20-May-2014 9:31 AM

Airlines start to rationalise Australia-Southeast Asia market, but more enduring efforts needed

Analysis

The over-capacity Australia-Southeast Asia market is showing signs of improvement with airlines beginning to reduce capacity. Qantas and Singapore Airlines have down-gauged services, Qantas from 747-400 to A330-300 while Singapore Airlines has replaced a daily A380 flight at each of Melbourne and Sydney with a smaller aircraft.

Qantas has exited the Perth-Singapore market while Scoot continues to offer reduced frequencies on its Australian services. Garuda has abandoned plans to deploy 777-300ERs to Australia.

But these initiatives so far are largely the low-hanging fruit of cutbacks. Qantas still faces a reckoning of a Singapore-Australia market only slightly larger than Emirates' Singapore/Malaysia-Australia market. Capacity has yet to come out of Malaysia, where AirAsia X has aggressively built a presence, while Malaysia Airlines tenuously holds its ground in its largest international market, despite a higher cost base and mounting losses.

Summary

Qantas and Singapore Airlines have reduced capacity in the over-capacity Australia-Southeast Asia market by down-gauging services and cutting routes.
Qantas has exited the Perth-Singapore market and reduced capacity on Brisbane/Sydney-Singapore routes.
Low-cost carriers, such as Tigerair, Jetstar, and Scoot, have had a growing impact on the Singapore-Perth market.
Qantas is reducing A330 operations in the domestic market to re-deploy the aircraft, allowing for the retirement of two 747-400s.
Emirates will offer almost as many seats from Australia to Singapore and Malaysia as Qantas.
Singapore Airlines is reducing capacity below 2013 levels and down-gauging some services from A380s to 777s.

Qantas ends Perth-Singapore and down-gauges Brisbane/Sydney-Singapore to A330

Qantas had served Perth-Singapore with double daily flights, then reduced this to daily after ending Singapore-Europe flights, which took feed from Perth-Singapore. A single daily Perth-Singapore flight could not compete with Singapore Airlines' four daily flights, or even the up to two daily flights from Jetstar Asia.

Raising frequency would not have helped Qantas either, as no amount of capacity would correct its lack of ability to transfer traffic beyond Singapore at anywhere near the scale of Singapore Airlines, which also operates with a lower cost base.

Qantas also could not compete with the growing impact of low-cost carriers.

LCCs on the Singapore-Perth market consisted of Tigerair and the Jetstar Group, and in a significant development were joined by Scoot, which brought widebody 777-200 capacity to the market. Tigerair and Jetstar operate A320s between Perth and Singapore. At around five hours flying, Perth-Singapore was a route passengers were more willing to fly a LCC on than longer sectors.

Australia to Singapore (seats per week, one way): 19-Sep-2011 to 9-Nov-2014

Qantas in May-2014 announced it would further decrease Singapore-Australia capacity by down-gauging Brisbane-Singapore and Sydney-Singapore services from 747-400 to A330-300. (One of two daily Sydney-Singapore services is already operated by an A330-300. The second daily service will become A330-300 from Sep/Oct-2014.) This potentially offers efficiency as Qantas will operate an all-A330 service to Singapore.

From Oct-2014 Qantas will offer about 8,300 weekly seats to Singapore, about a 25% reduction from the approximately 11,000 seats offered in Oct-2013, according to OAG.

Qantas' Singapore load factor dipped considerably in 2013, and the first two months of 2014 (which is the latest data available), Qantas is performing better than in 2013. Further data in 2014 should indicate deteriorating conditions amongst the various carriers. Anecdotally, mid-week load factors can be below 50%, with the passengers carried having a very low yield.

Qantas Singapore-Australia load factor: 2012-2014

These changes are part of Qantas' initiative to be more productive. After cutting international routes to re-deploy A330s into the domestic market, Qantas is now reducing A330 operations in the domestic market to re-deploy the aircraft. This in turn allows for the retirement of two 747-400s.

