By Ben Rickman 

Valentines Day this year marks the beginning of the Chinese New year and 2010 is the year of the Tiger. So as we say goodbye to the mighty Ox what can we aviation investors expect from the flighty feline?

Well it’s going to be busy for one thing with no less than five significant, market sensitive announcements being made in the first few days of calendar 2010.

Jetstar gets friendly with Air Asia

Perhaps most significant is the walk down the aisle announced to the stock market on Jan 6th between the two low cost heavyweights which the airlines say will reduce costs, pool expertise and result in cheaper fares.

Poignantly, the airlines said the key to the agreement was a proposed joint specification for the next generation of narrow-body aircraft with the airlines investigating opportunities for the joint purchase of aircraft.

Qantas Airways chief executive Alan Joyce said at the time that the non-equity alliance would give Jetstar and AirAsia an advantage in the Asia-Pacific space, one of the world’s most competitive aviation markets, stating that, ‘‘Jetstar and AirAsia offer unmatched reach in the Asia Pacific region, with more routes and lower fares than their main competitors and this new alliance will enable them to maximise that scale.”

He further added, “The aviation market in Asia is a growth market and has proven resilient over the past 12 months despite the tough operating environment, with significant growth in passenger numbers forecast in the region. This partnership will ensure that both airlines can capitalise on these growth opportunities.’’

From an investors’ perspective it does make some sense and reviewing the ‘formal media release’ you can see what they are looking to achieve – noting intended cooperation in:

Future fleet specification – both carriers will investigate opportunities for joint procurement of the next generation of narrow body aircraft. A collective goal is to achieve cost reductions in terms of order volume and influencing design specification to deliver more efficient, low cost operations;

Airport passenger and ramp handling services – developing cooperative arrangements for the provision of passenger and ground handling in Australia and within Asia at overlapping airports by leveraging scale;

Shared aircraft parts and ‘pooling’ – pooling inventory arrangements for aircraft components and spare parts;

Procurement – Joint procurement, with a focus on engineering and maintenance supplies and services, with Jetstar maintaining its existing use of and commitment to Australian facilities; and

Passenger disruption arrangements – reciprocal arrangements for passenger management (i.e. support for passenger disruptions and recovery onto the other airline’s service) across both the AirAsia and Jetstar flying networks.

Jetstar Chief Executive Officer, Bruce Buchanan observed that, “Jetstar and AirAsia are passionate about offering consistently low fares, year on year.  Jetstar is reducing its controllable costs by up to five per cent annually and this agreement will enable a further step-change in our cost position and ensure sustainable low fares. In coming years Jetstar and AirAsia want to work with manufacturers on the next generation aircraft to ensure it best meets our business requirements.”

AirAsia Group CEO Tony Fernandes also trumpeted the decision noting, “AirAsia strongly believes the strategic tie-up will help the airline maintain its position as the lowest-cost airline in the world, despite rising costs associated with the fledgling global economic recovery.” 

“It is key for us to keep our costs as low as possible. This is what enables us to provide the low, low fares that our guests have enjoyed and will continue to enjoy.”

Mr Fernandes added that a common aircraft type specification (the next generation narrow body) should be proactively pursued by both airlines because of the efficiencies it would bring.

“With joint purchasing power it means that we can potentially work with airline manufacturers on the right configuration and design of an aircraft specifically for AirAsia and that best suits our operational needs for the future,” Mr Fernandes said.

“A strategic arrangement with Jetstar focussed on investigation of operational synergies is a logical development for us. AirAsia and Jetstar share the same philosophy of low cost, low fares and high quality customer service”.

Unfortunately nobody seemed to have told local staff last time I was on board, but I digress.  For an investment perspective it is worth highlighting that these two airlines represent the largest revenue producers in the Asia Pacific region with Jetstar and AirAsia jointly earning near on $3 billion in revenue in the 2009 financial year.
Jetstar operates up to 1900 services each week to more than 50 destinations with a total fleet of 60 and future orders / purchase rights for approximately 100 new aircraft.
AirAsia Group has 85 aircraft servicing 113 routes.

In closing this one out a significant point that seems to have been missed by a lot of commentators in Australia is that AirAsia has plans to list in both Thailand and Indonesia in a bid to tap into further Asian stock markets…but not here.

Tiger Airways Stock Market Listing

Speaking of the stock market, Tiger Airways, the budget carrier part-owned by Singapore Airlines, is rumoured (at time of writing) to be looking to raise about $150 million (AUD) in an initial public offering (float of new shares).

