News analysis

Helping Tigerair claw back to profitability

Joining SIA fold will lead to cost savings;offer is better deal than Tigerair's stock price now

It was never the intention but Singapore Airlines (SIA) has done it.

After doling out hundreds of millions to Tigerair in three fund-raising exercises since 2010, when the budget carrier went public, SIA has finally made a takeover bid for an airline of which it now owns 55.8 per cent.

At an offer price of 41 cents a share, the deal will cost SIA $453 million if other shareholders bite. It is not a big sum for an airline sitting on a cash pile of about $4 billion, but still, why throw good money into a seemingly bad business?

Tigerair, which took to the skies in September 2004, had some roaring good years, expanding its paw print to Australia, Indonesia and the Philippines.

But the tide changed after the carrier went public in January 2010.

At an offer price of 41 cents a share, the deal will cost SIA $453 million if other shareholders bite.

Hit by overcapacity that drove yields down and the grounding of its Australian carrier over safety concerns, among other problems, the tails started falling off one by one.

To be fair, Tigerair, which embarked on a major downsizing as part of a restructuring more than a year ago, has managed to trim its losses in the last few quarters.

But it has remained in the red for most of the last five years, which raises the question: Why is SIA hell-bent on keeping it alive?

Because Tigerair is a vital part of SIA's portfolio strategy, which chief executive Goh Choon Phong strongly champions.

To keep flying high, SIA must be part of the growth story in all sectors, he has said time and again. So in the premium space, the parent carrier does long haul, supported by its regional arm, SilkAir.

But the low-cost travel segment is a big part of Asia's aviation story.

Hence, the 2012 launch of budget carrier Scoot, which operates mid- and long-haul flights, leaving Tigerair with regional services. The aim: both carriers to work hand in glove, the way SIA and SilkAir have for years. About half of SilkAir's customers connect from SIA flights.

When SIA announced in 2003 that it was going to set up a budget carrier, then chief executive Chew Choon Seng made clear it was not the intention to run the new entity.

But when things started falling apart, SIA probably had little choice but to play a bigger role - culminating in the takeover offer.

Might as well take full control, instead of having to bail out the airline every now and then.

If SIA is to pour even more resources into Tigerair, it makes sense to bring all of it into the group, Mr Goh said yesterday.

The plan is to drive closer cooperation and integration to pool resources where possible.

Cost savings can also be achieved by economies of scale in other areas, for example, aircraft maintenance. For SIA then, and definitely for Tigerair, the buyout offer seems a good plan.

But what about shareholders?

The 41-cents-a-share offer may be a 32.3 per cent premium over the 31-cent closing price on Thursday but it seems a raw deal for those who paid $1.50 in January 2010.

Two-thirds of their investment is wiped out if they did not subscribe to the various rights issues.

Those who took up the offers have probably ended up with about half the original value of the shares.

On the positive side, 41 cents is not that bad a deal, given that, at their lowest, Tigerair shares slid to about half of SIA's offer price.

The buyout is likely to go through, but will this step give Tigerair more effective claws in a very competitive market?

A version of this article appeared in the print edition of The Straits Times on November 07, 2015, with the headline 'News analysis Helping Tigerair claw back to profitability'. Print Edition | Subscribe