Qantas 747 rationalisation: 2014

In this same change, Qantas announced down-gauging of Hong Kong-Sydney A380 services. Combined with re-timing Melbourne-London services, the A380 fleet has time to replace the 747-400 on Sydney-Dallas. The benefits are multifold: the A380 will introduce greater capacity (Qantas projects 10%). The A380 will also be able to operate non-stop on the return sector from Dallas to Sydney whereas the 747 could only go so far as Brisbane, requiring a connection (and in some instances, re-fuelling in the South Pacific was required). Third, the A380 will likely require a lower seat block than the 747.

Collectively three 747-400s will be retired by the end of calendar 2014 with a further two 747-400s to depart the fleet by the end of 2015. From late 2014, 747-400s will operate from Sydney to Hong Kong, Los Angeles, Johannesburg, Santiago and Tokyo Narita. The Hong Kong and Tokyo Narita sectors are the immediately obvious sectors on which to reduce 747-400s.

Jetstar's Melbourne-Singapore frequency drops to an historical low, pressuring re-think

Other Asian markets also await strategic initiatives from Qantas, and these were analysed previously. An outstanding strategic matter for Qantas to address at a group and even partnership level is the Melbourne-Singapore route. Qantas continues to operate daily A330-300 service while Emirates operates a daily 777-300ER service and Jetstar operates five weekly A330-200 services for the week of 19-May-2014.

Jetstar in 2013 down-gauged Melbourne-Singapore from daily to five weekly at the same time Qantas launched dedicated Melbourne-Singapore flights that terminated in Singapore rather than continued to London. This increased the number of seats available for passengers between Melbourne and Singapore.

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Qantas' aggressive pricing on Singapore sectors has left little room for Jetstar, forcing Jetstar to reduce frequency between Singapore and Melbourne. From the route's launch in Dec-2010 until early 2013 Jetstar operated a daily service. From Mar-2013 however Jetstar reduced frequency for the first time, but never dipping below five weekly flights. However in 2014 Jetstar for a few weeks will operate only four weekly flights and during one week will even operate three weekly flights, according to OAG data.

Cumulatively, Jetstar operated a daily Melbourne-Singapore flight in 2011 and 2012 but only 287 flights in 2013 and is scheduled to operate only 255 flights in 2014, a 30% reduction. Jetstar from Jul-2014 will exit the Singapore-Auckland market. Given the current situation of Qantas and Emirates operating between Melbourne and Singapore in addition to SIA, it is difficult to see Jetstar have a sustainable presence.

Any further cuts in this market from the Qantas Group will likely impact Jetstar more even though Jetstar has stronger prospects on the route in the long term than Qantas. This underscores the strategic relevance the Qantas Group still places on loss-making international services.

Jetstar weekly Melbourne-Singapore frequency: 2011-2014

Jetstar Australia's Singapore load factors generally did better in 2013 than 2012, although 2014 is so far under-performing 2013. Jetstar Asia saw weaker performance in 2013 than 2012. Jan-2014 was below Jan-2013 performance while Feb-2014 performance was slightly above Feb-2013 performance. This data of course excludes yield information and, in many cases, Singapore fares from Australia have decreased significantly.

Jetstar Airways Singapore-Australia load factor: 2012-2014

Jetstar Asia Singapore-Australia load factor: 2012-2014

Emirates will have almost as many Singapore/Malaysia-Australia seats as Qantas

Qantas' latest cuts means Emirates will offer almost as many seats from Australia to Singapore and Malaysia as Qantas. Qantas will offer a double daily flight from Sydney to Singapore and a daily from each Brisbane and Melbourne to Singapore. All services will be on the A330-300 compared to Emirates' 777-300ER deployment on a daily Melbourne and Brisbane to Singapore and daily Melbourne-Kuala Lumpur service.

Emirates' approximately 7,400 weekly seats on 21 frequencies will compare to Qantas' 8,300 seats weekly on 28 frequencies, giving Qantas only 12% more seats. This small lead is in spite of Qantas being the local operator while Emirates' services operate on a fifth freedom basis. There are some passengers who continue on these Emirates flights to Dubai, but Emirates nonetheless continues to operate them with some local traffic.

