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It was November 2012 and Koay P.Y., CEO of Singapore-based low-cost carrier Tiger Airways
Holdings Limited (Tigerair), was gearing up mentally to put together a compensation plan to be
submitted to the Boards Remuneration Committee (RemCo). He had been in discussions with
Ong Chee Mei, Chief Human Resources Officer, on key considerations of designing a
compensation scheme that supported the companys business and HR objectives.
Leading up to Koays appointment in August 2012, Tigerair had experienced a difficult time
since it was listed on the Singapore Exchange in January 2010. A series of events had
negatively impacted the companys brand reputation and financial performance. These included
events such as pilot strikes in Singapore, and Tigerair Australia being grounded due to
regulatory concerns - which had caused the group to take a financial hit. Moreover, several
senior executives had left, or were leaving, the group after its initial public offering in 2010,
and these positions had not yet been filled.
When Koay joined Tigerair as CEO, he had his work cut out for him. He urgently needed to
improve the companys performance by addressing the ongoing financial and image issues at
hand. This meant doing a few things, including emphasising safety and risk management, in
order to restore customer confidence. The company also needed to hire the right people who
could help turn the company around and build the foundation of a sustainable business.
The Board had surmised that as part of the solution to all these problems, Tigerair needed a
new compensation scheme to attract the right talent to meet both business objectives of shortterm crisis management and long-term sustainability. Koay was tasked to put together a
credible compensation plan for the RemCos approval, which could serve as a support
mechanism to bring about a turnaround in the fortunes of the company.
!
About Tigerair
The Airline Industry
In 2011, the global airline industry1 brought in US$570.1 billion in revenues.2 This was slated
to almost double by 2016 to about US$1.1 trillion, with a total volume 3 of 3.1 billion
passengers.
1
The airlines industry comprised passenger air transportation, including both scheduled and chartered, but excluded air freight
transport.
Marketline, Global Airlines, October 2012, EBSCOhost via SMU library, accessed June 2015.
3
Industry volumes were defined as the total number of revenue passengers enplaned (departures) at all airports within the country
or region, excluding transit passengers who arrived and departed on the same flight code.
2
This case was written by Fermin Diez and Adina Wong at the Singapore Management University. The case was
prepared solely to provide material for class discussion. The authors do not intend to illustrate either effective or
ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
Copyright 2016, Singapore Management University
Version: 2016-01-25
SMU-16-0011
The same year, Asia contributed to slightly over 22% of global airline revenues, compared to
42% for the Americas and 32% for Europe.4 China represented the largest share (28%) of this
revenue, followed by Japan (17%).5 Estimates were that by 2016, the value of the Asian
airlines industry was expected to more than double to US$264 billion, and service a volume of
slightly over one billion passengers.
Asia was poised to be the fastest growth region for the industry. At the beginning of 2012, four
out of the five airlines that received top quality ratings from international benchmarking
company Skytrax were Asian, as were six of the worlds largest airlines by market
capitalisation (Air China, Singapore Airlines, China Southern, ANA, China Eastern and Cathay
Pacific).6 Asia would also be the place of greatest expansion for low-cost carriers, such as
Malaysia-based Air Asia, and Australias Jetstar (refer to Exhibit 1 for airline capacity by type
and country of origin).7
About Tigerair
Tiger Airways was established in 2004 as a Singapore-based budget carrier, and by 2012 had
its largest footprint in Singapore and Australia.8 On 22 January 2010, the company was listed
on the Singapore Stock Exchange at S$1.50 (US$0.82)9 per share, and raised S$248 (US$203)
million proceeds from the listing.10 The funds raised from the IPO were to pay off short-term
debt, as well as enable Tigerair to carry out expansion plans in Asia.11 Public confidence in the
company was high, and the IPO shares were oversubscribed. 12 However, by 2012, the
company was reporting a net loss of US$80 million compared to a net profit of US$20 million
in 2010.13
Precipitating Change
The period after the IPO was difficult, with a series of events occurring that negatively
impacted the company.
