Tiger Airways' low-cost strategy in the Australian airline market

Australian Airline

Tiger Airways was the third major entrant into the Australian discount airline industry. The airline, a joint venture of Singapore Airlines, RyanAir and investor's groups, entered the market with the intent to undercut the existing competition. Tiger uses as a business-level strategy the low-cost model of RyanAir, which gives them several competitive advantages over Jetstar and Virgin Blue, including more efficient and comfortable planes and better positioning for the current social and economic climate. The trend in the Australian domestic airline industry is towards discount carriers, and the ability to succeed depends largely on the ability to control costs, something Tiger does well.

The company's cost-reduction model is a key strength, as are its two hubs in Melbourne and Adelaide. Weaknesses include the reliance in slim margins to succeed and the relative lack of brand recognition. There are opportunities for Tiger to continue to expand its domestic operations, but also to leverage its Singapore hub to build out international service. The deregulated market is a threat, however, as new entrants are attracted by the industry's strong growth figures. The economy is also a threat, as evidenced by the Tiger group's withdrawal from the Korean market as a result of the downturn.

Tiger's business-level strategies are largely congruent with its economic, social and competitive environment. The airline is focused on leveraging its cost competitive advantages and this has allowed it to build its market share rapidly over the past few years. There is risk in its dependence on slim margins, in particular given the high degree off volatility in jet fuel prices. On balance, however, Tiger has been highly successful.

Introduction

Singapore-based Tiger Airways first flew in September 2004, and by 2007 had expanded into the Australian domestic market. The firm is based out of Singapore, with secondary hubs in Melbourne and Adelaide. The firm was founded by a consortium of airlines, including Singapore Airlines, RyanAsia and a pair of holding companies. In terms of corporate structure, Tiger Airways Australia is a separate group within the Tiger Aviation Group.

At the time Tiger entered the Australian market, CEO Tony Davis outlined his plans as entering the Australian market "with continually lower fares than" Jetstar and Virgin Blue (Hadley, 2007). Tiger's strategy is essentially a low cost strategy, and they seek to emulate the model of co-parent RyanAir in this respect. The company attempts to find ways to stimulate demand in the market, thereby increasing its load factors. Cost controls are essential to the discount airline business model, and Tiger utilizes many of the same techniques as RyanAir. The third component of their strategy to attain their mission is capacity utilization.

Since it's entry into the domestic Australian market, Tiger Airways has steadily built out its route structure and in 2009 added the Adelaide secondary hub. When the company launched, it expected to be profitable in its first year, and to grow 20-25% in the first five years, a period which is just coming to an end now (Delfmann, 2005). The next five years will see increased expansion out of Adelaide and throughout the Australian network. The airline is also in the process of expanding into India as well (Tiger Airways, 2009).

The company's primary strategic goal is to reduce costs in order to offer the lowest-cost ticket prices in the Australian market. The airline has several business level tactics that support this strategy. Among them are a focus on Internet sales and ticketless travel, removing frills, use of new aircraft, usage of budget terminals and secondary airports, short aircraft turnaround times, and outsourcing aircraft maintenance (Tiger Airways, 2009).

The secondary strategic goal of increasing capacity utilization and driving higher demand is done through promotions, including price wars with the more established discount players in the Australian market. The company feels that Jetstsar (Qantas) and Virgin Blue were operating a "cozy duopoly" that was keeping airfares higher than equilibrium and seeks to drive higher traffic volumes by exploiting this overpricing (Hadley, 2007).

Lastly, given that for Tiger Airways forward bookings have increased despite the economic downturn, and the company is expanding its fleet from 10 to 16 in the next two years, with a goal of 60 planes total by 2016 (World Airline Report, 2009).

General and Task Environmental Analysis

The general environment for Tiger Airways is moderately favourable. The economic environment is relatively poor. Although the global recession has not hit Australia as hard as many other Western nations due to a stronger banking sector and corresponding lack of credit crunch, the country has seen some business slowdown. This has not had a substantial impact on the majority of Tiger Airways' existing business, but the strength of the downturn in Korea convinced the airline to scrap a planned joint venture based out of Incheon (World Airline Report, 2009). Overall, however negative impact of the economic downturn has likely been overstated, at least for the discount airline industry. Some other discount businesses have actually benefited from the economic downturn as customers trade down, and there is reason to believe that has been the case for Tiger Airways as well.

However, there are significant concerns with respect the economic environment. Fuel prices, the major input for discount airlines, are volatile and generally high based on historical levels. Capital is harder to come by and for many such airlines growth prospects are limited. Moreover, for a multinational airline such as Tiger there are currency risks -- razor thin margins can be eviscerated with even a slight shift in exchange rates, and this risk cannot be entirely hedged (Bell & Lindenau, 2009).

