Clawing Back Tigerair

Financially, Tiger has at least stopped the flow of red ink.

We’ve been working on this since 2013 and we now have a changed business. ” But while things look a lot brighter he still has some tough challenges to face. The meagre profits Tigerair is now producing have to be increased to sustainable levels. Flying internationally for the first time – taking over some of Virgin’s routes to Bali and going head-to-head with Jetstar offshore – will throw more complexity into the operation. And Sharp and his team have a major decision to make on the future fleet: whether to stick with Airbus or switch to new 737s to align itself with the type Virgin operates, bringing serious savings in maintenance and training.

Turning Tiger around certainly hasn’t been easy. Last year, Australia’s Airline Customer Advocate (ACA) named it the most complained about airline in the country – for a third consecutive year – after receiving more complaints from Tiger customers than any of the other four major operators. The ACA said it received 47. 1 complaints about refund requests against Tigerair for every million customers it carried last year. In comparison, 11. 1 complaints were made against Jetstar, 7. 5 for Virgin, 4. 4 for Qantas and 2. 8 for Regional Express. Tiger also received the most complaints in relation to flight delays or cancellations, terms and conditions, fees and charges and airport customer service.

Getting a bad reputation can occur very quickly. Eliminating it can take a long time. Nevertheless, Sharp’s words are far from being hot air. While it is doubtful Tiger will make any significant dent in the domestic dominance of Jetstar for some time to come, it has certainly dramatically improved its game when it comes to getting flights away on time. It is now the best low-cost carrier (LCC) performer in Australia’s domestic skies in terms of OTP (on-time performance) with its rate for the year to September hitting an average of 84 per cent, compared to Jetstar’s 79 per cent. Figures from the Bureau of Transport and Regional Economics show October was even better, with Tigerair at 86. 4 per cent and Jetstar at 83. 1 per cent (full-service Qantas has an OTP of 91. 8 per cent). It’s a major turnaround because in the first half of this year Tiger had an OTP of just 79. 3 per cent compared with Jetstar’s 82 per cent.

That sort of improvement is vital as Tiger continues to rebuild its image because flying to schedule is critical to retaining customer loyalty and attracting new leisure flyers and even attracting some budget-conscious corporates.

But it’s not all that Sharp has been doing.

The swathe of changes announced in October are aimed at totally eliminating the dreadful reputation that has persisted among many consumers since the grounding back in 2011. Changes include a brand campaign and a new-look uniform for staff, including crew.

“Historically our check-in agents and ground crew were wearing sub-contractors’ uniforms, and they’re very much working for Tiger, so the uniforms now really reflect the brand and personality of the organisation,” Sharp explained.

Another Airbus A320 has been added to the fleet, there is a revamped booking and check-in system, an updated website and a new mobile app. Tiger is also boasting a new and improved call centre and better communications through SMS notifications and flight itineraries.

According to Sharp, the changes are designed to change perceptions of the airline and to let people know that promises to improve thehave been fulfilled. “We’ve certainly changed the operation and the customer interface, now we need to get out there and change perceptions. ” He added that customers will see a step change in terms of communications through the SMS system and the new call centre, where there has been enhanced training, a special team set up for people with special needs as well as new flexibility that will allow staff numbers to be matched to peak-demand periods.

State-of-the-art website technology will also give the airline more flexibility to tailor the Tigerair proposition to the market. Customers will see a much cleaner screen that is easier to navigate and allows them to more transparentlysee added costs. “A combination of all of these will mean a very, very significant change that the customer will see,’’ Sharp said. “Our flights have never been consistently more punctual, our customer service never stronger and our customer satisfaction levels are now at an all-time high. ’’ The new A320, taking the domestic fleet to 14 (Jetstar has 53 A320s and six A321s operating in Australia/NZ), is the first to come equipped with ‘Sharklets’, Airbus’s new wingtip design that improves fuel efficiency. It will be based in Sydney from December to expand on routes such as Sydney-Cairns and Sydney-Adelaide. Tiger will also start new services between Melbourne and Coffs Harbour from December 9.