At the end of 2010 and early 2011, there was a pilot strike in Singapore over the issue of
remuneration, following which many pilots quit the company. This labour action and crew
exodus resulted in cancellation of flights and severe service disruptions for Tigerair
Singapore.14 The company had to appease a large number of disgruntled customers, who didnt
think twice about switching to other competing low-cost airlines.
A few months later, in July 2011, Tigerair Australia, a wholly-owned subsidiary of Tiger
Airways Holdings, was grounded by the Australian regulators due to breaches in safety
practices (refer to Exhibit 2 for some press coverage on the grounding).15 All ten of Tigerair
Australias aircraft at the time had to be grounded. The Sydney Morning Herald reported that it
was the first time that the Civil Aviation Safety Authority of Australia had to ground an entire
4
Ibid.
Marketline, Airlines in AsiaPacific, October 2012, EBSCOhost via SMU library, accessed June 2015.
6
Colin Baker, Travel DriverAsia is set to revolutionise the future of world travel, EDB, March 2012,
https://www.edb.gov.sg/content/dam/edb/en/resources/pdfs/publications/SingaporeBusinessNews/Singapore-Business-NewsMarch-2012.pdf, accessed June 2015.
7
Ibid.
8
Tiger Airways, About us, http://www.tigerair.com/sg/en/about_us.php, accessed June 2015.
9
US$ 1 = S$ 1.22 as of 1Nov2012, www.oanda.com.
10
Tiger Airways, Tiger Airways Shares Soar On Trading Debut, January 22, 2010,
https://www.tigerair.com/news/TH_20100122_Tiger_Airways_shares_soar_on_trading_debut.pdf, accessed April 2015.
11
Scott Rochfort, Start-up costs Tiger $80m, Sydney Morning Herald, December 23, 2009,
http://www.smh.com.au/business/startup-costs-tiger-80m-20091222-lbrp.html, accessed April 2015.
12
Tiger Airways, 2010 Annual Report, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
13
Tiger Airways, 2010 & 2012 Annual Reports, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
14
Tiger Airways, 2012 Annual Report, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
15
Tiger Airways, 2011 Annual Report, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
5
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airline.16 Just prior to the incident, the company was flying about 62 flights a day within
Australia. As revenues dropped to zero, the fixed expenses put immense strain on the
company's finances. Koay recalled,
There were procedural process and management system issues, which were starkly
highlighted by the grounding. There were a lot of questions, such aswhy did it happen
this way? Why wasn't there a proper response to the regulators? What caused the
regulators to be upset and ground the airline?
Over and above the grounding issue, the group had earlier placed a firm order for 50 aircraft
that was beginning to roll in at the rate of ten aircraft per year. From its fleet of 21 aircraft in
2010, the airline estimated that it would more than triple its fleet size to 68 aircraft by the end
of 2015. A big part of these deliveries were scheduled for Australia.
Due to the grounding, the group had to absorb the new planes meant for Australia into the
Singapore operations, and as a result, Tigerair Singapores capacity increased substantially by
more than 50% within a year. The overcapacity depressed prices and increased costs, leading
Tigerair Singapore into big losses. From a Group perspective it was a double whammy - losses
in Australia with no incoming revenue, as well as losses in Singapore (refer to Exhibit 3 for
Tigerair financials from 2008 to 2012). As Reuters reported in February 2012,
Tiger's Australian problem, combined with excess capacity in its Singapore operation, led
to a loss of S$87.9 (US$72)17 million in the first nine months of the 2011/2012 financial
year, a reversal from its profit of S$38.5 (US$32) million in the previous year.18
Around the same period, the company was planning to pursue a regional strategy that led to it
establishing and investing in airlines in the Asia region (Tiger cubs), starting with Thailand,
the Philippines and Indonesia.19 We think our franchise is well established in Singapore, the
groups Chief Executive Officer Tony Davis said in May 2011, Our objective now is to take
that franchise around Asia.20 By 30 January 2012, Tigerair had bought a 33% share of
Indonesian Mandala Airlines, in a joint venture move to enter the country.21 In August that
year, Tigerair further expanded its Asia network with a 40% stake in the Philippiness South
East Asian Airlines Inc.22
Koay summed up the issues that had to be addressed in the aftermath of these events,
The challenges at that point in time were very clear. Tigerairs balance sheet was at a
precarious point. There was also a profitability issue where the companys losses were
spiralling. The events at Australia and Singapore had affected the customers confidence,
and the grounding in Australia had impacted the customers here [in Singapore] too. They
began to doubt the safety of not just Tigerair Australia, but Tigerair Singapore too. There
were questions, like Is it a company philosophy that you dont prioritise safety?