The political/legal environment is generally favourable. This environment impacts the discount airline business in a couple of key ways. The first is with respect to gaining airport access rights. The discount airline business depends largely on the use of secondary airports, for which rights are generally easy and low cost to acquire. For example, Tiger has been able to build a hub out of Adelaide with strong support from the local and state governments, who are enticed by the prospect of increased tourism dollars (Government of South Australia, 2009). Even the failed Incheon initiative was a collaborative effort with the South Korean government, failing not because of lack of political support but because of an unfavourable economic environment.

The social environment is generally positive. The market for discount airline services is generally growing. In particular, consumers are becoming tired of subsidizing the high fixed costs of legacy carriers. To paraphrase Tony Davis, the average Australian consumer is tired of paying full-service prices for discount quality flights. The top 75 low-cost airlines recorded 9% traffic growth in 2008, despite the downturn. Tiger's passengers carried grew by 50%; Virgin Blue's by 9.2%; and Jetstar's by 20.1% ("Low-cost traffic rankings," 2009). These Australia-specific numbers make it clear that the social environment for discount airlines is very positive at present.

The task environment for discount airlines in Australia, however, is becoming increasingly difficult. Since the Australian market was opened to competition, Qantas was first joined by Virgin Blue and then in recent years a slew of competitors have entered the domestic industry. Tiger Airways was the first of these, but since then Australia has seen the entry of Indonesia-based Lion (Wastnage, 2008) and other, smaller operators gaining access to routes in the Australian domestic market.

Porter's five forces analysis can be used to determine the state of the task environment (Porter, 1980). The suppliers have a moderate to high level of power, depending on the input. Jet fuel suppliers are price setters, but the airlines often have a healthy amount of power with respect to labour, the other key input. The buyers have a high level of power. Competition within the industry dictates that the typical buyer has the choice between a variety of different airlines on any given route and therefore is a price setter.

The threat of substitutes is relatively low. On some routes, typically those six hours or less, there is some risk of substitution with cars or trains, but for many Australian routes, the distances are so vast there is little risk of substitution. Today, there are few barriers to entry. The government has few barriers and the number of secondary and tertiary airports available puts no constraints on the growth of discount airlines. While on the surface the high fixed costs and steep learning curve may prevent mass entry into the discount airline business, this has not been borne out in practice. There are many airlines around the world capable of operating a discount arm and with a surplus of airplanes, there are many craft available for purchase or lease at a fair price. Thus, the barriers to entry for the airline industry are sometimes overstated.

Lastly, the degree of rivalry is high. The main reason is that the service offered is perfectly perishable. Once a flight has flown, the empty seats can no longer be filled and represent lost potential revenue to the airline. This perishability instills in industry players a sense of urgency that increases the intensity of rivalry. Another contributing factor is the industry's high fixed costs. These costs increase the exit costs, which is another factor that increases the intensity of rivalry. The third major factor is the degree of consolidation within the industry. Aside from the minor carriers, there are essentially only three major discount airlines operating in the Australian market. Prior to the entrance of Tiger, the two players operated as a duopoly. Tiger increased the level of competition in the market, such that the industry is now characterized by vicious price wars. Corporate stakes can also increase the intensity of rivalry. Qantas owns Jetstar, and as the national carrier must be a major competitive force. Virgin has staked a substantial portion of its business on Virgin Blue. These two companies are highly entrenched in the market with high corporate stakes. The intensity of rivalry in the industry, therefore, is very high.

Critical Analysis of Business Level Strategies

Tiger Airways outlines their business-level strategies on their website (Tiger Airways, 2009). The first strategy is to focus primarily on Internet sales. This is congruent with the low-cost provider strategy that they have adopted and with the general industry trends. Internet sales is more cost-effective than sales through travel agents, and the trend in the airline industry is towards use of the Internet as a means to generate sales. By cutting out travel agents, Tiger can offer a reduced margin to consumers, thereby driving more business and reducing their costs. Paperless ticketing is a related business-level strategy that serves a similar cost-reduction function and again is congruent with the low-cost strategy and the trends in the social environment.

The no frills model is another core business level strategy for Tiger. This is congruent with the social trends in Australia, as evidenced by the strong growth in all discount airlines in the nation ("Low-cost Traffic Rankings," 2009). The no frills model also reduces the number of key inputs, which is congruent with the volatile economic environment. The intense nature of the competitive environment and the perishability of the core product has lead the industry into a model built around price competition and driving high volumes, which combined with the social desirability of no-frills air travel makes the Tiger strategy congruent with the business, social and economic environment.

