June 21, 2014 8:30 pm JST

Loss-making Tigerair to shut down Indonesia ops

MAYUKO TANI, Nikkei Staff Writer

SINGAPORE -- Tigerair Holdings, Singapore's low cost carrier (LCC) airline, will cease operation of its 35.8%-owned Indonesian unit Mandala Airlines, known as Tigerair Mandala. The flight from Hong Kong to Denpasar, Bali, in the early morning on July 1 will be the final flight. The loss-making carrier has been hit by overcapacity in the highly competitive LCC markets of Southeast Asia.

     The decision to exit the Indonesian market was made within two months of CEO Lee Lik Hsin coming on board from Tigerair's parent Singapore Airlines. Shareholders of Mandala concluded that the business was not sustainable and decided to stop funding the airline, although the final decision to liquidate the company has not been made. Ahead of the announcement, Tigerair is reported to have failed in negotiations with Malaysia's LCC giant Airasia and Indonesia's Citylink, an LCC owned by national flag carrier Garuda Airlines, to sell Mandala.

     The Indonesian venture was part of Tigerair's multi-hub strategy, in which the company tried to establish multiple bases outside of Singapore, aiming to capture shares in the growth markets of Southeast Asia. Tigerair acquired 33% of Mandala in 2012 and increased the shareholding to the current level in September 2013. Unable to capture substantial market share, however, the Indonesian entity continued to bleed red ink and failed to contribute positively to Tigerair Holdings' bottom line.

     In the last financial year ended March 2014, the management of Tigerair embarked on a turnaround plan to streamline business. Among other initiatives, the carrier sold 60% of Australian subsidiary to Virgin Australia, and sold off the entire share in Tigerair Philippines to Cebu Pacific. The mounting provisions for loss-making units pushed Tigerair's full-year loss to 223 million Singapore dollars ($178 million).

     Southeast Asia led the emergence of Asia's LCC industry, but it is now at a turning point. Even the region's top player, Air Asia, is actively searching for ways to be thriftier after recording a 54% drop in net profit in the fiscal year ended December 2013. Tony Fernandez, the founder and CEO, announced he would cut costs by 7.5% for the current financial year. HSBC analyst Mark Webb warned in a research report that the competition has been putting pressure on earnings of Air Asia. With oil prices rising again on the back of heightened tensions in Iraq, already-high jet fuel costs are going up, casting a shadow on the outlook for Asian LCCs.