16
CASA acted on 'serious and immediate risk' to Tiger Airways safety, The Sydney Morning Herald, July 2, 2011,
http://www.smh.com.au/national/casa-acted-on-serious-and-immediate-risk-to-tiger-airways-safety-20110702-1gvx8.html,
accessed April 2015.
17
US$ 1 = S$ 1.22 as of 1Nov2012, www.oanda.com.
18
Harry Suhartono, Tiger Air plans April start for Indonesia carrier, Reuters, February 27, 2012,
http://www.reuters.com/article/2012/02/27/uk-tigerairways-idUSLNE81Q01020120227, accessed June 2015.
19
Tiger Airways, Annual Report 2011, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
20
Bloomberg, Tiger Air Seeks More Tie-Ups to Expand Asia Budget Network, http://www.bloomberg.com/news/articles/201105-20/tiger-air-seeks-more-tie-ups-to-expand-asia-network-after-indonesia-deal, accessed April 2015.
21
Tiger Airways, Tiger Airways Completes 33% Investment In Mandala Airlines of Indonesia, January 30, 2012,
http://www.tigerair.com/news/TH_20120130_Tiger_Airways_Completes_33_Investment_In_Mandala_Airlines_Of_Indonesia.pdf,
accessed April 2015.
22
Rappler.com, Tiger Air completes purchase of 40% stake in SEAir, August 14, 2012, http://www.rappler.com/business/10468tiger-air-completes-purchase-of-40-stake-in-seair, accessed April 2015.
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Employee confidence was shaken too. They were asking, Where is the company heading?
What's going to happen to the company? Are we losing customers? When will we regain
profitability?
The company was urgently in need of a turnaround from its existing situation. There was,
subsequently, a series of leadership changes in Tigerair. The incumbent CEO, Tony Davis, who
had joined Tigerair in 2005, left the company at the end of October 2011.23 On 1 November
2011, Mr Chin Yau Seng, who had been seconded from Singapore Airlines, stepped up as CEO.
Chin had already been appointed acting CEO of Tigerair in July 2011 to support Davis, when,
after the Australia grounding incident, Davis took over the day-to-day running of Tigerair
Australia as its CEO. At that time Singapore Airlines held 32.8% ownership of Tigerair.
The Chairman of Tigerair, J Y Pillay, summed up the goal of the company in Tigerairs 2012
Annual Report,
The difference in profit between the previous year 2010-11 and the review yearwas an
unfavourable change of S$144 (US$118)24 million.
Rather than scraping around for excuses, we need to examine with clarity what we believe
were the root causes of the misadventures. The root cause of our troubles was a weakening
of governance, wherein, at its heart, lies the concept of accountability.
Besides inculcating the practice of robust governance, the task occupying the Board and
management is to foster the right values in the organisation so that the culture of service to
the customer is paramount.25
Elements of Change
What kind of turnaround are we talking about? Business turnaround, financial turnaround,
brand turnaround, organisational turnaround
- Ong Chee Mei, HR Director, Tigerair
Koay became the CEO of Tigerair on 10 August 2012, when Chin returned to Singapore
Airlines after a year, having contributed to Tigerairs regional expansion and corporate
governance efforts.26 Koay had extensive experience in the marine offshore and shipping, as
well as supply chain and logistics industries, but he was new to the airlines industry. Pillay
welcomed the new Tigerair CEO with the utmost confidence,27
Notwithstanding that he is entering the airline industry for the first time, the Board assesses
that [Koays] proven leadership and strategic skills, capacity for incisive thinking and
facility for building cohesive teams are able to propel the Group to greater and sustainable
heights.