The use of new aircraft is a strategy that functions on several levels. These aircraft have lower maintenance costs, which is again congruent with the need to compete on price in this industry. However, the new planes also provide a level of differentiation from their competitors, in particular Jetstar and Virgin Blue, both of which started with older model planes. Not only does Tiger derive a cost advantage from their new planes but they also win competitive advantage in the marketplace, since consumers prefer the comfort of new planes over the older models flown by Tiger's two main competitors.

Short aircraft turnaround is congruent with the low-cost strategy. However, it also makes the airline more attractive to airports and therefore can help it find good secondary airports from which to operate. Adelaide, for example, was excited to partner with Tiger because the multitude of flights into the city would add to the tourism base (Government of South Australia, 2009). Outsourcing of aircraft maintenance also allows the airline to hedge the cost of one of its key inputs by encouraging competition for maintenance contracts.

Overall, Tiger Airways operates the classic low-cost provider model for the airline industry, the same model as RyanAir that has been proven successful for a number of discount airlines. The firm's business level strategies are largely designed to reduce costs, which is essential given that the airline business is becoming commoditized. This shift in the industry is resulting in a business where margins are very slim and where it is essential to fill capacity in order to succeed. These changes are being driven by the increasing intensity of competition in the industry, a function of new entrants and the high exit costs for the existing players.

Furthermore, the firm's strategy is congruent with the current economic environment. In sluggish economic times, discount products and services often succeed while mainstream ones struggle. The strategy, however, is not congruent with the high degree of volatility in jet fuel prices. While Tiger has adopted strategies to control the price of many key inputs, often by offloading those costs onto the computer, it cannot control the sharp fluctuations in the price of jet fuel. The slim margins make the company more highly susceptible than other airlines to changes in the price of jet fuel.

The success of Tiger Airways' entry into the Australian discount airline market is a clear illustration that its strategies to this point have been successful. In general, their business level strategies are a good fit with the competitive environment, the social environment, the firm's strengths and the economic environment. The company has demonstrated some weaknesses, but at this point in time those weaknesses have not manifested in any substantive way. The firm should continue to exploit its strengths to take advantages in future, in part to build out its routes both domestically and internationally in order to help support its volume strategy. Moreover, such a leveraging of key strengths would also help to avert the most significant threat, which is the entry of new competitors to the market. Tiger Airways appears to have competitive advantages over Virgin Blue and Jetstar as a result of its association with RyanAir and its all-new fleet of aircraft. These advantages, however, would not necessarily hold against new competitors.

Tiger Airways' strategy has been so successful because it works well in concert with the current social, economic and competitive environments. Their current strategy, however, leaves little room for error, or for a change in strategy. There can be little doubt that to the extent current operating conditions remain unchanged, Tiger Airways will continue to build market share. However, should these conditions change dramatically, it may be difficult for Tiger to change with the conditions, and the firm's high level of congruence with today's conditions could put its future in jeopardy at that point.

Works Cited:

Wastnage, J. (2008) Lion in Wait. Travel Weekly, 25 January, p 6

Hadley, M (2007) Rumble in the Jungle. Travel Weekly, 23 March, pp 4-5

Tiger Airways website. (2009). various pages. Retrieved August 20, 2009 from http://www.tigerairways.com/au/en/about_us.php

Delfmann, Werner. (2005). Strategic Management in the Airline Industry. Surrey, UK: Ashgate Publishing.

No author. (2009). World Airline Report: Asia/Pacific. Air Transport World, July 2009.

No author. (2009). Tiger Airways' Adelaide Base Takes Off. Government of South Australia. Retrieved August 20, 2009 from http://www.ministers.sa.gov.au/news.php?id=4409&print=1

Bell, Michael & Lindenau, Thierry. (2009). Sleepless Nights. Airline Business. Retrieved August 20, 2009 from http://web.ebscohost.com.ezproxy-m.deakin.edu.au/ehost/detail?vid=4&hid=8&sid=81a97e6b-985d-4734-b09e-3be7bd309d20%40sessionmgr11&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&an=40396379

No author. (2009). Low-Cost Traffic Rankings. Airline Business, 25(5) pp.74-75.

Porter, Michael. (1980). Competitive Strategy. New York: Free Press.

Hannon, David. (2009). Despite Lower Jet Fuel Prices, Fewer Airlines Hedging. Purchasing 138 (5), pp.22.