Tiger gets Qantas By The Tail

[NickN]

From todays The Age.

I found this interesting...

September 29, 2008

Against the odds, this airline is beating everyone in the price wars, writes Clive Dorman.

It wasn't meant to happen like this. When Qantas created Jetstar in May 2004 to counter the emergence of Virgin Blue, part of the unspoken strategy was to "lock up" the Australian low-cost airline market forever.

Jetstar's ultra-low fares were meant to poison the water for any other upstart airline hoping to compete in the local travel industry.

When Qantas arch-rival Singapore Airlines invented Singapore-based Tiger Airways just five months later, Qantas's response was to invent a new version of Jetstar and base it in Singapore to swim in the rivers of gold that were thought to be flowing towards the Asian low-cost airline industry.

But Tiger and Jetstar Asia hit a brick wall when neighbouring countries refused to grant them the air rights they had assumed would be readily available. Their ambitious plans stalled.

To break the deadlock, Tiger did what only an airline with Singapore's deep pockets could do: enter the lion's den and take on Qantas at home, exploiting Australia's ultra-liberal aviation laws. It is one of the few countries outside deregulated Europe that allows foreign-owned airlines to operate domestic services.

Fast-forward almost a year since Tiger began its first Australian domestic services and the unthinkable has happened - on the routes on which Qantas operates, Tiger has displaced Jetstar, Virgin and Qantas as the price leader.

Although it is still tiny, with just four planes operating from Melbourne, on almost all days of the week it is generally the cheapest carrier, although it aggressively applies a raft of ancillary charges, some of them hidden in the fine print, that can increase return air fares by $100 or more.

Tiger is to add three more planes to its Australian fleet by year's end and continues to talk about eventually basing up to 30 jets in Australia.

But it apparently plans to do this without two of Australia's most important cities in its network. It steadfastly refuses to accept the high costs of operating from Sydney airport and hasn't been willing so far to take on Virgin Blue's home-base fortress, Brisbane.

Qantas's fares, where available, are generally the dearest, followed by Virgin Blue, but Tiger is now usually cheaper than Jetstar on routes they contest.

On the hotly contested Melbourne-Adelaide route, where Tiger now has three services a day compared with Jetstar's one, Tiger has a regularly available one-way fare from $40, undercutting Jetstar's $49.

Compare this with the Melbourne-Sydney route, which Tiger doesn't contest. Jetstar's $64 (from Avalon) still leads the pack ahead of Virgin's $100 and Qantas' $125.

It is now often dearer to fly to the Gold Coast from Sydney ($69 Jetstar special but regularly from $109 to $159 for Jetstar and Virgin) than from Melbourne ($90 on Tiger, $99 on Jetstar booked a month ahead).

But odd things happen, so you should spend time web-shopping for the best fare. There are even some days and routes on which Qantas is cheaper than Tiger.

A recent trend, for example, is that fares booked a month out are often dearer than those booked just a week ahead, as the airlines more carefully juggle their inventories to make sure empty seats are sold at the last minute.



http://www.theage.com.au/news/news/tiger-gets-qantas-by-the-tail/2008/09/17/1221330895135.html

[Radi K]

Things are not soo rosy @ Tiger. I'm not sure on the factual nature of the whole article. As far as being the 'price leader' on its routes. Even if true, this doesn’t guarantee you profits, especially if the 320’s are half empty!

[Brian Wilkes]

Things are not soo rosy @ Tiger. I'm not sure on the factual nature of the whole article. As far as being the 'price leader' on its routes. Even if true, this doesn’t guarantee you profits, especially if the 320’s are half empty!

If things are not that rosy at Tiger, there may try and lift some of there 100 or so stupid restrictions on passengers and fares!