CAPA, Tiger Looks to catch-up after rights issue and departure of founding CEO Tony Davis, August 30, 2011,
http://centreforaviation.com/analysis/tiger-looks-to-catch-up-after-rights-issue-and-departure-of-founding-ceo-tony-davis-57927,
accessed April 2015.
24
US$ 1 = S$ 1.22 as of 1 November 2012, www.oanda.com.
25
Tiger Airways, 2012 Annual Report, http://www.tigerair.com/sg/en/investor_relations.php, accessed June 2015.
26
Tiger Airways, Tiger Appoints New Group CEO, July 6, 2012,
https://www.tigerair.com/news/OA_20120706_Tiger_Appoints_New_Group_CEO.pdf, accessed April 2015.
27
Ibid.
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team had to re-define the objectives of the organisation and bring about the necessary changes
required to achieve these objectives. In Koays words,
There were immediate issues for the company to address at that time. By early-September
2012 (14 months after the grounding), Tigerair Australia had not yet been given back its
rights to fully fly its original 62 daily flights in Australia. The regulators were gradually
giving back the rights to 18, and subsequently 38, flights a day.
Koay and his team agreed on the business priorities Tigerair needed to address in order to turn
the company around in a sustainable way,
Business priority is a broad description. It includes everything that a shareholder, a
board member or a senior executive might be concerned about. That covers five broad
areas. The first is the strategic development of an organisation. What is your future
supposed to look like? What do you do today to harvest the rewards of the future? Second
is business performance. It can include many financial and operational performance
measures. Third, is about managing the company's capital and cash matters. Fourth, is
people management, including the ability to attract and retain people, and develop them in
the organisation. And fifth, risk management. You could do the first four very well but you
could lose everything if you don't manage the risks involved. Any reward system will have
to be aligned towards managing risks on a long-term basis, because at the end, it is about
managing for the companys longevity and for sustainable returns.
In December 2009, it was reported that Daviss remuneration was a fixed salary of S$600,000
(US$491,803)28 and a bonus of up to half his base salary each year. He would also have a two
percent stake in Tiger when it was listed.29 After the listing, in October 2010, it was then
reported that Davis earned something between S$750,001 and S$1 million (US$614,754 and
US$0.82 million)30, with his base salary making up about 68 per cent, and his performancebased bonuses contributing to the rest.31 (refer to Exhibit 4 for Tigerairs compensation
scheme in 2011).
28
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HR Objectives
A key priority for the business was to ensure that, going forward, HR objectives were aligned
with the business ones, namely, to hire the right people to both manage the short-term
challenges in financial performance and customer confidence, and also to bring about long-term
stability and sustainability to the company.
Koay described the type of people that were required to manage the company at each stage of a
business, When you look at the transformation of the company, quite clearly the type of
people that you want are pretty different too. Pre-IPO you might want a team that is very
focused on a very clear endpoint and exit. Beyond that it's managing across the board and
across the various diversities of challenges.
Ong explained the kind of profile of the kind of employee that Tigerair was looking to hire,
There was a sense of urgency to attract people who were more agile, more adaptable, and
able to deal with various things at the same time Somewhat different from a company
that is more stable and mature.
You would want somebody who was aligned with your shareholders and motivated to keep
in mind the interests of long-term shareholders.
Ong went on to share about the people she had seen do well in Tigerair so far,
In a turnaround company, there are not many systems in place, compared to a very stable,
and mature company. When I look at the executives that we hired across the region, I think
these people were fairly entrepreneurial who came with proven experience from other
established companies. If we pluck them from the market without any experience, I think
they would have a hard time over here, because the learning curve would be very steep.
