Tiger IPO

Tiger Airways is launching an IPO to raise up to $246.8 mil dollars. A fellow SMU friend emailed and asked if we should subscribe to this IPO, here's my take on it. After scrolling through the 300 over pages of prospectus available on SGX homepage.

The following discussion assumes that you intend to buy and hold Tiger Airways for at least 5 years and beyond.

Should you decide to subscribe, please consider the following;

1. The airline industry is insanely competitive. Few airlines company makes accounting profit, much less generate free cash flow after capital expenditure needs.

2. The world class low cost carrier leaders are Jetblue and Southwest airlines. Both suffered terrible results over the last three years. Do you think Tiger will fare better should we face any economic turmoil in the future?

3. Financials:
(a) Income statement (pg 12 -13), the results for the past 3 years are dismal.

(b) Balance sheet (pg 14 -15), the company is in net NEGATIVE equity position

(c) Over 3.7 BN in operating lease commitment (pg 64), this is OFF BALANCE SHEET!!! So what is the 'true' financial standing of this firm? You decide.

Thought Experiment: Assuming that you can afford to buy the whole company and has to hold it in your family for the next 3 generations (without the option to sell), how much would you pay for it?

My answer is that I will not own it at any price cuz I believe this company (and most airline companies) will consume more cash than it can generate, and that my family will be worst off having this non-cash generating cow that eats way too much grass.

So do continue taking Tiger as we now know that the fleet is at a youthful 2.4 years (but depreciated over 23 yrs!!!). It is also likely that we are not overcharged when we buy our air tickets looking at the almost non-existent gross margins :)

Meanwhile hear the father of business strategy, Michael Porter, talks about competitive advantage and the terrible economics of the airline industry.