[Lukas M]

Things are not soo rosy @ Tiger.
Do you work for Tiger Radi?, How do you know this, just general assumptions I suppose?. From what I have heard (tiger employees here), things are alot better then how the company was operating months back (especially in 2007), and the company is now facing the right direction.
I'm not sure on the factual nature of the whole article. As far as being the 'price leader' on its routes
Fact: Tiger is the "price leader" in Australia Radi, it always has been. Does Jetstar, Virgin offer $19.95 fares? Do they have everyday sales on their website?. Also, comparing Tiger against every airline that it serves on its Australian network(low-cost or not), are they the cheapest 70% of the time? Yes.
As usual, if a sector is reaching capacity, as all airlines do, they will not be the cheapest, but still close to the rivals price. However, even a full Alice Springs flight will still be cheaper than QF's everyday outragous $312 price.
especially if the 320’s are half empty!
Half empty now are they?? Personal Experience here?
I have flown Tiger more than a Dozen times, and yet to get below 75% load, and this is across their network, not just single destinations. For example, came back last week from Canberra, going out was 155 pax and coming back about 175 pax. I have heard of the odd Adelaide/Launceston flight that is at half load, and it wont get much worse than that.

From time to time, all airlines will experience below average loads. In July I came from SYD-AVV with about 25 people on board.

Tiger certianly are a player in this market, once their fleet builds up, and enter ports like Sydney (Bankstown?) and Brisbane, they will be quite a dangerous target to their opposition.

[David B.]

Fact: Tiger is the "price leader" in Australia Radi, it always has been. Does Jetstar, Virgin offer $19.95 fares? everyday on their website?, Do they have weekly sales like TT?

What drivel...

You must have been bitten by a Tiger to not realise that Virgin Blue have a "Happy Hour" sale most days, low "Go Fares" and permanent "Mid-week mini" fares.

Tiger to Brisbane? Like to see that... from what I've heard they are far too demanding and won't start services until they get their own way (i.e. a tin shed setup in Brisbane like in MEL).

:rolleyes:

[Lukas M]

You must have been bitten by a Tiger to not realise that Virgin Blue have a "Happy Hour" sale most days, low "Go Fares" and permanent "Mid-week mini" fares.

Tiger to Brisbane? Like to see that... from what I've heard they are far too demanding and won't start services until they get their own way (i.e. a tin shed setup in Brisbane like in MEL).

:rolleyes:
David,

Virgin or any other competitor do offer very competitive Happy Hours and so on, but these only last for what, a hour or as per "JetMail only sale..between 8pm to midnight!" . A search of the "Go Fare" reveals fares on quite a restricted basis but still are competitive. Plus dont we all know about Jetstar and their low-fare gimick sales(ie- only Tuesdays, Wednesdays and Saturdays before 8am and after 6pm!! Complete Rubbish)

Where as TT has a sale 24hours each day, 365 days a year, and choices are alot greater in terms of flight choices, basically on a "every flight, every day" basis. Without doubt they are a price leader (Remember $9.95 fares' availability and travel periods)

Chances of this airline entering markets like Sydney or Brisbane might be low now, but there is always possiblilty in the future.

[Andrew McLaughlin]

Do you work for Tiger Radi?, How do you know this, just general assumptions I suppose?

Don't you just hate it when people make general assumptions based on no personal experience Lukas? God forbid that should happen on THIS board...!:eek::rolleyes::D

[Will T]

I agree with Radi's assessment of both the article and the issue at hand.

Tiger have adopted a price leader strategy. In this way, they use a low unit cost (marginally lower than JQ in this case) to achieve sustainably lower fares, thereby attracting the most price-sensitive leisure travellers and stimulating additional demand at the 'bottom end'. This strategy - effectively one of low yield, high volume - works well in buoyant economic times (when disposable income is high), or when capacity is constrained (and a fare-based point of difference can be made against the 'majors', whose yields generally improve during these periods).

On the flipside, the price-sensitivity of its target market makes yields and loads - and therefore profitability - particularly volatile, especially when economic conditions (=disposable income) deteriorate, or increased unit costs (eg. fuel, fx) necessitate a fare increase. When seat capacity significantly exceeds demand, all airlines will attempt to maintain a minimum market share through discounting and fare reductions, reducing the ability of the price leader (Tiger) to achieve a substantial - or sustainable -fare-based point of difference.

Tiger's Australian operations are leagues away from the 'critical mass' required to minimise unit costs, and their progress to date is likely to have been significantly hampered by current economic and trading conditions, as well as the recent oil spike. To that end, and for a number of other reasons, I find it incredibly hard to believe that they're breaking even right now, let alone profitable. Lukas's assessment of their network load factors may or may not be valid, but is meaningless as an indicator of success unless the yield being extracted from those loads is taken into account. Only where the average yield per passenger exceeds the average cost will profitability occur.

