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Competition in Southeast Asia's low-cost airline sector heats up as capacity surges

5-Sep-2013

Southeast Asia continues to experience rapid LCC expansion even though some key markets are approaching saturation. The region’s LCC fleet is poised to grow by about 20% in 2013, approaching 500 aircraft at year-end. With some of the largest airline orders in recent years coming from ASEAN-focused LCC groups, rapid growth for the sector is assured for the medium to long term.        

The LCC penetration rate within Southeast Asia is now above 50%, having steadily increased over the last 10 years from less than 5% in 2003. Even in the intra-Southeast Asia international market, which is about one-third the size of the region’s domestic market, LCCs now account for 50% of total seat capacity – a remarkable figure given that ASEAN has not yet moved to a single market concept like the EU.

Opportunities still remain for LCC market share gains in some countries, particularly Myanmar and Vietnam. These important pioneer markets have the lowest LCC penetration rates among the seven main ASEAN countries but LCC start-ups from both countries are expanding rapidly.

 

Projected 2013 LCC fleet growth in Southeast Asia by carrier

Huge opportunities remain for Southeast Asian LCCs to grow along with the total market. While the long-haul travel market is relatively weak the intra-Asia market has remained strong, providing ample growth opportunities for LCCs as well as full-service groups. Southeast Asia’s flag carriers are responding to the opportunities by rapidly expanding their full-service regional and budget subsidiaries while pursuing limited or no growth at their mainline widebody operations.

Southeast Asia’s economy continues to expand rapidly, led by Indonesia, which accounts for over one-third of the region’s GDP and is the world’s fourth most populous country. The region’s middle class is expanding rapidly, leading to higher discretionary incomes exceeding travel threshold levels and a much larger first time flyer population.

LCCs are better placed than full-service carriers to tap into Asia’s surging middle class as they are focused primarily on short-haul markets and their lower fares make flying more affordable. Southeast Asia’s new middle class will eventually have the discretionary income to travel outside the region but at least for now the domestic and short-haul international trips on LCCs account for almost the entire segment.

Indonesia's LCC fleet approaches 200 aircraft

Indonesia has emerged as the hottest market in Southeast Asia and probably the world. Indonesia now has the world’s fifth largest domestic air travel market after China, with over 70 million annual passengers in 2012. LCCs currently account for about 60% of Indonesia’s domestic market and over 40% of the much smaller international market, which accounted for about 16 million passengers in 2012.

Indonesia’s LCC fleet will consist of about 200 aircraft by the end of 2013. Lion Air and its regional subsidiary Wings Air currently operate 122 aircraft and account for almost 50% of Indonesia’s domestic seat capacity. Lion plans to have 100 aircraft in its fleet at the end of 2013 while Wings will have 27. But it is Indonesia’s three other LCCs which have been growing more rapidly in 2013 as the Lion Group has been allocating a large share of its new aircraft deliveries this year to new Malaysian hybrid/LCC subsidiary Malindo and to its new Indonesian full-service subsidiary Batik. (Fleet growth at Lion/Wings also has been slower than normal this year as it has phased out its MD-80 and Dash 8 fleets.)

Citilink has emerged as one of the fastest growing LCCs in Southeast Asia as its full-service parent Garuda Indonesia is keen to close the gap with market leader Lion. Citilink aims to carry approximately six million passengers in 2013, up from only 3.1 million in 2012 and 1.8 million in 2011. The carrier transported 3 million passengers in the first seven months of 2013, an increase of 110% compared to the same period in 2012.

The Garuda subsidiary currently operates a fleet of 22 A320s, having recently phased out seven 737-300/400s, and is expected to end 2013 with 29 aircraft, including 25 A320s and its first four ATR 72 turboprops.  Even more rapid expansion over the next two years is expected as Citilink’s fleet grows to an expected 80 aircraft by the end of 2015.