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And so we picked people who were fairly bottom-line drivenmanaging directors who are
all very financially astute, very comfortable with grey areas, and very comfortable learning
on the fly and dealing with their own individual market.
People who tend to survive and thrive in our environment are employees who are strategic
but hands-on at the same timepeople who don't mind rolling up their sleeves to help build
systems and talents. People who love problem-solving. Things keep changing every day as
we were dealing with multiple concurrent challenges. Even some of the KPIs (key
performance indicators) could be re-prioritised every year depending on business
circumstances. So people that we hire tend to be very nimble, very resilient, and very
versatile.
We have also come to realise that employees who were very comfortable in their former
stable and mature organizations tend to find our environment a bit frustrating. When they
come over, they will say "Oh, I used to have a team of five people supporting me, how can I
now do everything by myself?"
Ong recognised that hiring the right people from the market may prove to be a challenge. She
recalled,
From the people strategy point of view, our biggest challenge was how to engage, and to
retain employees. We had people who were quite ready to leave the company because they
were not quite sure if this company could survive or sustain. We also had trouble attracting
good people from the market after recent negative publicity arising from the Australian
grounding.
So when we look at compensation, we needed to make sure that we are attractive, and take
into consideration a total compensation approach, keeping a good balance of short and
long term goals.
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some very complex schemes to assess long-term performance (refer to Exhibit 5 for some key
operating indicators and valuations for the global airline industry)
Element four would be employee benefits. For some employees, perhaps the more junior ones,
benefits could be an important component of total compensation. But typically for more senior
employees, the long-term incentives would be weighted higher, and benefits lower.
Different companies could carve out further subcategories among these. In Tigerairs case, it
wanted to bring about a balance of these elements that could help to incentivise the right
behaviour towards achieving its goals.
Achieving a Balance of Factors
Ong added,
In terms of balance, we need to carefully align our commercial brand with the
organisational brand. Commercially we are known as a budget airline, a low-cost carrier.
But when it comes to our compensation philosophy, sometimes I think the candidates have
this perception that just because you're low-cost, you can't pay. If we pay the lowest in the
market we will not be able to attract good people. We're fighting in a very competitive
market place.
It's also very important to know, for different positions in a company, how easy or how
tough it is to recruit from the marketplace. We need to position our compensation structure
quite differently.
Senior executives come with a fairly high base already, because they are proven executives
from their former organisations. And because this is a turnaround company, we also need
to look at how to actually incentivise them based on the turnaround performance they
provide so this is where the variable compensation comes in.
Koay added,
It would be quite different if you are hiring for a more junior role. It is probably good
practice, if you can, to have everyone think like an owner; but if you can't, then definitely to
have the more senior ones do so. For the junior roles, it may be more difficult to have them
think of themselves as an owner. Because when I say think as an owner, compensation
must be comparable and fair as well, considering the commensurate risks that employees at
different levels can or should take.
Ong interjected,
For top executives, they are in positions where they have more direct control over the
companys performance; whereas if we were to put too much at risk in terms of the junior
employees' (variable) compensation, that probably won't appeal to them because they look
for stability in their job.
But, Koay concluded, the base must be at the right level for different people. Because the
base being at market, above market, or below market says different things to people. It depends
on what type of person you want to recruit. So it is not about getting the best value for money
for the company by paying the lowest amount for a position. (refer to Exhibit 6 for executive
pay packages for some Tigerair competitors and Singapore listed companies)
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Regaining Altitude
How should the new compensation plan be designed? Koay and his management team had to
come up with a plan that made sense with respect to the business and HR objectives that
Tigerair wanted to pursue. In a discussion with the HR consultancys Senior Partner, part of the
conversation went as follows,
We were in an environment where the IPO executives had left. The new executives are in an
environment where there are multiple crises. Some of the things are very urgent; some of
the things will take more time and wont be completely addressed in six months or so. And
therefore we have to balance the total compensation design to include short-term and longterm components of compensation. Short-term variables need to be pegged to the various
crisis points. Because you don't want to take too long to fix your customers' confidence and
your brand positioning, your balance sheet issues or performance. Long-term variables
would link to a turnaround of the organisation.