Will

[Radi K]

Excellent summation Will, many thanks for better clarifying and articulating my original point.

Lukas, for the record no I don’t work for Tiger but do, like Will, have very much exposure to the industry in our region.

Can I reverse the question: Lukas, do you work for Tiger? No you don’t.

To then make flippant remarks like : “From what I have heard” I don’t see how you can validate your comments versus mine?

Like Will, based on their leisure driven business case I can’t fathom them making a profit in the current environment.

For example, came back last week from Canberra, going out was 155 pax and coming back about 175 pax.

Lukas, one thing you will learn, if you ever gain some formal business and/or commercial qualifications in aviation or you are lucky enough to work in the industry one day, is that load factor doesn’t equate to yield, revenue and ultimately profits. As an example, last week was school holidays, of course loads were quite high but these are low yield leisure passengers. Don’t judge a book by its cover.

Finally, of all the Australian airlines to struggle and to stay viable with the threat of a worldwide downturn and recession it would be Tiger due to its leisure based business plan.

[Daniel M]

great detailed answers Will and Radi.

I think a big point to make is that, yes, Tiger is being supported by Singapore Airlines, but just how long do you think they will keep pouring cash into a sinking ship? There's only so long you can sustain $19.95 airfares...

[Tony G]

I hope the lost cost carriers stay. If tiger cant make it with the backing of SIA, not sure if others will attempt a start up, unless demand grows. It does give the average person more oppotunity to fly within Australia. A few years back, It cost me $140 more (airfare) to fly to Malaysia and watch the Motogp there, compared to flying to Melbourne from Sydney and booking a hotel. Things have changed now, I find if you book domestic way in advance you usually can get a good deal. Now all we need is a decent airfare to Perth to watch the Red Bull Air race:).

[Rhys Xanthis]

Now all we need is a decent airfare to Perth to watch the Red Bull Air race:).

Jetstar is usually cheap :p (~$200)

And QF usually have 1 flight each way per day at ~$200-$230...not overly exhorbitant.

As for Tiger, well...i guess we have to wait and see. Daniel is right...how long can Tiger sustain $20 airfares? And with more planes coming...perhaps they might be a double-edged sword for Tiger? Depends how many more destinations and hubs they have planned that they think feesible.

[NickN]

Until Tiger can break into the Sydney and Brisbane markets they are just playing in the minor leagues. They can dabble all they want with their current routes but I doubt they will turn a serious dollar until they take the plunge with Sydney and Brisbane. And if they do decide to operate to those two ports, good luck staying as low cost as they are right now.

[Lukas M]

How long can Tiger sustain $20 airfares
$19.95 fares can be sustained as they are only offered on a few seats here and there, as we all know. The seat that is usually "empty" might as well be sold for something, better than being bare. Dont forget, add Baggage (20kg), pick your seat and the CC fee, your already up to $55. Dont forget their Cost Base, is very low (they work out of classrooms, use Second Hand furniture..as Davis seems quite proud of!)

Bit like what Ryanair do with those 1p flights, they cost a fortune in the end. But they do attract the customer...

Now all we need is a decent airfare to Perth to watch the Red Bull Air race
On terms of the Tiger, they are charging $129.95 for MEL-PER during the race

[Rhys Xanthis]

Haveng flown, but i have heard that the seats aren't too comfortable..anyone able to provide some feedback on that? Its a long flight to Perth!

[Justin L]

Haveng flown, but i have heard that the seats aren't too comfortable..anyone able to provide some feedback on that? Its a long flight to Perth!

I've flown Tiger on NTL-MEL-NTL and CBR-MEL-CBR, and mind you while I had exit row seats for all four sectors, the seats themselves were comfortable. Family members have flown ADL-MEL-ADL in non-exit seats but said the seat pitch wasn't too limiting (mind you it's a short sector). I'm flying them (well TR) on SIN-HAN-SIN in the new year, so if I don't get exit seats I will be able to judge better on this longer sector in terms of pitch.