Financially, Tiger has at least stopped the flow of red ink. In the first quarter of this financial year, ended September 30, it had earnings before interest and tax (EBIT) of $400,000, an improvement of $20. 2 million over the same period a year earlier. “Tigerair Australia has further improved performance, delivering its first profit for the September quarter,” Virgin chief executive John Borghetti said when delivering the group’s first quarter results in early November. Virgin has said that Tiger is expected to achieve full year profitability in 2015/16, as is Virgin itself. (Virgin’s profit for the quarter was $1. 7 million, bouncing back following a $59. 1 million loss in the corresponding period the previous year. ) Essentially, yields at both Virgin and Tigerair increased in the quarter, compared with the prior year, while underlying cost per available seat kilometre, excluding foreign exchange and fuel, were lower. “The group has achieved a significant turnaround in financial performance for the first quarter ofthe 2016 financial year,” Borghetti said in a statement. “This result reflects our continued success in driving revenue per available seat kilometre and yield growth, while controlling costs. ” Last month’s result certainly showed significant improvement in the re-engineering of Tigerair and also marked a shift in Virgin’s international operations. Its international capacity is likely to decline further in the coming months as it exits the Perth-Phuket route in January 2016 and hands over its Perth-Bali, Adelaide-Bali and Melbourne-Bali services to Tigerair in March. Tiger is already seeing passenger growth and entry onto international flying will see that pick up pace. It carried 965,159 passengers in the quarter ended September 30, a 7. 2 per cent improvement over last year. Revenue passenger kilometres were up 4. 4 per cent, while the airline’s capacity growth, measured by ASKs, was 9. 9 per cent. Virgin said that with capacity growth running a bit ahead of passenger demand, Tigerair load factors fell 4. 6 percentage points to 85. 6 per cent.

“There is likely to be ongoingcapacity growth from Tigerair in the period ahead as a result of the previously mentioned start of international flights to Bali and given the airline recently took delivery of its 14th Airbus A320,” Virgin said.

All of this would seem to point towards Borghetti’s big gamble finally beginning to pay off. Tiger’s recent result was its first black ink since it launched as Tiger Airways Australia in 2007. At the time it was majority owned by the Singapore-based Tiger Airways Holdings, affiliated with Singapore Airlines (SIA). Borghetti grabbed a 60 per cent stake for $35 million in 2012, taking a big gamble on the struggling budgeteer, before famously buying the remaining 40 per cent from SIA in October last year for a mere $1, bringing Tiger under total Virgin control.

While Sharp and Borghetti have until now been entirely focused on re-invigorating Tiger in the domestic market, the decision to adjust strategy and launch it onto international routes marks a critical moment in the Virgin group’s overall strategy. Taking over Melbourne, Perth and Brisbane to Bali routes from Virgin – they weren’t making any money for the parent – should contribute to reducing the losses of Virgin’s own international operation, say consultants CAPA – Centre for Asia Pacific Aviation.

While they will carry the Tiger livery, the flights will also continue to be operated under the Virgin Australia air operator’s certificate using Virgin Australia pilots, resulting in higher operating costs. Tigerair is taking over three Virgin 737-800s, which will be retrofitted into 180-seat all-economy configuration (it would have faced payload limitations on Melbourne-Bali with a 189-seat all-economy 737). CAPA says LCC competitors on Melbourne-Bali using widebody aircraft will also continue to enjoy much lower unit costs as Tigerair is not able to configure the 737-800s to maximum density of 189 seats in single-class, nor can it operate its own fleet of A320s, due to the length of the route.

At some stage a decision will have to be made on the fleet. Sharp has said that whether to stick with A320s or switch to 737s is an important issue. On the one hand, akey consideration for customers is that the 737 has slightly narrower seats compared with the A320: 43cm/17in versus 46cm/18in. However, it’s costly for the Virgin Australia group to service and maintain just 14 A320s when Virgin has so many 737s.

“Clearly it’s an important decision for us and it’s one that we’re working through,” said Sharp. “We have Boeing and Airbus and everyone touting for our business, but that’s going to take a little while before we come out with anything. We haven’t made a decision at this point and when we do we’ll announce it to the market. We don’t have a timeline on it. ” However, it should be noted that in August Virgin beefed up its order book for the new Boeing 737 MAX from 23 of the fuel-efficient jets to 40 after converting 17 orders it had for 737-800s to the MAX. They are due to be delivered from 2018, by which time Virgin will have a pretty good idea whether its Bali budget venture has paid off and Tiger can launch to other international destinations. Some of those MAXs, if passed on to Tiger, would give it far better economics in terms of reduced fuel use, as well as improved range and payload.

Streamlining the Virgin/Tiger narrowbody fleet to a single type would certainly have a beneficial impact on the bottom line. At the moment Tiger’s base maintenance checks are done under contract by BAE Systems Australia. Indeed, in November, BAE passed the 400 maintenance checks mark for the carrier from its Melbourne International Airport hangar for Tiger’s A320 fleet. It has played a significant role in improvement of the on-time performance.