Tiger is expected to base its share sale on financial forecasts that include making a net income of $44.2 million in the year 2010/ 11 and then $60.6 million the year after and the initial share sale will value Tiger (at the high range price end) at $730 million.

Tiger has placed orders for 66 Airbus SAS aircraft, according to Airbus' website and plans to increase its fleet from 17 to 68 Airbus A320s by at least 2015.

Further evidence of a pending market listing is found in the amended service agreement of its chief executive, Tony Davis who will now have a fixed salary of $S600,000 (Singapore dollars) and a bonus of up to half his base salary each year. He will also have a 2 per cent stake in Tiger when it is listed.  The airline also paid $S5.1 million in pre-IPO '’cash award arrangements’' for senior staff.

Talk in the corridors of my office, however, suggests that the carrier may struggle to raise interest in the float, with institutional investors endeavouring to bring together wildly optimistic forecasts with the factual evidence that is Tiger’s current financial condition. 

Filling their 2008/09 statements in December, Tiger disclosed that the group had lost more than $40 million and was basically funding its day to day operation from forward sales. This atop the fact  that Tiger has to find about $600 million to fund its commitment to new planes over the next three years all add up to a ‘tough to recommend’ investment for someone in my shoes. 

The forecasts – at least in my opinion – are frankly unfeasible.  From a $40 million loss they expect it to earn $A33.7 million this year rising to $60.6 million in 2011-12 as the fleet (and debt) grows suggesting revenue will grow at a compound annual rate of 43 per cent and pre-tax profits by 500 per cent over the three years.

For a group working amongst the grave sites of so many failed Australian carriers to have come and gone before them, the forecasts are very ambitious and our analysts have questioned Tiger’s ability to deliver the expected earnings growth particularly in light of the Air Asia – Jetstar courtship.

Even the more famous Tiger – the one with the private jet full of golf clubs and condoms - would be a little sceptical that things could turn around that quickly in 2010 (I promised myself I wouldn’t do it but I expect 9 out of every 10 readers has been waiting for a mention of some sort…)

Tiger is 49 per cent owned by Singapore Airlines, 24 per cent by US private equity firm Indigo Partners, 16 per cent by the Ryan family (founders of Ryanair) and 11 per cent by Singapore’s state-owned Temasek Holdings.

Singapore Airlines and Temasek are expected to maintain their investment but Indigo and the Ryans may sell down some of their holdings, which poses the question: why, if Tiger’s about to hit pay-dirt, would they seek external investors and walk away at this point? 

Perhaps they too are stretched for capital, but you would think that the existing investors would have the capacity to raise that level of funds under their own steam and bottle the profit for themselves, rather than selling up to 30 per cent of the airline.

Even with the capital raising, which I doubt will be successful, Tiger will be highly leveraged and vulnerable to a competitive blitz and the amount of funds it is seeking isn’t enough to cover an unexpected setback and as you would all know, in aviation, a setback of some description is inevitable.

Virgin and Delta

Virgin Blue, which has been haemorrhaging from the launch of V Australia, had a recent breakthrough with regulatory approval for its joint venture with Delta Airlines allowing it to finally break even on the US route in the coming period.  Enough said.

Qantas withdrawal from AAPA

Meanwhile Qantas has ended its 40-year membership of the Association of Asia Pacific Airlines. The 17-member group includes Singapore Airlines and Cathay Pacific and has been credited with forging many past alliances.

Qantas said it had cancelled its membership because it preferred to build relationships directly with other airlines rather than through AAPA, consequently announcing the Jetstar – AirAsia liaison the very next day.

Qantas Frequent Flyer Program

In further Qantas news, the 1 millionth new frequent flyer member has been signed up from its deal with Woolworths. The deal, which tied Qantas FF program with the retailer's own rewards scheme and took the total number of Qantas frequent flyers to over 6.5 million members, has allowed Qantas to close in fiercely on its target of 7 million card holders. 

Look out for a separate stock market listing of this part of the Qantas business anytime soon.

Qantas Share Price

Finally on Qantas, they released a pretty juicy market update in late December forecasting a first half (2009/10) profit of between $50 and $150 million.  Mind you it is a pretty big range and they have given themselves heaps of breathing space but the number is significantly beyond most analyst expectations (including mine) and if achieved, even at the lower end, is a marvellous result. 

With that noted we have upped our guidance and now expect a full year profit (before tax) of $579M and we retain our HOLD recommendation on the stock (as at January 6th, 2010) cautiously noting a still volatile global recovery.

Any advice contained in this article is general advice. It has been prepared without taking account of any person’s objectives, financial situation or needs and because of that, any person should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs.