From the archives: Tiger Airways Australia takes off

On November 23 2007, Tiger Airways Australia operated its first flight. To mark the 12-year anniversary of that event, this story from the Australian Aviation archives by Geoffrey Thomas from the January/February 2008 edition looks at the entry of the low-cost carrier into the Australian market.

The headline writers and commentators had a field day with the launch of Tiger Airways’s Australian domestic services in November with feline cliches abounding as Tiger chief executive Tony Davis and arch rival Jetstar chief executive Alan Joyce traded marketing barbs.

While the media focused on comparisons with Impulse and Compass I & II the rival airline CEOs slugged it out on bragging rights for the lowest costs and thus fares.

But the reality is somewhat different with both airlines backed by two of the industry’s heavyweights and an Australian Aviation survey of both airlines’ routes over a three-month period from December through March showing Tiger just having its whiskers in front in the “I have the lowest airfare stakes”.

The heavyweight behind Tiger Airways Australia is Tiger Aviation which is owned by Singapore Airlines (49 per cent); Indigo Partners, the investment firm founded by Bill Franke (24 per cent); Irelandia Investments, the private investment arm of Tony Ryan, who started Ryanair (16 per cent); and Temasek Holdings, the Singaporean government investment company which is also the majority Singapore Airlines shareholder (11 per cent).

There is no doubt, given its serious backers, that the arrival of Tiger in Australian domestic skies is hugely significant, but this fact has escaped most media.

To appreciate the impact we need to wander back through history to Sir Peter Abeles, whose stated aim was to have in Ansett the world’s most luxurious domestic airline. Tales of his excesses – such as gold ashtrays in his A320s – have become folklore. He didn’t actually get his way on the ashtrays but in many others ways Ansett – and to an extent Australian Airlines – were completely out of step with the rest of the world.

Grossly under funded up-starts such as Compass I & II only perpetuated the myth of invincibility of the incumbent airlines with both their management and staff.

With the federal government opening Australia’s domestic skies to all comers in the late 1990s with the removal of foreign ownership restrictions, the scene was set for a major upheaval, which arrived in the form of Virgin Blue, which had the backing and name of Sir Richard Branson and green fields contracts which resulted in seat miles costs around half those of Ansett. With Qantas holding the lions’ share of the corporate market Ansett’s fate – with ASK costs of 16 cents – was sealed.

With the success of Virgin Blue and the growing use of the internet the scene was set for a revolution in the way passengers booked and paid for their travel.

“Our competitors have done a lot of the preparation work for us,” Tiger CEO Tony Davis told Australian Aviation. “Australian consumers are extremely comfortable booking air travel online.” And they are also very comfortable – well at least used to – paying for drinks and meals for low fares, says Davis.

And that success galvanised thinking at Qantas with its Jetstar subsidiary emerging to match Virgin Blue. Qantas cleverly positioned Jetstar at arm’s length from Qantas’s key business routes so as to protect yields, including operating from Melbourne Avalon. And by default this move also protected Virgin Blue’s yields.

The arrival of Tiger Airways, based at Melbourne’s Tullamarine Airport, changes that cozy arrangement on many routes and possibly before 2008 is out on all major trunk routes.

When Tiger announced headline grabbing fares such as Perth to Melbourne’s Tullamarine airport for just $59.95, Jetstar didn’t respond initially despite a guarantee that it would not be beaten on fare levels. Instead it referred the matter to Australia’s competition watchdog because of what a spokesperson cited as the “lack of availability of the fare level,” a claim Tiger denied.

Davis told Australian Aviation at the time that while he “would not reveal how many of the cheap seats were available on each flight, Tiger had made it very clear that it did not believe in gimmicks or quoting fares that were not available to people”.

In late September, Jetstar responded with back of the clock Tullamarine-Perth flights at similar fare levels, thus setting in motion the chipping away of yields on major trunk routes. Preaching from the bible for low-cost carrier (LCC) CEOs written by Sir Richard Branson, Davis claimed that Jetstar matching the Tiger fare proved that the Australian public had been “paying too much”.

