Tiger exposes it's claws down under

Australia’s air wars are back on the boil and this time the new entrant has claws.
Tiger Airways confirmed yesterday that it planned to start an Australian low-cost carrier (LCC) and bring its fully fledged no-frills service and cheap fares to the domestic market.
It is applying for an air operator’s certificate and hopes to begin service later this year with five Airbus A320s. It predicts it will create up to 1000 new jobs.

Tiger’s management has identified an opening left in the low-fare end of the market by Virgin Blue’s move to reinvent itself as a “new world carrier” with more appeal to the business sector.

It will pit itself against Virgin and Jetstar to tap the public’s insatiable taste for cheap airfares.

With fares often up to 60 per cent below competitors’, it has the potential to do some damage.

While no one is pretending Tiger will have an easy time, there is a recognition among aviation industry observers that this is no fuel-sniffing wannabe.

It is a serious airline backed by investors with deep pockets and extensive airline experience in the low-cost and full-service sectors.

Singapore Airlines, one of the world’s most successful carriers with a deep interest in the Australian market, owns 49 per cent while the Singapore Government’s investment arm, Temasek Holdings, owns 11 per cent.

Indigo Partners, the investment company founded by former America West chairman Bill Franke and Texas Pacific Group’s David Bonderman, owns 24 per cent. It is understood this includes an investment of under 10 per cent owned by TPG, part of the consortium trying to buy Qantas. An Airline Partners Australia spokesman said yesterday that the investment, part of an old Newbridge fund, was passive and involved no say in management. The remaining 16 per cent is owned by Irelandia Investments, a private vehicle of Ryanair founder Tony Ryan and his family.

Tiger is also an airline whose management, blooded in the fierce low-cost fare wars of Europe, has a singular dedication to the pure, low-cost model of Ryanair.

Tiger CEO Tony Davis – an airline veteran who had worked with Gulf Air and British Airways – helped develop and was managing director of British low-cost operator Bmibaby when it launched in 2002 to take on Ryanair and Easyjet. The upshot of all this, say analysts, is not good news for the incumbents.

“Tiger (is) a true LCC (with) low fares and low costs, which puts them in a perfect place to position themselves in a low-end niche,” says Deutsche Bank analyst Jason Bloom. “The Australian domestic market has historically not fared well with multiple players and this only increases the potential risk for the current carriers.”

Centre for Asia Pacific Aviation executive chairman Peter Harbison believes Tiger has the opportunity to undercut Qantas and Virgin Blue on the main trunk routes, where low-cost Jetstar does not operate.

Harbison notes that domestic fare levels have been steadily edging higher over the past 12 months and says Tiger “will add significantly to competition”.

But he does not see this as some sort of complicated play by Singapore Airlines.

“Despite SIA’s interest in Tiger, the new entrant is probably more focused on a direct attack on the local market, rather than providing support to the Singapore flag-carrier,” he says.

“But SIA would not weep over any adverse economic impact on one of its major rivals.”

Virgin was not commenting yesterday but Qantas, which has experience battling Tiger through its Singapore-based Jetstar Asia investment, appeared unfazed.

Jetstar significantly boosted its profits in the first half of this year and was already looking at adding aircraft to its domestic operations before yesterday’s announcement.

Chief executive Alan Joyce is also no stranger to the European low-cost battlefield and believes his airline is capable of taking on Tiger – a confidence shared by Qantas CEO Geoff Dixon.

“We’ve been through this many times over the past 15 years with new entrants,” says Dixon.

“Obviously, we take all of them seriously and we’ll take Tiger seriously. They are a serious airline with serious owners.

“That said, I am very confident the Qantas Group is sound enough to stand up to them.”

Putting the newcomer in perspective, Tiger has just nine aircraft in service and 11 more currently on order will bring its fleet to 20 by 2010. It has been flying since September 2004 and by the middle of last year had racked up more than $S60 million in cumulative losses.

It operates from Singapore to six cities in Thailand, two in Vietnam, four in China and to Indonesia, the Philippines and Darwin. It is also due to start a four times weekly Singapore-Perth service next month.

Davis says Tiger is moving now because it sees a market opportunity for which the timing is right and has the expertise to capitalise on it.

“We’ve got a model now that works and we’ve got management and shareholder experience that gives us a lot of confidence that the model will be successful,” he says. “In Australia over the last few years … the competitive environment between Qantas and Virgin Blue has kind of reverted back to the duopoly.”

Davis says the airline’s decision to fly to Darwin, where it offers fares before taxes and charges as low as $40 one-way to Singapore, prompted constant comments that Tiger should bring its service to Australia.

But he is cagey about where the airline will fly, saying he wants to keep his competitors on the back foot. But he says it will be looking at new routes to regional and secondary airports.

“What I can say to you is Tiger will be a national airline and that means it will have a significant presence in many of the markets in the country,” he says.

“But we are keen to make sure that we develop not only along the core markets that are already served but also develop these new services into perhaps airports which historically have been overlooked by incumbents.”

Fares are another area he is not keen to detail at this stage, saying that how much the carrier will undercut its competition will vary according to the route.

“Low fares are part of our DNA,” he says. “The Ryanair model has shown a single-minded focus on keeping fares down and that the growth you get from the business is by adding volume and not by trying to push fares up at every opportunity. And that’s the model that we’ll be adopting.

“If you look at what’s already happened in the markets we operate in Australia, certainly in the Darwin-Singapore routes, we’re often 60 or 70 per cent below Jetstar.”

While the airline’s shareholders signed off on the deal, Davis says the decision to come to Australia was purely a Tiger management decision.

He says even SIA’s majority investment is strategic and there are no commercial or operating interactions between the two.

“We manage the business as an entirely independent operation, make our own route decisions and don’t commercially connect with them or interline or anything like that,” he says. “No doubt there’ll be some conspiracy theories but this is a Tiger initiative because we believe this is the right thing for Tiger.”