Singapore Airlines cuts back on growth, to reduce capacity below 2013 levels

The disparity between Qantas and other carriers is perhaps most evident when considering Singapore Airlines. SIA will retain its position as the largest carrier between Singapore and Australia with about 35,000 weekly seats in Oct-2014. Qantas will still be the second largest carrier but with only 8,300 seats. To put this into perspective, SIA will operate more seats between Singapore and Sydney only (9,100) than Qantas will from all Australian points to Singapore. Even Perth will see almost as much SIA capacity (7,700 seats) as Qantas' entire Australia-Singapore network.

Singapore Airlines started 2014 bullish with some weeks having capacity growth as high as 15%. But from late Aug-2014, SIA is turning pessimistic with high single-digit capacity cuts. The last three quarters of 2014 will experience less than 1% seat growth from SIA compared to a year prior, according to OAG data.

Singapore Airlines weekly seats and frequencies to Australia: Apr-2014 to Dec-2014 year-over-year

At the same time however SIA is seeking to maintain a strategic advantage by offering more frequencies. SIA is doing this by down-gauging some services, notably from A380s to 777s. While seat growth will be less than 1%, frequency growth will be just over 3%.

The network changes are not universal. Brisbane will have relatively no changes; Perth will show growth; Melbourne and Sydney will have cuts while Adelaide shows proportionally large cuts. SIA is dropping Sydney capacity in Jun-2014 but will not cut Adelaide and Melbourne capacity until Aug-2014. This likely indicates the severity of the Singapore-Sydney situation where Qantas has two daily flights while British Airways has a daily flight and Scoot now less than daily, creating large over-capacity in the market.

Singapore Airlines weekly seats to Australia by route: Apr-2014 to Dec-2014 year-over-year

Singapore Airlines has sought to decrease Australian capacity while preserving its network by down-gauging A380 services. In Jun-2013 and Jul-2013 SIA operated four daily services to Sydney, including two A380s, but in Jun-2014 and Jul-2014 will down-gauge one of the A380 services to 777 while keeping overall frequency at four daily. Melbourne will also lose one daily A380 flight.

SIA's load factors in Australia in 2013 were significantly below 2012. Jan-2014 was above Jan-2013's performance while Feb-2014 was significantly below Feb-2013, although this could be due to the earlier Chinese New Year holiday period.

Singapore Airlines Singapore-Australia load factor: 2012-2014

Scoot has also cut back from previous levels

Scoot, the wholly-owned low-cost long-haul carrier of SIA, cut Singapore-Sydney frequencies from daily to five weekly in Mar-2014, with further cuts to four weekly. Daily services will resume in peak periods through Oct-2014 while off-peak periods will see reduced services.

Scoot's load factors have consistently weakened year-on-year, with Feb-2014 performance under 65%.

Scoot Singapore-Australia load factor: 2012-2014

AirAsia X and Malaysia Airlines are yet to adjust Australian capacity

The Southeast Asia-Australia capacity increases have largely been led by AirAsia X, which rapidly grew partially in response to the entry of Scoot. AirAsia X sees that it must be the largest long-haul LCC in the markets it operates in, essentially saying it will fight a market share battle. Malaysia Airlines also increased capacity to match AirAsia X. Neither plan to cut capacity. Conversely, AirAsia X is planning growth in Dec-2014.

AirAsia X and Malaysia Airlines Malaysia-Australia weekly seat capacity: 2013-2014

Source: CAPA - Centre for Aviation and OAG

AirAsia X's Jan-2014 load factor was above 85%, beating 2013's performance, while Feb-2014 was above 75%, below 2012 and 2013. Malaysia Airlines saw similar performance with Jan-2014 being stronger than Feb-2014. MAS' 2013 loads were significantly improved over 2012 and better than AirAsia X's.

However, MAS and some other full service Asian carriers have a strategy of chasing load factors in exchange for lower yield.