Indonesia AirAsia and Tigerair Mandala pursue rapid expansion

Indonesia AirAsia is accelerating expansion as the AirAsia Group has recognised it needs a much bigger presence in Indonesia, particularly in the country’s colossal domestic market, to achieve its goal of becoming ASEAN’s largest player. Lion has quietly surpassed AirAsia as a bigger LCC group within Southeast Asia as a result of Lion’s domestic operation in Indonesia. Lion and AirAsia between them now carry more than two out of every three LCC passengers within ASEAN and more than one out of every three passengers overall.

LCC capacity share within Southeast Asia by airline group: 2-Sep-2013 to 8-Sep-2013     

Rank     

Group                  

  

Weekly Seat Capacity

(Rounded to the nearest thousand)       

Capacity Share
(% of total LCC seats)    

1

Lion

1,103,000

37%

2

AirAsia*

945,000

32%

3

Cebu Pacific

310,000

10%

4

Tigerair

157,000

5%

5

Garuda (Citilink)

144,000

5%

6

Thai (Nok)

136,000

5%

7

Jetstar

112,000

4%

8

VietJet

68,000

2%

9

Golden Myanmar

8,000

<1%

10

Orient Thai

7,000

<1%

11

SIA (Scoot)

6,000

<1%

AirAsia, however, is still in the top position when including total Southeast Asia capacity as, unlike Lion, it has a big operation connecting ASEAN with other parts of Asia.

Lion allocates about 95% of its capacity to Indonesia’s domestic market and its current network does not touch North Asia or Australia. But this will certainly change as Lion and its growing portfolio of affiliates and subsidiaries will need to place a large chunk of the approximately 600 aircraft the group has on order on international routes.

LCC capacity and capacity share to/from/within Southeast Asia by airline group: 2-Sep-2013 to 8-Sep-2013      

 

Rank 

  
Group                      

Weekly Seat Capacity

(Rounded to the nearest thousand)  

Capacity Share
(% of total LCC seats)    

1

AirAsia*

1,181,000

34

2

Lion

1,110,000

32

3

Cebu Pacific

350,000

10

4

Tigerair

207,000

6

5

Jetstar

169,000

5

6

Garuda (Citilink)

144,000

4

7

Thai (Nok)

136,000

4

8

VietJet

68,000

2

9

SIA  (Scoot)

30,000

1

10

Golden Myanmar

8,000

<1

11

Orient Thai

7,000

<1

 

Others*

46,000

1

Indonesia AirAsia is expanding its A320 fleet from 22 aircraft to 29 aircraft in 2013, with roughly half of the capacity to be allocated to the domestic market. Indonesia AirAsia previously focused more on building its now leading presence in Indonesia’s international market. Indonesia AirAsia recorded 17% growth in passenger traffic in 2012 to 5.8 million passengers and reported 34% growth in passenger traffic for 1H2013, an indication of its accelerated trajectory for the current year.

Tigerair Mandala is also growing rapidly in Indonesia, with plans to add seven A320s during 2013 for a total of 12 aircraft. The Indonesian carrier resumed services in Apr-2012 following a 15-month suspension and a new ownership group that includes Singapore-based Tiger.

Mandala and Tiger are confident they can benefit from the anticipated continued rapid growth of Indonesia’s market, with plans to operate a 25-aircraft fleet by the end of 2015. But as the smallest and last LCC in Indonesia, Mandala faces an uphill battle in trying to carve out a meaningful presence in an intensely competitive market.

Even with the early 2013 exit of full-service carrier Batavia, which has allowed Mandala and Citilink to secure important slots at congested Jakarta Airport, Indonesian trunk routes are in many cases experiencing over-capacity, with more than five brands competing. Achieving profitability in such conditions is challenging and the market could benefit from further consolidation – an unlikely outcome in the short term.

Malaysia LCC market posts the fastest growth in Southeast Asia

The biggest LCC growth market in Southeast Asia for 2013 will be the smaller Malaysia. This is driven not by a solid surge in demand, as is the case with Indonesia, but by the introduction of new competition.

Malaysia is the third biggest aviation market in Southeast Asia but had been the only market among the largest six that had just one low-cost player. That has changed this year.

