Wednesday, December 18, 2013

Tiger Airways : Unveils regional alliance strategy (CS)

Tiger Airways
Price (16 Dec 13 , S$) 0.52
TP (prev. TP S$) 0.47 (0.47)
Unveils regional alliance strategy

● Tiger Airways (Tigerair) has signed a series of agreements to develop regional alliances to accelerate its growth and improve assets utilisation. Tigerair has announced that it has signed an interline agreement with India's SpiceJet to connect 14 Indian cities onto Tigerair's flights to Singapore and beyond via Hyderabad airport.

● Tigerair said that it is also looking to further align its commercial and network operations with Scoot to increase synergies. This is subject to an anti-trust review in Singapore.

● Tigerair announced that it has also formed a JV with China Airlines called Tigerair Taiwan (TRT). However, the near-term impact is minimal given Tigerair's 10% stake in TRT.

● These initiatives are potentially positive for Tigerair, but have a long gestation period. We do not expect these to significantly impact its near-term profitability. Thus there is no change to our earnings forecasts and target price for Tigerair. We maintain our UNDERPERFORM rating on the stock.

Developing regional alliances
Tigerair has unveiled a regional alliance strategy to accelerate growth in the region and strengthen its competitive position without stretching its balance sheet.
In India, Tigerair has signed a three-year interline agreement with SpiceJet. From Jan-2014, SpiceJet passengers can seamlessly connect between 14 Indian cities (including Delhi and Chennai) through Hyderabad airport onto Tigerair's flights to Singapore and beyond. Thus, on a single ticket, a traveller can fly from Chennai to Bali with stops in Hyderabad and Singapore. This should improve connectivity, increase Tigerair's penetration of the Indian market and improve asset utilisation. If successful, the interlining agreement could be expanded to include Tigerair's five other destinations in India.

Deepening the relation with Scoot
Tigerair and long-haul low cost carrier Scoot (unlisted) have signed an alliance agreement to further align their commercial and network activities. For instance, both airlines could co-ordinate connecting flight schedules to make it more convenient for passengers to take connecting flights between the two carriers. Waiting time for passengers taking a connecting from say Bangkok, Thailand to Gold Coast, Australia (via Singapore) could be reduced to make the interlining agreement a more attractive proposition to travellers.

The potential synergies from the deepening of the relationship have yet to be determined, and is subject to the alliance receiving anti-trust approval from the Competition Commission of Singapore (CCS). However, the benefits are significant enough for Scoot to replicate the tie-up in Thailand via an MOU with Nok Air. Note that Scoot's decision to tie-up with a local Thai LCC implies that Tigerair is unlikely to look to start a joint venture in Thailand in the near future.

JV with China Airlines
Tigerair has formed a joint-venture China Airlines called Tigerair Taiwan (TRT). For details of the JV, please refer to China Airlines daily dated 16 December entitled “LCC market entry...more meow than roar” by Regional Transport Head Timothy Ross. Click here to view document (5 pages, 269KB)
Tigerair will invest US$8.5mn for a 10% stake in TRT. This small stake is part of Tigerair's 'asset light' strategy to expand the business and improve asset utilisation without adding pressure on the balance sheet. With only an initial 10% stake, we do not expect the JV to have a meaningful impact on Tigerair's earnings in the near term.

We see Tigerair's moves to broaden its alliances as positive, as it should lead to better utilisation of its fleet. However these initiatives have a long gestation period, and will not significantly impact near-term profitability. Thus, there is no change to our profit forecasts and target price. We value Tigerair at S$0.47, which is based on 7x FY15E EV/EBITDAR. This implies a 10% potential downside to the stock, thus we maintain our UNDERPERFORM rating on the stock.

Publish date: 17/12/13

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