Tiger Airways chief Tony Davis’ decision to sell 1 million of his own shares in the company last week didn’t send the best message about his prognosis for the budget airline’s future in Australia.
While Davis’ decision to sell is a personal matter, it has created some uneasiness in the market about the long-term direction and expansion plans for Tiger.
The airline’s Australian subsidiary is running at a loss, and has been forced to cancel a number of routes in recent weeks.
To complicate matters further, Australia’s Civil Aviation and Safety Authority (CASA) has officially voiced concerns regarding standards in pilot training and maintenance procedures and issued Tiger’s Australian operators with a show notice why their license to operate should not be revoked.
Tiger’s troubles come during a period of fluidity in the aviation market, with Virgin announcing plans to form a “long-term alliance” with Singapore Airlines today.
This alliance will enable the partners to leverage each other’s network routes. It will also provide Singapore Airlines with the opportunity to expand its operations and services into the Australian domestic market via its new partner.
The powerful Singapore-Virgin alliance represents a major challenge in what is an already crowded market place. This strategic move will not come as a great surprise to Qantas chief Alan Joyce, but it is not particularly welcome news for him nor the Qantas group.
It certainly will impact Tiger’s Australian operations, and Davis will not be estatic about Singapore’s new partnership either.
What this deal means for Tiger’s future is unclear, but these clearly are difficult times for the airline. Less clear is how much of this strife is of the airline’s own making.
It would be easy to say that Tiger has made mistakes in its journey into the Australian market. The truth is, the airline may have simply misread the changing commercial climate.
Sharing the skies
Davis is a 20 year veteran of the industry who is very passionate and focused on achieving competitive advantage.
Tiger Airways’ business model is largely based on other low-cost operators, such as South West Airlines in the US, Ryanair and easyJet in Europe. Davis is an outspoken advocate for the low-cost airline business model as a efficient strategy for increasing market share and creating shareholder value.
The low-cost airline business model emanates largely from the deregulation of airline markets. They emerged in the United States after 1978 and in Europe in the latter half of the 1990s after each of their respective markets were deregulated.
The “no frills” airline model’s initial success can be attributed to two key elements: geographic positioning and tapping market segments that traditional airlines did not service.
The second element drove out costs through operational efficiencies. This required the low-cost airlines to invest in new single-aisle and fuel-efficient aircraft models, such as Boeing 737 and Airbus A320 and operating wherever possible from secondary airport.
Given the airline industry’s propensity for imitation, the low-cost business model was quickly and broadly adopted. This was particularly the case in mature markets such as North America, Europe and Australia. Since then low cost carriers have redefined the rules of competition for the entire global airline industry.
Trouble in the cockpit
The role of a chief executive in an airline business is not an easy gig. It is a tough business.
He or she must balance national interests, regulatory regimes, environmental concerns, political, social, technological and commercial pressures – some of which are often in conflict with each other.
It certainly is not everyone’s cup of tea. Tony Davis might agree that market entry is fraught with hazards, particularly for new players.
Even forecasting demand for an airline’s products and services is a complex exercise.
Contrary to public perceptions, this is an industry where the introduction of new products, technical systems and processes are more likely to emanate from an evolutionary rather than revolutionary management approach.
Senior executives – with their leadership teams – tend to favour extending existing strategies, services and products rather than selecting the more innovative but sometimes riskier alternatives available.
Adopting this approach however has for many proved to be a recipe for failure, as is evidenced in the long list of airline bankruptcies.
Doing the same as others or copying best practices may sound like a good idea or a safer option, but is it a sound sustainable good long term strategy?
Management guru Professor Michael Porter defines a good strategy as gaining competitive advantage through finding a distinctive way to serve the needs of a set of customers.
Well, apparently some airlines executives seem not to agree with Porter’s definition.
For the past several years a string of adverse media reports have appeared about airlines and their lack of customer focus.
Persistent rumblings continue to emanate from the media about aircraft safety, poor service levels and the extra “supplementary charges” levied by low-cost airline operators.
This has prompted calls for increased regulation of the industry to protect customers, investors and stakeholders’ interests.
This does beg the question in an industry fraught with uncertainty, change and complexity: is the low-cost airline model an effective and responsible strategy?
Has the model failed to achieve its intended objectives to provide a sustainable platform for wealth creation in a sustainable and socially responsible manner?