Lion saw the AirAsia-Malaysia Airlines (MAS) duopoly as ripe for breaking. AirAsia’s Malaysian subsidiary has consistently had the highest operating profit margin among LCCs in Asia and one of the highest globally, including 23% in 2012 and 20% in 1H2013. The Malaysian domestic market is not huge but there is still room for growth and a third competitor on major routes.

After an initial surge as AirAsia expanded from its humble roots, growth in Malaysia has been much slower than other ASEAN markets in recent years as the LCC focused on expanding its other markets. But AirAsia over the last several months has resumed rapid growth in Malaysia, ahead of and following the Mar-2013 launch of Lion’s Malindo. Malaysia Airlines (MAS) also has expanded rapidly, leading to a 20% surge in passenger traffic in the overall Malaysian market.

See related reports:

AirAsia is confident Malindo will impact MAS more than AirAsia, given Malindo’s product positioning, which despite its LCC tag includes business class and a full-service economy product featuring seatback in-flight entertainment, meals, drinks and complimentary checked bags. But the new capacity Malindo is adding to the market will ultimately have an impact on both incumbents.

Malindo plans to end 2013 with 10 aircraft, including 10 737-900ERs and four ATR-72s, and aims to grow over the long term to 100 aircraft. While for the first five months it only competed in the domestic market, Malindo launched international services on 28-Aug-2013 and plans to focus most expansion for the remainder of 2013 and 2014 on the international market. This will likely lead to a surge of capacity in Malaysia's international market similar to what has already transpired domestically.

See related report: Malindo emerges as Lion Group's main international carrier with nine new routes from Kuala Lumpur

AirAsia's Malaysian short-haul subsidiary has been expanding rapidly in both the domestic and international markets in 2013, reporting 13% growth in RPKs and 12% growth in passengers carried for 2Q2013. The carrier plans to add six A320s in 2013, four of which will be delivered in 2H2013, for a total of 70 aircraft.

Meanwhile medium/long-haul sister carrier AirAsia X plans to add seven A330s in 2013 for a total of 18 aircraft. As a result, Malaysia’s LCC fleet is poised to surge in 2013 by 31%, a significantly faster rate than any other Southeast Asian country.

Competition to intensify in Thailand

Thailand will be the next market to become a battleground in the intensifying AirAsia-Lion rivalry. Lion has said it plans to launch an affiliate in Thailand by the end of 2013, which by no surprise is the third original AirAsia home market in Southeast Asia after Indonesia and Malaysia. But in this case Lion is entering a relatively crowded, albeit slightly larger market.

Thailand is already seeing rapid LCC growth in 2013 as both the country’s main LCCs use proceeds from IPOs to accelerate expansion. Thai AirAsia completed its IPO in 2012 and plans to add eight A320s in 2013 for a fleet of 35 aircraft. Thai AirAsia saw its passenger traffic grow by 21% in 2012 and 23% in 1H2013. More rapid growth is expected in 2014 as another eight A320s are added as part of a fleet plan that envisions 61 aircraft by the end of 2017.

Flag carrier Thai Airways’ low-cost affiliate Nok meanwhile completed its IPO in Jun-2013 and has unveiled plans to grow its fleet to 30 aircraft by the end of 2015. Nok plans to add only three aircraft in 2013 for a total of 23, including 14 737-800s, four ATR 72s and five Saab 340s (the Saabs are operated by a partner).

But capacity growth has been much faster as Nok is replacing its remaining 737-400s for larger and more heavily utilised 737-800s. Nok began to accelerate expansion in 2012 as it used its new fleet of 737-800s to roughly double capacity. Nok reported 36% growth in RPKs in 2012 and is on track to record similar RPK growth for 2013.

Nok was until recently purely a domestic operator and is now starting to pursue modest international expansion. Thai AirAsia has an almost even split of domestic and international capacity and is pursuing growth in both segments. AirAsia’s long-haul partner, AirAsia X, has also selected Bangkok as its second base, which will result in a new joint venture medium/long-haul low-cost carrier operating in Thailand, most likely starting in 2014.

