http://www.businessspectator.com.au...tar-Virgin-Blue-pd20091222-YY7SY?OpenDocument
No Tiger in the tank
Stephen Bartholomeusz, 22 Dec 2009
Pre-marketing documents for the proposed float of Tiger Airways tend to confirm the speculation that Tiger has more than halved the size of its proposed capital raising to about $S200 million ($A160 million). It may struggle even at that level, with institutional investors endeavouring to reconcile optimistic forecasts with Tiger’s current condition and capital requirements.
When Tiger’s March-year financial statements were belatedly filed earlier this month they disclosed that the group had lost more than $S50 million ($A41 million), had negative equity to the tune of $S110 million ($A89 million) and had run down its cash balances from $S33.4 million ($A27 million) to $S13.2 million ($A10.7 million).
It was effectively funding its operations from its forward sales but not growing those forward bookings fast enough to avoid running down its cash reserves.
Despite that bleak picture, and the knowledge that Tiger has to find about $S750 million ($A609 million) to fund its commitment to new plans over the next three years, the pre-float research produced by two of its lead-managers, Morgan Stanley and Citigroup, is remarkably upbeat.
The investment banks refer to Tiger as "disciplined", and laud the execution of its low-cost carrier – Morgan Stanley describes it as the "highest quality low-cost airline franchise", despite the group not recording an operating profit in its first five years of existence.
Their forecasts are "hockey-stick" in character. From its losses in 2008-09 they expect it to earn $S41.6 million ($A33.7 million) this year, $S54.6 million ($A44.2 million) in 2010-11 and $S74.9 million ($A60.6 million) in 2011-12. Over that same period debt will increase from $S101 million ($A82 million) to $S600 million ($A485 million) as its fleet doubles in size.
Revenues are expected to 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 that said it would break even in its first year of operation, the forecasts are rather ambitious and make any assessment of the valuations of between $S500 million ($A404 million) and $S900 million ($A728 million) difficult. Investors on the receiving end of the marketing have questioned Tiger’s ability to deliver the projected earnings growth and pricing that reflects market valuations of established low cost carriers.
The other noteworthy aspect of the investment bankers’ research is, given Tiger’s losses relate largely to its Australian operations, how little discussion there is about the competitive settings and likely developments in this market.
Once Tiger launched on the key Sydney/Melbourne route, Qantas responded immediately by putting Jetstar-badged aircraft on that route. In fact, Qantas is using Jetstar to shadow Tiger’s route expansions. If Jetstar continues to increase capacity and aggressively discounts the empty seats at the back of its planes, it could impose significant pressure on Tiger.
Virgin Blue – which has been focused on maximising the profitability of its domestic business to offset the heavy start-up and operating losses from launching V Australia on the trans-Pacific route, even as the global aviation sector went into a tail spin – has some relief in sight now that its proposed joint venture with Delta Airlines has been cleared. It expects to break even on the route by the middle of next year.
Even with the capital raising, should it be successful, Tiger would be quite highly leveraged and vulnerable to a competitive onslaught. The amount of funds it is now seeking isn’t enough to provide insurance against any unexpected setback.
Qantas, which already has a beefed-up presence in Asia through Jetstar Asia, announced last week that it is in talks with Malaysia’s low cost carrier, AirAsia, about a joint venture. Air Asia is the biggest of the Asian low-cost carriers. That combination, and Qantas’ continuing ambitions for Jetstar in the region, would impact the rest of Tiger’s routes.
The pre-float marketing gets a boost from Tiger’s parentage; 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, so the risks posed by Tiger’s funding requirements could be mitigated by the pedigree of its shareholders.
Singapore Airlines and Temasek are expected to maintain their stakes through the float, but Indigo and the Ryans may sell down some of their exposures.
An interesting question posed by the bullish pre-float material is why, if Tiger’s revenues and earnings are about to explode, would they pursue an initial public offering in the first place? That’s particularly pertinent in the context of the global aviation industry’s distressed condition.
The existing investors should be able to write a cheque for $S200 million without difficulty, preserving all the near-term upside for themselves, instead of handing 25 to 30 per cent of the airline to new investors at (despite some very recent faint signs of life) close to the worst point in the industry cycle.
The fact that they aren’t writing that relatively modest cheque may explain the lukewarm response to the offer by institutional investors and the consequent scaling back of the proposed offer size.
The signal sent by the current owners has been amplified by the understanding provided by the pre-float documentation that, in an industry where generally everything that can go wrong tends to do so (generally all at once), Tiger’s path to stability and fortune relies on absolutely nothing going wrong.
It’s a safe bet that Tiger’s competitors in Asia and Australia are poring over the pre-float documents and already developing plans to make sure something does.