And Davis backs up that oft-used claim, stating that Tiger Airways “has the world’s second lowest ASK costs” after Air Asia.

And he adds a warning; “We are reducing our costs all the time.”

In commenting on the initial fleet of just five aircraft Davis explains that the normal economy of scale issue doesn’t apply, as much of the back office support is being done from Singapore.

“Our start-up costs [for Australia] such as financing cash flow and brand establishment didn’t apply,” he argues. He also adds that the awarding of the airline’s AOC was done under budget and on time – a first in Australia’s recent history – thanks to support from the Singaporean-based operation.

“We have been cash flow positive for two years in Singapore and profitable for the last two quarters. While we are new to domestic Australia we are a well established airline.”

“The shareholders have also taken a long-term view and the last shareholder injection into Tiger in Singapore was October of 2005. Tiger is a successful business that is being invested in by our shareholders that’s growing rapidly.”

Davis explains that many LCCs fall into the trap of trying to lift yield with frills and different models of aircraft. “But we are sticking rigidly to the simplicity model.”

Davis is also sticking – in most cases – to the LCC bible targeting new routes and secondary airports as he has done – with great success – in southeast Asia. Two of the three routes on the first day of service in Australia are serviced only by Tiger – Melbourne to Rockhampton and Melbourne to Mackay.

“The LCC model works best when you can stimulate the market by offering affordable airfares to people who historically have never travelled,” says Davis. In southeast Asia over 50 per cent of the routes operated by Tiger Airways have no competition.

One excellent case in point is the route from Singapore to Clark Field in the Philippines. The airline launched a thrice weekly service in April 2005 and by July of that year it was daily and within six months 10 times per week.

And another major lesson from the LCC bible is ludicrously low fares to grab a swag of free publicity, which Tiger did in late October when it offered 40,000 seats at $9.95 inclusive of taxes and charges for flights to Hobart, Newcastle, Canberra, the Gold Coast, Launceston, Mackay and Sunshine Coast.

But not to be outdone Jetstar offered 5000 seats at $0.05 – yes five cents – in the week of Tiger’s first services on November 23 to the Gold Coast, Rockhampton and Mackay. Tiger’s Davis responded by labelling the fares “a gimmick.”

“It shows that we are serious about offering low fares,” Davis said.  “It is our competitors who have to initiate seat sales around Tiger’s events around Tiger’s sales … ultimately the customers will make Tiger a success in Australia.”

And Davis is really smiling about the massive free publicity that the Jetstar reaction has given the airline. “We have spent no money on advertising.”

“Forward sales are significantly ahead of budget and we are pleasantly surprised by the level of demand.”

But Davis is adamant that Tiger is not here to lose money.

“We are confident that with the kind of fares that we are offering on a promotional basis and a sustained basis that we can make money here in Australia.”

Tiger’s initial network was 12 routes with a fleet of five A320s and over the ensuing months services were to be added between Melbourne and Perth, Adelaide, Darwin, Newcastle, Canberra, Launceston, Hobart, Alice Springs and the Sunshine Coast.

Tiger had talks with Sydney Airport but was unable to reach any agreement. Davis noted that “there are some airports that we haven’t been able to fly to in this first phase, places like Sydney and Brisbane, which some commentators said were essential.” Davis adds with a smile, “We’re saying not necessarily. Ryanair doesn’t fly to Heathrow.”

Davis adds that “Tiger is not following a conventional path. We are using the experience from Europe and there are big advantages in not being conventional.”

“Australia hasn’t experienced a Ryanair as yet. It [Ryanair] is the 12th largest airline [by passengers] and the 10th most profitable,” Davis says with a smile.

But not everything went according to plan with Qantas accused of balking on providing ground support at Alice Springs. In a strongly worded statement, Tiger blamed Qantas for forcing the carrier to delay services to Alice until March.