The launch of Thai Lion and the planned 2014 launch of a Thai joint venture carrier from VietJet will lead to further strains on demand in an already busy marketplace. Thailand’s other existing LCC, Orient Thai, has already pulled out of all but two domestic routes, citing the intense competition. Orient Thai is now focusing primarily on the charter and international leisure sectors, particularly between Thailand and China, along with other small Thai carriers.

See related reports:

Philippine LCC market benefits from consolidation

The Philippines is seeing slower LCC growth in 2013, following a period of rapid capacity expansion which led to over-capacity.

LCCs in 2012 accounted for 80% of domestic passengers in the Philippines, giving it the highest LCC penetration rate in the world among medium and large size markets. But competition on many routes was irrational and four of the five LCCs were unprofitable – AirAsia Philippines, Philippine Airlines (PAL) affiliate AirPhil Express, Tiger affiliate Tigerair Philippines and Zest. Only the market leader Cebu Pacific, which captured 46% of the domestic market last year, ended 2012 in the black.

Consolidation came in early 2013 as AirPhil Express rebranded as PAL Express and in the process transitioned to a regional full-service model. AirAsia Philippines also entered into a partnership and cross-ownership deal with Zest, which gives AirAsia access to the Manila market. Zest flights are now available on the AirAsia website and the carriers are in the process of integrating further, culminating in Zest adopting the AirAsia brand. The deal means there are now a more palpable three LCC players in the Philippines – AirAsia (including Zest), Tigerair Philippines and Cebu Pacific.

The consolidation has led to more rational capacity levels and an improved outlook for all Philippine carriers. The total LCC fleet in the Philippines is expected to grow in 2013 by a relatively modest 10% to 69 aircraft (excludes AirPhil/PAL Express).

Cebu Pacific plans to expand seat capacity by 11% in 2013 as it adds seven aircraft for a year-end fleet of 48. Cebu Pacific’s seat capacity was up by 16% in 2012 but its passenger traffic was up only 11% to 13 million with equal increases across its domestic and international networks. The drop in load factor was a reflection of the over-capacity in the market.

Cebu Pacific was able to improve its load factor in 1H2013 as it started to benefit from a more rationale marketplace. The carrier reported 8% passenger growth and 6% seat growth for 1H2013.

AirAsia Philippines plans to add one aircraft in 4Q2013, its first addition since launching services in Mar-2012 with a fleet of two A320s. Zest plans to add two A320s in 2H2013 for a total 13 A320s but compared to the start of 2013, when it also operated turboprops which have since been phased out, its fleet has shrunk.

Tigerair Philippines was originally planning to add two or three aircraft in 2013 but the struggling Tiger affiliate is now expected to keep its A320 fleet at just five aircraft. The carrier has not grown its fleet since mid-2012, an indication of the challenging conditions in the market.

Singapore sees more LCC expansion led by Tigerair 

The Singapore market saw a large surge of capacity in late 2011 and early 2012, which resulted in losses for its two LCCs, Tigerair Singapore and Jetstar Asia/Valuair. Market conditions and profitability have since improved as capacity growth slowed. But Tigerair has re-accelerated fleet expansion, which could once again lead to capacity strains. The Singapore-Indonesia market is particularly vulnerable as several LCCs rapidly expand in 2H2013 following a new bilateral agreement between the two countries, previously heavily entry-restricted.

Tigerair Singapore plans to grow its fleet by five aircraft in the fiscal year ending 31-Mar-2014 for a total of 25 while the Jetstar Asia Group, which includes Valuair, is adding one A320 for a total of 19. The Tigerair group currently accounts for about a 10% share of seat capacity in Singapore while Jetstar accounts for about 7%. New medium/long-haul LCC Scoot, which recently added its fifth 777, has a small but significant 2% share as it has become the first LCC on several routes from Singapore to Australia and North Asia.

LCCs overall now account for about 30% of capacity in Singapore, compared to near zero a decade ago, a very high LCC penetration figure for a country that does not have a domestic market. The Tigerair expansion will likely push the LCC penetration figure up further over the next six months. But in the medium to long term there is limited room for further market share gains in the Singapore LCC market except in the relatively under-penetrated medium-haul markets, which Scoot is now starting to target.

