divested its Philippines-based operations, and shut-down its Indonesia-based associate, Tigerair Mandala.

Now, Tiger Airways just needs to focus on handling one troubled airline – Tigerair Singapore – instead of worrying about four failing airlines (with the other three being Tigerair Australia, Tigerair Philippines, and Tigerair Mandala).

But despite all the positives at hand with Tiger Airways, there may be stronger negatives which are pulling in the other direction.

A history of losses and inability to produce cash

On the surface, Tiger Airways seems like it’s on its way to becoming a great turnaround story given the aforementioned lower fuel costs and streamlining of operations.

But if we look at Tiger Airways’ remaining business in Tigerair Singapore, trouble’s still around.

As you can see in the chart below, Tiger Airways’ continuing operations had been making losses in the financial years ended 31 March 2012, 31 March 2013, and 31 March 2014 (FY2012, FY2013, and FY2014 respectively). The trend also looks like it will continue in FY2015 given the magnitude of the losses suffered so far in the fiscal year.

tiger airways tug

Source: S&P Capital IQ; *FY2015 is only for the first nine months of the financial year

Bear in mind that the company is not only loss-making – it is also having trouble generating cash from its business, as seen in the same chart above. This means that the S$99.5 million in cash on the company’s balance sheet (as of 31 December 2014) might only be enough to sustain the company for one more year based on its recent cash-burn rate.

Moreover, the company currently has an order for 37 new A320neo aircraft with an option for 13 more; these are to be delivered between 2018 and 2025.

Given that a new A320neo has an estimated price tag of around US$103 million, it follows that the whole deal would cost Tiger Airways roughly US$3.8 billion. That’s a serious amount of money for a company that has trouble generating cash and which has only S$99.5 million in liquids at last count.

Investors will need to question where Tiger Airways will get that capital from. A partial answer can be found in the table below, which shows the company’s history of issuing new shares for capital since its listing in 2010.

Tigerair's history of equity issues

Source: S&P Capital IQ

As you can tell, Tiger Airways has had a penchant for issuing new shares – these are dilutive acts (although some of them are rights issues, which are less dilutive than secondary offerings or private placements) which can prevent existing shareholders from enjoying per-share growth in the company’s future earnings or cash flow.

If Tiger Airways would continue to have trouble generating cash in the future, existing shareholders may see their stakes in the company get diluted again.

Low cost producer (not!)

Tiger Airways might be a low-cost carrier – but that’s an entirely different thing from being a low-cost operator.

In the airline industry, the Cost per Available Seat-Kilometer (CASK) metric is commonly used to measure the costs an airline incurs in carrying out its business of flying passengers around.

This metric was 6.06 Singapore cents for Tiger Airways for the third quarter of FY2015. In comparison, Airasia Bhd, another low-cost carrier in the region, had a CASK of 12.79 Malaysian sen (around 4.7 Singapore cents) in the third quarter of 2014.

In the airline industry, being a low-cost operator is very important for an airline if it wants to achieve economic success – unfortunately, this is an area where Tiger Airways is lacking.

Lower fuel costs can’t help much

With the price of oil having fallen more than half since June 2014, fuel will become cheaper for airlines and that’s a great thing for them at first glance, as I’ve mentioned earlier.

But, cheaper fuel is actually an industry-wide phenomenon. Having the same advantage as your competitors would also mean that you actually have no advantage to speak of in the first place.

In fact, many airlines across the Asia-Pacific region – like Japan Airlines, Qantas, Virgin Australia, and Airasia – have all announced the removal or reduction of their fuel surcharges earlier this year. What this means is that savings the airlines could have been enjoying from lower fuel prices are now being transferred to travellers.

Consequently, there might not be any real lasting advantage for Tiger Airways when it comes to lower fuel costs.

The bigger picture

Switching gears to the macro trends happening around the region, Southeast Asia – and to a greater extent, Asia – is experiencing growth in both population and affluence. These can provide strong tailwinds for the demand for air travel in the region.

According to the International Air Transport Association, the Asia-Pacific region is actually home to the second fastest-growing area for air travel in the world now, second only to the Middle-East. With such strong demand currently and some rather clear room for growth, isn’t investing in Tiger Airways similar to investing in the future of air travel in Asia?

Not quite, at least according to what history has taught us. This is what billionaire investor Warren Buffett said about the topic in 1999:

“All told, there appear to have been at least 2,000 car makes [in the U.S.], in an industry that had an incredible impact on people’s live. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.”

So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies – themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America – and also an enourmous impact, though not the anticipated one, on investors.”

For added effect, of the three car companies that survived to the 1990s, two of them actually faced bankruptcy during the Great Financial Crisis of 2008-09. The phrase “a rising tide lifts all boats” does not necessarily work all the time.

Foolish Summary

So there we have it. Tiger Airways has struggled to make a profit and generate cash; investors run the risk of getting their stakes diluted; it’s certainly not a low-cost operator in a commodity-like business; and having strong macro tailwinds need not necessarily improve its business fortunes.

I rest my bear case.

Read the bull case for Tiger Airways here.

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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 Stanley Lim owns shares in Airasia.