Koay needed to give a concrete plan to the Board about the different components of the new
compensation scheme; how it would work and which employees would be included. He also
needed to explain how the design of the scheme would achieve the desired impact on the
business and solve the root causes of the problems that had precipitated in the companys
predicament.
He wanted to make sure that his recommendation was a sound one.
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Available seat miles (ASMs) by Airline Type and Country Origin (Dec 2011)
Scheduled
Network %
Value %
Other %
Charter %
Asia
80.30%
10.40%
1.00%
8.30%
Middle East
78.80%
7.30%
3.00%
10.90%
Africa
76.60%
10.80%
1.60%
11.00%
USA
71.70%
27.90%
0.10%
0.30%
S. America
69.30%
5.40%
0.60%
24.70%
Caribbean
69.30%
16.70%
4.70%
9.30%
Europe
66.70%
19.70%
2.90%
10.70%
Canada
65.70%
28.70%
0.60%
5.00%
Mexico/
C. America
59.30%
34.30%
0.50%
5.90%
Oceania
54.80%
41.20%
0.10%
3.90%
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32
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The last straw came last Thursday night when a Tiger Airways Airbus A320 from Sydney to
Tullamarine (Melbourne) breached minimum altitude levels -- first on a failed landing attempt
and then a second time as it grappled with a tailwind.
The plane was 15 kilometers from the tarmac at about 500 meters altitude, well below the 750
meters stipulated by the aviation authority.
But the writing was already on the wall. CASA gave the airline a show cause order as to why
their license shouldnt be revoked in March, citing deficiencies with pilot training and
maintenance procedures.
Tigers downfall is other airlines gain
Tiger Airways began service in Australia in 2007 with a fleet of five aircraft then swiftly
doubled its size.
Singapore Airlines began with a 49 percent share in the budget carrier, but has reduced its share
to 33 percent.
Tiger Airways has lost AU$7.1 million (US$7.4 million)33 in the last year and its share price
has crashed on the Singapore stock exchange, while Singapore Airlines shares continue to grow.
Qantas and Virgin have both put on extra services to accommodate travelers affected by the
Tiger grounding. Qantas engineers called off a strike that was set to roll out across the country
this week.
With a tarnished brand and mounting losses, the question remains how long Tiger Airways -even if it is given flight approval by CASA - will remain in Australian skies.
Local obituaries for the budget carrier are already being written.
Source: CNN Travel, Tiger Airways grounded over safety concerns, July 4, 2011,
http://travel.cnn.com/sydney/visit/tiger-airways-grounded-australia-and-its-future-air-175085, accessed April
2015.
33
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EXHIBIT 5: KEY OPERATING INDICATORS AND VALUATIONS FOR THE GLOBAL AIRLINE INDUSTRY
Key operating indicators and valuations for the Global Airline Industry (2011)
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Revenue per Available Seat Kilometre (R/ASKM): The Best Basic Measure
o Multiply load factor times yield to get the measure of revenue generated per increment of capacity
Cost per Available Seat Kilometre (C/ASKM): The Basic Measure Of Cost
o Unit costs represent how much it costs to fly one seat (empty or filled) one-kilometre
o To calculate unit costs, divide total operating expenses by Total ASKM capacity
Source: American Airlines, Basic Measurements in the Airline Business, http://www.aa.com/i18n/amrcorp/corporateInformation/facts/measurements.jsp, accessed June 2015.
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Comparator Global Low Cost Carriers selected for Pay Benchmarking (as of end Dec 2011)
Total Revenue
(US$ '000)
Market Cap
(US$ '000)
$734,992
$2,316,603
$63,549
$1,474,654
$2,439,802
$736,952
$3,468,324
$4,143,378
$1,055,706
$2,345,623
Company
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