No Tiger in the tank
Stephen Bartholomeusz, 22 Dec 2009
Pre-marketing documents for the proposed float of Tiger Airways tend to confirm the speculation that Tiger has more than halved the size of its proposed capital raising to about $S200 million ($A160 million). It may struggle even at that level, with institutional investors endeavouring to reconcile optimistic forecasts with Tiger’s current condition and capital requirements.
When Tiger’s March-year financial statements were belatedly filed earlier this month they disclosed that the group had lost more than $S50 million ($A41 million), had negative equity to the tune of $S110 million ($A89 million) and had run down its cash balances from $S33.4 million ($A27 million) to $S13.2 million ($A10.7 million).
It was effectively funding its operations from its forward sales but not growing those forward bookings fast enough to avoid running down its cash reserves.
Despite that bleak picture, and the knowledge that Tiger has to find about $S750 million ($A609 million) to fund its commitment to new plans over the next three years, the pre-float research produced by two of its lead-managers, Morgan Stanley and Citigroup, is remarkably upbeat.
The investment banks refer to Tiger as "disciplined", and laud the execution of its low-cost carrier – Morgan Stanley describes it as the "highest quality low-cost airline franchise", despite the group not recording an operating profit in its first five years of existence.
Their forecasts are "hockey-stick" in character. From its losses in 2008-09 they expect it to earn $S41.6 million ($A33.7 million) this year, $S54.6 million ($A44.2 million) in 2010-11 and $S74.9 million ($A60.6 million) in 2011-12. Over that same period debt will increase from $S101 million ($A82 million) to $S600 million ($A485 million) as its fleet doubles in size.
Revenues are expected to 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 that said it would break even in its first year of operation, the forecasts are rather ambitious and make any assessment of the valuations of between $S500 million ($A404 million) and $S900 million ($A728 million) difficult. Investors on the receiving end of the marketing have questioned Tiger’s ability to deliver the projected earnings growth and pricing that reflects market valuations of established low cost carriers.
The other noteworthy aspect of the investment bankers’ research is, given Tiger’s losses relate largely to its Australian operations, how little discussion there is about the competitive settings and likely developments in this market.
Once Tiger launched on the key Sydney/Melbourne route, Qantas responded immediately by putting Jetstar-badged aircraft on that route. In fact, Qantas is using Jetstar to shadow Tiger’s route expansions. If Jetstar continues to increase capacity and aggressively discounts the empty seats at the back of its planes, it could impose significant pressure on Tiger.
Virgin Blue – which has been focused on maximising the profitability of its domestic business to offset the heavy start-up and operating losses from launching V Australia on the trans-Pacific route, even as the global aviation sector went into a tail spin – has some relief in sight now that its proposed joint venture with Delta Airlines has been cleared. It expects to break even on the route by the middle of next year.
Even with the capital raising, should it be successful, Tiger would be quite highly leveraged and vulnerable to a competitive onslaught. The amount of funds it is now seeking isn’t enough to provide insurance against any unexpected setback.
Qantas, which already has a beefed-up presence in Asia through Jetstar Asia, announced last week that it is in talks with Malaysia’s low cost carrier, AirAsia, about a joint venture. Air Asia is the biggest of the Asian low-cost carriers. That combination, and Qantas’ continuing ambitions for Jetstar in the region, would impact the rest of Tiger’s routes.
The pre-float marketing gets a boost from Tiger’s parentage; 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, so the risks posed by Tiger’s funding requirements could be mitigated by the pedigree of its shareholders.
Singapore Airlines and Temasek are expected to maintain their stakes through the float, but Indigo and the Ryans may sell down some of their exposures.
An interesting question posed by the bullish pre-float material is why, if Tiger’s revenues and earnings are about to explode, would they pursue an initial public offering in the first place? That’s particularly pertinent in the context of the global aviation industry’s distressed condition.
The existing investors should be able to write a cheque for $S200 million without difficulty, preserving all the near-term upside for themselves, instead of handing 25 to 30 per cent of the airline to new investors at (despite some very recent faint signs of life) close to the worst point in the industry cycle.
The fact that they aren’t writing that relatively modest cheque may explain the lukewarm response to the offer by institutional investors and the consequent scaling back of the proposed offer size.
The signal sent by the current owners has been amplified by the understanding provided by the pre-float documentation that, in an industry where generally everything that can go wrong tends to do so (generally all at once), Tiger’s path to stability and fortune relies on absolutely nothing going wrong.
It’s a safe bet that Tiger’s competitors in Asia and Australia are poring over the pre-float documents and already developing plans to make sure something does.