Davis at the time said: “The behaviour of Qantas shows their contempt for the people of Alice Springs and certainly shows why Qantas is so desperate to maintain its dominance of the Australian domestic market. But we are made of sterner stuff and there is no doubt that Tiger Airways will operate to Alice Springs.”

But Qantas executive general manager John Borghetti laid the blame with Tiger stating that “it is normal practice for any business to have all its arrangements in place before it starts operations”.

Spats and lowest fare gimmicks aside the true extent of the impact of Tiger’s influence on the Australian market will depend on how quickly it ramps up its fleet of A320s. In June 2007 the airline contracted for 30 more A320s, with 20 options for delivery between 2011 and 2014. The airline’s current fleet is 12 with four more for delivery in 2008, and four over 2009 and 2010.

“We can grow our fleet to a potential 70 aircraft [including those based at Singapore],” warns Davis.

Davis adds that the airline is happy to “grow the business in Australia to whatever size the Australian consumer decides is appropriate.”

However, Davis adds that he has consistently said that the airline is not going to lay out its fleet plan and route network plans to our competitors. “Certainly there are a lot of airports around Australia that we’d like to have Tiger Airways serve their airport, and we’re talking to a lot of airports around the country.”

The long term goal also involves more destinations in Asia such as China and India, with the airline offering combo fares through its Singapore hub, although there are no transit facilities.

Also on Davis’s radar are services between Australia and New Zealand and within New Zealand. “We’re looking at New Zealand and there are many airports in New Zealand expressing interest in having Tiger serve their airports.”

To match Tiger, Jetstar is significantly ramping up its fleet, including the 213-seat A321 to be introduced from March 18. Those assets are to be deployed from Tullamarine on services to Cairns and the Gold Coast, while services to Hobart and the Sunshine Coast are to be ramped up with up to 200 services a week from Tullamarine.

Jetstar CEO Alan Joyce told Australian Aviation that the “introduction of an A321 fleet firstly onto some of our strongest domestic routes from Melbourne is in direct response to existing growth opportunities. As the largest member of the Airbus A320 family, the A321 offers Jetstar a suite of benefits to meet the demands of a growing market and to maintain our low fares leadership position.”

The A321s are part of the Qantas Group order placed in November for up to 188 737s and A320s. The Jetstar component was for 68 A320 Family aircraft including 17 A321s plus 40 options.

While some of these assets are destined for Jetstar Asia the order represents a massive increase in capacity for Jetstar, which will also receive three A320s from Jetstar Asia by the end of January. These three aircraft were leased out by Jetstar Asia, which, while expanding in its own right didn’t need them.

Joyce explains further that Jetstar is taking over the Cairns-Darwin-Singapore route, releasing an A320 for Jetstar Asia.

Joyce adds that the fleet buy will also support the airline’s trans-Tasman and domestic New Zealand ambitions along with short haul international routes into Asia from both Perth and Darwin to be established.

“We will have a portfolio of markets to absorb the aircraft,” argues Joyce, who also adds that the extra capacity is “also about bringing travellers from Asia to Australia – not necessarily about domestic Australian services”.

But Joyce sees Jetstar’s future hubs of Perth and particularly Darwin as keys to dominance of the low-cost turf. “We have a great advantage with Darwin as a future hub into southeast Asian ports.”

And Jetstar is also running a “beauty contest” for a hub in southeast Asia says Joyce. The airline has five cities in mind, with the winner not only being a focus for intra-Asia flights but also the launch pad for international flights to Europe.

According to Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation (CAPA), the massive order for Jetstar made it abundantly clear that “Jetstar is the vehicle of choice for long term competition in the domestic market and will grow much faster than Qantas.”

Harbison also believes that the order sends a big signal to both Virgin Blue and Tiger – and any other prospective entrants – that the Qantas Group will take no prisoners. “This order will necessarily be factored into future planning by those airlines and, in due course, by any prospective purchaser of Virgin Blue. In this way, Qantas is effectively exercising the market power that comes with dominance – at the same time as protecting that dominance”.