AirAsia X Malaysia-Australia load factor: 2012-2014

Malaysia Airlines Malaysia-Australia load factor: 2012-2014

Garuda Indonesia abandons plans for 777-300ER Sydney service

Garuda Indonesia meanwhile has smartly reneged on plans to operate its new 777-300ER between Jakarta and Sydney, which would have only exacerbated the Southeast Asia-Australia situation.

As CAPA previously wrote:

Garuda took delivery of its first 777-300ER in mid-2013 and added three more of the type by the end of 2013. The carrier plans to take delivery of three more 777-300ERs over the remaining eight months of 2014 and a final three 777-300ERs from its 10-aircraft commitment in 2015.

The original deployment plan had the initial batch of four aircraft being deployed on new non-stop services from Jakarta to London Gatwick and on the existing Jakarta-Sydney route. Garuda initially planned to launch Jakarta-London on 2-Nov-2013 with five weekly 777-300 frequencies. At the same time it was also intending to use 777-300ERs to take over from A330s on its daily Jakarta-Sydney service.

Garuda in Apr-2013 began selling its London service as well as a one-stop same plane product between Sydney and London. It also started promoting one-stop connecting flights from Melbourne and Perth to London. (Brisbane-London was also available for sale but as a two-stop product because Garuda only serves Brisbane from Bali while its other three Australian destinations are served from both Bali and Jakarta.)

As CAPA previously discussed, Garuda was keen on becoming a major player in the Kangaroo route between Australia and the UK, recognising local demand between Indonesia and the UK was not sufficient to fill up the new Jakarta-London service. Garuda was expecting about one-third of its passengers between Jakarta and London to originate in Australia and about one quarter to originate in Sydney. Assuming average load factors of 80%, Garuda was expecting 63 passengers per Jakarta to London flight to originate in Sydney with another 21 passengers to originate in other Australian gateways.

Dropping plans to operate non-stop flights to London is also a sensible move for Garuda as the local Jakarta-London market is not large enough to support the flight and the carrier would have struggled to secure enough connecting passengers to make the route viable. On the London end, connections would be difficult as Garuda has been unable to secure slots at London Heathrow, where there would be more opportunities to work with other SkyTeam members.

At the Jakarta end, Garuda's only feasible option besides domestic connections was Australia connections as other destinations in Asia-Pacific would require backtracking and Garuda's regional international network is much smaller than rival SIA or Malaysia Airlines (MAS).

But the Australia-London market is extremely competitive and Garuda would have likely had to sell tickets below cost to fill up the seats, particularly as it was offering unattractively long connection times at a congested airport with an inferior transit experience compared to most Kangaroo route hubs. By banking heavily on Australia connections in its original strategy for the London market Garuda was making a risky bet.

Garuda's targeting of the Sydney-London via Jakarta market would have placed it in competition on the Kangaroo Route that is also suffering from over-capacity.

Virgin Atlantic has exited Australia by cutting its Hong Kong-Sydney tag. The overall Europe-Australia market will become more competitive as Etihad eventually deploys A380s to Australia. Turkish Airlines - with a network of over 100 European destinations - has also mooted serving Australia, possibly with A380s. This was Garuda's battle to lose, and it is sensible for the Indonesian flag not to engage in it at all.

Outlook: More adjustments are needed, but some fledging airlines will see this as their opportunity

While airlines recognise the dire situation of the Southeast Asia-Australia market, most see the problem as a collective one that requires adjustment from all parties. Consequently this means carriers are at best willing to take only incremental steps, and at worst are waiting for others to move first. Other airlines may be taking a long-term view and are trying to muscle out weaker ones. AirAsia X, with a leaner cost base, certainly has stronger prospects than its higher cost local rival Malaysia Airlines.

Yet rationalisation can also create opportunity as fledging new entrants - especially low-cost carriers from Southeast Asia - see a void they can fill. With 10 low-cost carriers considering the Australian market, there is no shortage of contenders.

Full service carriers are more structurally at risk but have the size to try to fight out this difficult time. Low-cost carriers meanwhile potentially have long term potential but short term financial targets to meet. While there are some positive developments in reducing capacity, there is still plenty of opportunity for the situation to become worse before it improves.