I find as a general perception that A320 seats on TT and JQ feel less cramped than B737 seats on QF and DJ from experience. It may not be the case, but it is what I have felt.

Also, there was this recent article on Tiger regarding them perhaps offering late check in fees to allow people to check in past the 45-minute cut off. I saw a couple of dramas for late check in for an ADL flight from MEL while waiting in queue for the CBR check in to open recently.

http://www.smh.com.au/news/travel/news/tiger-lines-up-later-checkin--at-a-fee/2008/09/26/1222217491675.html


Tiger is considering a late check-in ... for a price.
Mathew Murphy
September 26, 2008

TIGER Airways is considering allowing passengers to check in after its 45-minute cut-off time if they are willing to pay an additional fee.

The Age believes the proposal is being discussed in a bid to reduce the number of irate passengers being told they can't check in despite arriving at the terminal well before departure.

To keep costs low, Tiger uses the same staff member who checks in passengers to help those passengers board the aircraft.

A Tiger spokesman refused to deny the budget carrier was looking at the option. He said Tiger was keen to allow passengers as many options as they were prepared to pay for.

"If we were able to look at a way where that would be cost effective, then we would look at it," he said. "It's a process that needs to be looked at and gone through because the last thing we would want to do would be to increase costs for something people don't want.

"Our model is all about giving people choice for the bits that they want to pay for. If they want to take 30 kilos of luggage, that's fine by us, you just pay a little extra."

Tiger's check-in cut-off time is the strictest of the domestic carriers. Jetstar requires passengers to arrive no later than 30 minutes before departure. Qantas' policy is 30 minutes, or 15 minutes if passengers only have carry-on luggage. Virgin Blue's check-in time is 30 minutes but is flexible.

All carriers have different policies for checked-in baggage, with Qantas the only domestic airline that has not yet introduced a charge to check in baggage.

[James Smith]

On terms of the Tiger, they are charging $129.95 for MEL-PER during the race.

Not much good for Tony who is in Sydney!

[Marty H]

Seems Virgin Blue have got QF by the tail eating into their Business market, there was a report in todays Herald Sun, cant seem to find a link to it on the net though.

[Torin Wilson]

Haveng flown, but i have heard that the seats aren't too comfortable..anyone able to provide some feedback on that? Its a long flight to Perth!

I think the seats are pretty comfortable. They seem like old school seats, a bit bigger and the foam harder. But I find the 'not as soft' far nicer to sit in then JQ seats. The leg room is pretty much the same, or seems to be. I can fit in my seat length wise, and that pretty much all I care about after paying $10.

I think the standout for Tiger though is the attitude of the crew. They are very friendly, and seem to take a customer orientated approach.

I flew JQ 6 times and TT 3 times in 8 days, and the TT crew were brilliant each time and for the whole time.
JQ on the other hand were shocking on the most part, some pretty rude crew. One of the checkin girls was really good, but that was the only standout good part of the time with JQ.

I'm a price sensitive traveller, but I'm willing to pay more to fly TT than JQ.

On the point of TT not flying to Sydney and Brisbane, why would they fly in markets where they will undoubtably get slaughtered?
Sydney and Brisbane are probably too expensive to operate from in terms of airport costs. If they did fly there, it would be unlikely they would still offer $19.95 fares and push themselves from that market differentiator.

If they can make money by flying some pretty oddball routes, with less competition on them and have lower costs for the airline then whats the matter with that?

You don't have to fly all the major routes, some of which have the highest traffic volume of anywhere in the world to make money.

I should be writing my last 600 words for my research report instead of this, especially when this is half of all I have left :o

[Will T]

Seems Virgin Blue have got QF by the tail

Marty, I haven't seen the article in question, but I don't agree with that statement. We could write a 4000 word piece on the dynamics of the Australian domestic airline industry right now, but in summary (and with a bit of background)...