“Since we transitioned to BAE Systems for our base maintenance in 2013, we’ve seen efficiencies and improvements in our on-timeperformance and, year to date, we’ve had the lowest cancellation rate in the industry of all the major domestic airlines, which has helped underpin a major step change in customer satisfaction,” said Tiger head of engineering Robin Furber. “In that time, the company has helped the airline significantly improve its on-time performance. ” How that relationship would be affected if Tiger transitions to the 737 is not known.

Where Tiger ventures in the longer term remains to be seen. Virgin is also dropping its Perth-Phuket flights early next year but that’s a six-and-a-half hour flight which Tiger won’t be able to operate economically. Melbourne-Bali is nearly six hours while Adelaide-Bali is about five hours and Perth-Bali is slightly under four hours. Sharp told CAPA seats will have a pitch of about 31in to 32in, slightly better than the typical LCC seat pitch of about 30in. The 737-800s will also offer passengers WiFi and wireless in-flight entertainment (a mix of free and paid), providing a better product compared to the carrier’s A320s. It will also offer an enhanced hot meal menu on international flights.

In the meantime Virgin itself will continue to operate Sydney-Bali and Brisbane-Bali. CAPA says Melbourne-Bali could prove to be a challenging route with the 737s. “Melbourne-Bali could be viewed as a test case for Tigerair Australia as it is very unusual for a narrowbody LCC to operate a route of over five hours. If Melbourne-Bali is successful it could give the Virgin Australia Group the confidence to hand over similar medium-haul routes such as Brisbane-Bali and Sydney-Bali. ” But it points out turning a profit on Melbourne-Bali could be particularly challenging as Tiger will be competing against widebody LCC operators. Jetstar currently serves the Melbourne-Bali route nine times weekly with 787‑8s while Indonesia AirAsia X operates five weekly flights using A330-300s. Jetstar has a 39 per cent share of seat capacity in the Melbourne-Bali market followed by AirAsia X with a 25 per cent share, Garuda with a 20 per cent share and Virgin Australia with a 16 per cent share, according to CAPA.

Sharp also told the consultant that Tiger expects to generate higher load factors than its LCC competitors because smaller gauge aircraft enable it to better match capacity with demand on a year-round basis. He also believes its narrowbody product will be more appealing than a widebody LCC product offering less personal space. Sharp also pointed out LCC widebody operators have lower aircraft utilisation rates and face higher risks than LCC narrowbody operators.

Nevertheless, CAPA warns that Bali-Melbourne is an unusually long route for a narrowbody LCC, with no connectivity. “But ultimately it seems unlikely that Tigerair Australia will be able to generate sufficient yields to cover the relatively high cost of operating long narrowbody routes such as Melbourne-Bali.

“Most narrowbody LCC routes of over five hours are operated in high yielding markets with limited competition and significant business demand. Bali is almost entirely a price sensitive leisure market and is also hugely competitive. ” Tiger is offering promotional one-way fares starting at A$89 for Perth-Bali, A$99 for Adelaide-Bali and A$129 for Melbourne-Bali. “Higher fares will likely be necessary to make these routes profitable but Tigerair could find it challenging to raise fares given the competition with other LCCs,” CAPA said.

In the longer term most analysts suggest that if Tiger is to expand

Whatever the challenges, there is little doubt Sharp has righted a sinking ship.

its international footprint – or even improve its presence in the Bali market – it will have to take a serious look at the possibility of adding widebody aircraft to its fleet. The most likely option would be the Airbus A330neo or the 787. If it is to ultimately take over Sydney and Brisbane services to Bali it would be competing against the likes of Jetstar, which operates 787s on the routes, or Indonesia AirAsia X, which is expanding there with its A330-300 fleet.

Whatever the challenges, however, there is little doubt Sharp has righted a sinking ship. When he announced the changes in October, he said it marked the next chapter of Tigerair’s evolution as it continued to transform budget air travel in Australia.

“When we rebranded to Tigerair and the joint venture with Virgin Australia was first launched in July 2013, we made a promise to Australian consumers that we would listen and we would change. The past couple of years have been focused on rebuilding the business and putting the right platform in place for future sustainable growth, with the customer at the core of everything we do… I can proudly say we are delivering on those promises. Our flights have never been consistently more punctual, our customer service never stronger and our customer satisfaction levels are now at an all‑time high. It’s time to spread the word. A Tiger can change its stripes. We’re an airline that evolves based on customer feedback and demand. All of the new product enhancements… makes it easier, more convenient and seamless than ever to fly Tigerair. ” He and Borghetti can only hope that the people who matter, the passengers who buy air tickets, get the message.