While Tiger is claiming the ASK low ground Jetstar is also making a pitch as “the most competitive unit cost compared to other airlines in the Australian domestic market”, a claim made before Tiger took to the air.

According to published reports Jetstar’s total cost per ASK for 12 months to June 30 ’07 was 7.53 cents, a 4.1 per cent reduction on the prior year, notwithstanding a significant fuel price increase over the period. The higher fuel cost was more than offset by strong capacity growth.

And excluding fuel, cost per ASK reduced 7.4 per cent year-on-year from 5.93 cents to 5.49 cents “reflecting strong capacity growth, cost containment and improved productivity,” says Joyce.

Jetstar’s net expenditure cost per ASK was 6.77 cents, an improvement of three per cent on the comparative period.

Jetstar also claims that excluding the fuel it achieved a 6.6 per cent reduction in net expenditure cost per ASK despite higher aircraft lease costs, driven by increased capacity, cost containment and improved productivity.

These numbers put Jetstar at least 15 per cent below Virgin Blue, which of course is pitching for higher yield business, and a massive 40 per cent below Qantas, say insiders.

Going forward Davis believes that Tiger is about “under promising and over delivering, making fares affordable and delivering a consistent travel experience. It’s hard to go away from McDonalds and be disappointed,” he says.

Not that Tiger Airways serves Big Macs. There are hot meals for $8 on flights over three hours and a comprehensive range of snacks and drinks that can be purchased at reasonable rates.

Compared to some other more high profile LCCs, Tiger’s measured growth has not grabbed the international headlines, but that doesn’t concern Davis in the slightest. “Our strategy is measured growth that enables us to get the basics and fundamentals right.”

He believes Tiger has a great deal to offer with a robust shareholding structure and management experience of some of the world’s most successful LCCs.

Davis himself brings a wealth of experience with 19 years in the industry including development of bmibaby’s business plan, eventually growing the airline to a fleet of 14 aircraft serving 26 destinations in the UK, Ireland and continental Europe.

Growth will follow two paths, organic expansion and JVs in other countries – except Australia and New Zealand where it is not required for domestic operations.

“Once we have a strong base we can establish JVs,” Davis says. The JVs – such as the one just struck in Korea – would carry the Tiger brand and its distribution model.

“We are looking carefully at China and the fact that we have been successful in getting [access to] three cities means we are in there in a meaningful way and it gives us a foundation into the China market,” he said.

The reality is that with 63 per cent of the global population and more than half of the world’s mega-cities (populations over 10 million), the Asia Pacific region holds a great deal of opportunities for Tiger Airways, Air Asia and Jetstar, which are streets ahead of any other LCCs in what is a largely undeveloped region.

Leaving aside the mega cites – which are typically the haunt of premium carriers – Davis points out with a smile that there are “122 compatible airports [for the A320] within 2.5 hours of Singapore and 241 within five hours, and 72 of those cities have populations over 1 million and 98 over 500,000.” And the numbers aren’t that much different from Darwin.

CAPA’s Harbison says that “Tiger Airways’s Australian launch of operations is not so much about low fares, but the beginning of a brand war that will envelop Asia Pacific aviation in the next few years”.

He adds that “neutral brands, such as Tiger or Qantas’s Jetstar, that can penetrate cross-borders, are at the cutting edge of aviation development in the Asia Pacific region, and will steadily diminish the presence of the national identity brands, or flag carriers.”

Harbison suggest that what we are seeing is nothing short of a revolution in the airline business in this region. The Asian travel market, while growing in size, is much the same as it ever was in essentials – but airline business models have changed, as airlines, led by the likes of the Qantas Group and Singapore Airlines have become more sophisticated in serving that market with separate flying brands.

This story first appeared in the January/February 2008 edition of Australian Aviation.