- Virgin Blue was conceived as a value-based airline at a time when the Australian domestic market was characterised by high-cost, high-fare insulated duopoly. VBA's initial business plan - in my opinion, the best-executed LCC plan of the last decade - deployed an airline with substantially lower unit costs than the incumbents. This cost advantage was achieved through simplicity of product, processes, fleet, operations and labour, and facilitated VBA's position as a 'price leader' (more correctly, a 'cost leader') through which it could use low fares as a prime differentiator from QF/AN. In product terms, it 'unbundled' the traditional network airline product (eg. hot meals), on the basis that - for their target market - getting from A to B was the most important part of a short, domestic sector. In these ways, VBA lured the custom of price-sensitive, high-volume leisure passengers for whom their unbundled product offering was of little concern. There were rapid inroads into the post-AN domestic market, with virtually linear market share growth from 0 to 30% over a couple of years, largely at the expense of post-AN QF.

- QF's initial responses to this included a major cost reduction drive (remember the boxed meals?), re-deployment of widebody fleet capacity (with a lower CASK) to trunk domestic routes, and aggressive re-negotiation of several key labour agreements. These substantially narrowed the cost gap between QFA and VBA, but QF's positioning as a full-service, integrated network carrier (vs. VBA's low-cost, simple point-to-point model) rendered the rest of this cost gap virtually unbridgeable for the time being.

- QF launched JQ as a competitive response to the rapid inroads being made by DJ into its domestic leisure 'volume business', and the plan hinged on achieving final CASK decidedly below VBA's. In this way, JQ became the new cost leader, which in turn enabled it to become the new price leader, which thus gave the QF Group a vehicle in which to truly compete in markets where the fare was the prime differentiator (ie. price-sensitive leisure). Furthermore, this gave QFGroup's full service airline - QF - the ability to focus on its high-yielding, full-service bundled network business, without having to worry about its Y-class cabins being cherry-picked by DJ on key routes. The QF Group effectively identified two distinct market segments (business and leisure), deployed two distinct and highly-aligned brands/products to serve these respective markets, and reinforced this position by effectively becoming 'best in class' in each segment.

- QF's deployment of the Two Brands immediately halted VBA's growth. QFGroup had the cost leader (JQ) and the high-yield product differentiator (QF), and DJ's cost base and product made it neither, and left it stuck in the middle.

So... DJ clearly needed to reconfigure its business to get out of the pincer. Or at least focus on a profitable niche within the pincer. But this is where I believe they tripped up....

- DJ embarked on what it termed a 'New World Carrier' strategy. While it never explicity defined this strategy to investors, it involved taking its low cost base (which was still very low, but just not as low as JQ), and incrementally adding key product ingredients identified as being important to the high-yielding business segment. These included lounges, frequent-flier programs, premium seating etc, each of which was modelled to deliver a given revenue benefit over and above the costs incurred by adding them (ie. value adding), and would in turn improve DJ's yield mix. The Embraers were also very much part of this strategy, enabling them to develop high frequencies on thin, but high-yielding business markets (eg. CBR), among other things. In any case, the strategy would theoretically improve yields and margins (and particularly margin quality/consistency), converging with QF at the higher-end of the market, and taking the airline away from the low-yield, more volatile leisure segment where it was no longer a 'cost leader'. So New World Carrier was a hybrid of low(er) cost base and high(er) yields, which of course would translate nicely into an overall margin/profit improvement.

What has happened since then?

- DJ's product has moved upmarket in a number of areas, but seems to have been unable to derive the necessary yield increase to justify the strategy overall. In particular, I question their decision to take their ENTIRE Australian airline (and its cost base) upmarket, rather than deploying a focussed and premium offshoot and working to improve the cost base of the incumbent airline, which was certainly not 'out of the ballpark' (and definitely not in the case of Pac Blue). They had also developed a strong, recogniseable and compelling leisure brand and low-fare mantra ('Keeping the Air Fare'). Instead, they have introduced significant complexity to their business in fleet, product and overheads at a time when successful airlines are refining and aligning their focus to specific and targeted market segments, and setting up additional airlines to do so if need be. Their crusade to sway high-yield traffic towards their unbundled, pay-per-use product frills would probably work nicely in the abstract, or in the old-world duopoly where the fare gap would've have been too compelling for even the bigger spenders. But in today's ever-globalising business travel market, premium product norms are informed by the large global players (EK, SQ, LH, etc), who in almost all cases are increasing their product bundling (limousines, premium lounges, corporate jets, concierge check-in, etc etc), and certainly not reducing it. Domestically, this is reflected in QF mainline's addition of Business Class Lounges, among several other things in the pipeline.