Research confirms that deregulation and market forces have produced far more flights to far more destinations at considerably lower fares than would have otherwise been the case.
A key factor that is driving competition in the airline industry presently is excess capacity and certainly a case can be made that it is to blame, at least in part, for the current misery of so many airline passengers.
Air travel has become a great deal more competitive and efficient, but also has exposed its customers and stakeholders to the increased likelihood of significant market failures.
Discount airline operators seem to have little financial incentive to take into account the cost to passengers of delays.
As markets evolve and mature, consumption patterns differ.
The mature Australian domestic aviation market, for example, has some very unique characteristics compared to the much faster growing but less-mature Southeast Asian market.
Arguably, this has exposed a major floor in Davis’ low cost no frills philosophy.
His emphatic belief is that markets in the Asia Pacific regions are no different from markets in North America and Europe. His commitment to the Ryanair business concept remains.
Davis has modelled his expansion plans for Tiger Airways into the Asia–Pacific region and incorporating ideas from AirAsia.
So far, this has produced a mixed bag of results.
Tiger Airways Singapore recorded an operating profit of $SG53.8 million ($40.8 million) for the financial year ended March 31, 2011.
In contrast, Davis’ vision for Tiger Airways to become Australia’s third full scale domestic airline has met with little success so far. Its Australian subsidiary’s was responsible for a $SG9 million ($6.8 million) loss.
Cost-cutting measures in Tiger Airways’ Australian operation prompted a mass desertion of its pilots that severely disrupted its flight schedules.
Proving that life was not meant to be easy for an airline CEO, Australian unions representing airline cabin crews, ground staff and baggage handlers are pushing the federal government to force foreign airlines like Tiger that fly domestic Australian routes to pay local rates to staff.
Australia has a disproportionately large and mature domestic aviation market relative to its population and passenger numbers continue to grow (by 7% in 2010).
One of the busiest routes is Sydney – Melbourne, 7.9 million passengers flying between these two cities each year. Australia is a tough market with high entry barriers for Tiger Airways to fly into and operate within.
The domestic market is essentially a duopoly ruled by two experienced, sophisticated and well resourced rivals, Qantas/Jetstar and Virgin Australia. The effectiveness of Jetstar operations and low price strategy has prompted Virgin Australia to shift its focus and look at the premium high priced market for future growth opportunities.
But there seems to be more bad news in the pipeline for Davis and Tiger Airways.
Qantas’ domestic business is strong and can be largely attributable to the successful execution of its radical and successful two brand strategy.
Now Qantas chief Alan Joyce and his team are planning to leverage the Jetstar brand success in Asia. They are contemplating the option of moving some of the premium Qantas brand operations to Asia, the fastest-growing and least mature major aviation market in the region.
Tiger Airways remains a formidable competitor in the region and it has an impressive list of shareholders. There have been however some recent puzzling developments.
Tiger Airways’ original shareholders include Singapore Airlines (49%), the Singapore government firm Temasek Holdings (11%), US-based, US investment firm Indigo Partners, which founded by ex-America West chairman Bill Franke (24%), and the family of Ryanair’s founder Tony Ryan (16%).
Tiger Airways Holding limited listed on the Singapore Stock Exchange in January 2010.
In August, Davis and two of Tiger’s largest shareholders, Ryanasia and Indigo Partners, sold almost 66 million shares - representing 12% of the issued capital - for about S$125 million.
Davis’ latest share sale adds to this somewhat strange series of events.
Learning from experience
Davis does suggest that he gets no special treatment and claims that he is independent from Singapore Airlines.
Perhaps this is not a mantra he should chant to loudly.
He may be well advised to borrow some good ideas from parent SIA, one of the airline industry’s most cost-effective operators.
Many western-educated executives believe that cost leadership and differentiation strategy, globalisation and localisation are contradictory tensions and are not compatible.
SIA however has achieved what is the seemingly impossible to some by combining customer service excellence (differentiation) and lower operating costs (cost leadership).
This seems to confirm a lot of research evidence that suggests that dual strategies are more readily and successfully executed by Asia companies and firms based in emerging economies.
The key lesson that emerges from the data is the world may not be flat after all.
Contemporary airline markets, customers and their expectations present a far more complex, diverging and challenging environment than anticipated.
Tony Davis and his team should perhaps consider adopting a dual strategy airline model rather than persisting with a low-cost airline business model originally designed for a marketplace that now no longer exists – and certainly not in Australia.