Myanmar and Vietnamese LCC markets have the biggest growth opportunities

Of the five smaller markets in ASEAN, Myanmar and Vietnam are the most dynamic from a LCC perspective. Vietnam still has a relatively low LCC penetration rate of about 20%. But this is rising due to the rapid expansion of VietJet, an independent LCC which launched services in Dec-2011. VietJet has already surpassed Jetstar Pacific, which was established in 2008, as Vietnam’s largest LCC.

VietJet started 2013 with five A320s and plans to end the year with 10 aircraft. Jetstar Pacific only operates five A320s, having completed the transition from 737-400s in early 2012. The LCC has had a bumpy ride; now 70% owned by Vietnam Airlines with Jetstar holding the remaining 30%, it is expected to eventually resume expansion and enter the international market. VietJet began international services in early 2013 and plans to operate three international along with 14 domestic routes by year-end.

See related report: VietJet pursues more domestic expansion and plans Seoul as second international destination

Golden Myanmar Airlines launched services in Jan-2013 and is looking to match VietJet’s rapid success in another under-penetrated pioneer market, Myanmar. Golden Myanmar is Myanmar’s first LCC and is unlikely to be its last given the country’s huge potential.

See related report: Myanmar’s first LCC Golden Myanmar prepares to enter international market

Golden Myanmar is currently operating one domestic and two international routes with a fleet of one A320. But it plans to add one more A320 in Oct-2013 and its first two ATR 72, which will be used to expand in Myanmar’s fragmented domestic market, are slated to be delivered in 1Q2014.

Foreign carriers, including LCCs, have expanded rapidly in Myanmar over the last 18 months, resulting in a doubling of international capacity. Local carriers including Golden Myanmar are now looking to join the boom in demand for travel to and within Myanmar. The market is ripe for LCCs, as the penetration rate of its market is about 23%, making it, along with Vietnam, the least penetrated of the main ASEAN markets.

LCC penetration rates (% of total seats) in Southeast Asia by country

LCCs have had tremendous success in Southeast Asia over the last decade. But are there now too many LCCs in the region?

Three much smaller Southeast Asian countries – Brunei, Cambodia and Laos – all have LCC penetration rates below 20% as they lack local LCCs. The Cambodian and Lao markets are both growing rapidly from very small bases, led by a surge in capacity by their flag carriers.

But Cambodia, Laos and Brunei are not likely to see much LCC activity as their markets are too small to support a home-grown LCC. There has been some expansion in foreign LCC services but the much bigger growth opportunities are in the larger countries.

The last decade has been an incredible success story for Southeast Asian LCCs. The region has not only has seen LCCs quickly capture over 50% of the short-haul market but has seen some of the world’s most successful LCC groups emerge, led by AirAsia.

Intra-Southeast Asia LCC capacity share (% of total seats): 2001 to 1H2013

The market has also seen pioneering models as full-service airline groups adopted multi-brand strategies to capture the high growth bottom end of the market. Garuda, Singapore Airlines, Thai Airways, Vietnam Airlines and Qantas all now have LCC affiliates or subsidiaries in Southeast Asia. MAS and PAL have abandoned the budget end of the market by transitioning their subsidiaries (Firefly and PAL Express) away from the LCC model, but will be pressured to revisit these decisions.

While the multi-brand strategy has been successful, LCCs which are part of or are affiliated with FSC groups (Tiger, Scoot, Jetstar, Citilink and Nok) account for only 20% of LCC capacity to/from and within Southeast Asia. The Lion and AirAsia groups control a much larger and powerful 66% of the region’s LCC market.

Independent LCCs not affiliated with FSCs or the two main LCC groups account for the remaining 14% of capacity. Only four of the 22 LCCs in Southeast Asia are now in this category. There are some strong players in this segment, particularly Cebu Pacific. But consolidation (or exit) appears inevitable among the region’s smaller LCCs, including both independents and those affiliated with larger groups, as competition intensifies and the last batch of under-penetrated markets are invaded.

Note: a version of this article was originally published in the August/September-2013 edition of CAPA's strategy journal Airline Leader


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