- DJ's designs on QF's domestic yield premium (Brett Godfrey has reiterated these a number of times) are well-intentioned, but represent an incredible challenge. QF is a large regional/small global player with an integrated full-service network (with international-domestic feed interplay) and is a member of a large global alliance. It has developed its brand, reputation, sales relationships and operations over decades. And while some of this is 'legacy' stuff, much of it remains central to their current success. As discussed, QF is the established 'differentiator' in the domestic market, and enjoys the yield premium flowing from that position. If DJ intends to capture even some of that yield premium (as Brett Godfrey has announced), it will increasingly rely on their ability to differentiate from Qantas mainline. Based on current and announced product initiatives, it seems unlikely that they'll be in any position to do this on product, which leaves 'value for money' (or even airfares) as the remaining lever. In this way, they could seek to offer most of the frills that Qantas do, but for substantially lower fares. This price-leader/differentiator hybrid is what I believe their NWC strategy is all about. But Qantas's recent public estimation that their domestic mainline unit costs would fall below DJ's 'soon' seems to render this position redundant, and it would seem that - even with on-line feed from VAustralia (which will be successful) - they will remain stuck in the middle for some time to come.

- For these reasons, and many more, Marty, DJ's effect on QF's corporate business has thus far been very minor (according to public statements), and QF is likely to continue to consolidate its differentiator position in the market through additional product initiatives.

- Lastly, in pursuing their NWC product strategically domestically, DJ have been unable to move up the curve fast enough to escape the reality that price-sensitive leisure remains a core component of their passenger mix. As discussed above, JQ and now Tiger have emerged as slightly better-configured players in this market, and are able to target DJ's lower-yield business by translating their lower cost bases into aggressive air fares on competitive routes. In all, DJ's present inability to command either end of the Australian domestic market is reflected in their profit guidance for FY08-09 (and of course fuel is affecting all players).

DJ is managed by shrewd and experienced players, and I'm sure will emerge with a modified course of action that will capitalise on their likely successes with VAustralia, and make better use of Virgin Blue's existing, significant brand capital and business strengths. They're one of the last players in the region that I'd be 'writing off' about now. Their quagmire will, however, take some time to fix.

I've exceeded my word limit now, Marty, and haven't even covered half of it!

[NickN]

Will,

One of the best responses and most enjoyable reads I have had in many months. Thank you for the excellent reply. Thanks for putting the time in to construct a reply which was both informative and effective.

[Greg McDonald]

Will,

One of the best responses and most enjoyable reads I have had in many months. Thank you for the excellent reply. Thanks for putting the time in to construct a reply which was both informative and effective.

Absolutely agree with that.

If ever you get sick of being up the front end Will you could obviously turn your hand to Aviation analyst/writer!!

[Steve Jones]

Interestingly if you look at the online bookings for Tiger, a number of off-peak flights to various destinations have been canned ad-hoc at least until early December... Low pax numbers?

[Marty H]

Very good write up Will, the article basically said that VBA's pax numbers are up by about 17.9% this is due to a number a factors including strike issues at QF.

Please feel free to email me more information

Cheers

[Radi K]

Will,

Who da man?

http://www.knight-foundation.com/images/1knightthumb2.jpg

You da man! ;)

Good write up, you should submit it at UNI :p

As an aside, another article which discuss some the issues raised in this series of posts.

Meet Virgin Blue’s best marketer: Qantas
http://www.aviationrecord.com/news-articles.aspx?articleType=ArticleView&articleId=1258

[Rhys Xanthis]

Yep, well done Will, fantastic post.

VAustralia will definetly succeed - its almost the lifeline that DJ need.

[NickN]

its almost the lifeline that DJ need.


Geez Rhys it's not like they are on their last legs or anything.:eek:

... and Radi.... 10 points for managing to include the Hoff in this thread!

I am surpirised the Hoff hasn't started his own airline, something along the lines of **** Hoff Airways.

[Rhys Xanthis]

No, thats true, but they're in a semi-precarious situation with fuel prices etc hitting them hard.