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

Following a slump in crude oil prices amid a supply glut, there is much to cheer especially for sectors and companies that rely heavily on oil as an input for their operations.

One of such sectors is transport, in particular to airline companies where some of these companies incur fuel charges to as much as 50 percent of their revenue.

Here, I will present the bull case for Tiger Airways Holdings Limited (SGX: J7X), which is a subsidiary of the national carrier of Singapore, Singapore Airlines Ltd (SGX:C6L).

Inflection Point Reached

On its financial statements, it is hard for much optimism to be drawn considering the low cost carrier (LCC) has booked in operating losses for two out of three years between FY12 and FY14.

Following a major restructuring of the group’s operations that began in 2014, where it has divested a few of its subsidiaries including Tigerair Australia and ceasing the operations of a loss-making associate, Tigerair Mandala, the group has re-calibrated focus on its core operations in the Singapore market.

The turnaround move appeared to have paid off as the group has turned in $2.6 million in profit before tax for 3Q15, compared to four consecutive quarters of losses before tax from 3Q14 to 2Q15.

Moreover, losses arising from exceptional items could have already been fully hammered out by 3Q15, which followed four quarters of losses that ranged from $14.6 million to $161.1 million.

The source of these loss amounts which dragged on for a few quarters, arose from the group’s restructuring efforts from the disposal and cessation of operations in its loss-making associate and subsidiary that included Tiger Airways Australia and Tiger Mandala.

Stringent Control On Capacity

As at 31 March 2014, Tiger Airways had a total fleet of 49 aircrafts which was subsequently reduced to 30 aircraft as at 31 January 2015 according to a statistic published by the Civil Aviation Authority of Singapore.

While available-seat-kilometres may have fallen 5.7 percent to 2,984 million year-on-year, however, the smaller fleet size has boosted the airline’s operating statistics where a notable 6.2 percentage points improvement in load factor was achieved as revenue-passenger-kilometre has also registered a 2.1 percent gain to 2,447 million.

In addition, the group’s fare-per-passenger has moved North by 15.5 percent to $114.90.

The key over here is to upkeep a smaller capacity, which will in turn enhance the operating efficiencies of the airline and eventually be beneficial to its profitability.

As opposed to a game of vying for the top spot in terms of market share but at the cost of profitability, the exercise of capacity discipline will provide the potential for Tiger Airways to rejuvenate its earnings moving forward.

Lower Oil Prices Is An Engine For Operating Profits

Since the global slump in oil prices, where the Brent Crude Oil index has fallen as much as 46 percent since a year ago to a closing price of US$58.90 as at 23 February, this is undoubtedly a positive note for the entire airline industry.

Amid the decline in oil prices, Tiger Airways has recognised a cost savings of 21.2 percent in actual fuel costs (excluding hedging expenses) in 3Q15 compared to the corresponding period last year.

Consequently, the group was able to turn in an operating profit of $4.1 million compared to the past six consecutive quarters of operating losses (1Q14 to 2Q15).

Although a further decline in oil prices is muted considering how it is already at the 5-year historical low point, a reversal is not on the horizon judging from the adamant stance of the Organization of the Petroleum Exporting Countries (OPEC) in resisting production cuts to boost prices in light of its quest to maintain market share.

In conjunction, Saudi Arabia’s Oil Minister challenged that the OPEC will not budge even if oil prices are to fall to as low as US$20 per barrel, dampening hopes for a near- term price recovery of the commodity.

However, should a US$20 per barrel of oil turn into reality, this would not only create further upside for Tiger Airways but also the entire airline industry.

Poised To Benefit From Parent

Tiger Airways has completed a rights issue to raise gross proceeds of $234 million in January 2015, where the group required fundings to improve liquidity in order to maintain its working capital as well as cushion the impact on its capital structure.

More importantly, as a large proportion of rights were subscribed by SIA, Tiger Airways has become a 55.8 percent-owned subsidiary of SIA.

The result of this has forged closer ties between the two carriers especially with Scoot, a subsidiary and LCC of SIA, thereby creating synergies that will be beneficial to both parties in the longer run.

Moreover, come April, the inclusion of Tiger Airways into SIA’s strong loyalty programme which is one of the top rated loyalty programmes in Asia according to Flyertalk, KrisFlyer, will also enhance the throughput of passengers choosing the LCC.

The Turnaround Story

The tide may have turned now amid the group’s restructuring efforts that have yielded positive results, including the enduring of a few painstaking quarters of losses arising from the divestment of unprofitable subsidiaries and associates which appeared to have already been hammered out.

In addition, the exercise of a stricter capacity discipline has lifted the airline yields which could translate materially in the next few quarters.

Moreover the externality of a global decline in oil prices is a much-welcomed catalyst for the airline industry including Tiger Airways in terms of operating profitability, since oil prices represent one of the largest segments of costs for an airline.

Lastly, as Tiger Airways has become a subsidiary of SIA, the closer interline relationship is expected to create benefits for both airlines.

Read the bear case for Tiger Airways here.

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