09-May-2013 11:45 AM

Jetstar aims to catch up in Indonesia after squandering first mover advantage inherited from Valuair

Analysis

The Jetstar Group is preparing to increase its presence in the booming Indonesia market with additional services from its Singapore hub. The expansion follows several years of relatively flat capacity to Indonesia for Jetstar while its LCC competitors have pursued rapid growth.

Jetstar faces challenges as it tries to catch up on several years of missed opportunities in the Indonesian market. The group may struggle to compete with larger players, most of which are also pursuing rapid capacity expansion. Jetstar lacks an Indonesian affiliate, making it difficult to sell in the local Indonesian market, which remains heavily dependent on travel agents.

But the opportunities in Indonesia are too humongous for the usually conservative Jetstar to pass up. It needs to make a push or risk being shut out entirely in one of the largest and fastest growing markets in Asia.

Summary

Jetstar Group is planning to increase its presence in the Indonesian market.
Jetstar currently has less than 5% share of capacity in Indonesia's international market.
AirAsia Group is the largest LCC group in the Indonesian international market with a 62% share of capacity.
Jetstar has subsidiaries in two of Indonesia's three biggest international markets - Singapore and Australia.
Jetstar is the fifth largest player in the Singapore-Jakarta market with an 8% share of seat capacity.
Jetstar is considering shutting down Valuair and moving all Singapore-Indonesia flights to Jetstar Asia.

Jetstar accounts for less than 5% of international capacity in Indonesia

Jetstar currently serves Indonesia with 73 weekly return frequencies, including 43 from Singapore and 30 from Australia. The group's approximately 28,400 weekly seats to and from Indonesia gives it less than a 5% share of capacity in Indonesia's international market.

Among LCCs, Jetstar has an 11% share of international capacity in the Indonesian market. This includes a 6% share from Australia-based Jetstar Airways, which operates all 30 of the group's Australia-Indonesia weekly frequencies as well as six of the 43 Singapore-Indonesia frequencies. The other 37 Singapore-Indonesia frequencies are operated by Valuair, which was acquired by Singapore-based Jetstar Asia in 2005 and currently has a 5% share of total international LCC capacity in Indonesia.

Indonesia LCC international capacity share (% of seats) by carrier: 6-May-2013 to 12-May-2013

Indonesia LCC international capacity (seats) by carrier: 6-May-2013 to 12-May-2013

AirAsia Group is by far the largest LCC group in the Indonesian international market, with a 62% share of capacity. This includes a 40% share for Indonesia AirAsia, which is the largest international carrier in Indonesia (bigger than even full-service flag carrier Garuda), as well as a 21% share for AirAsia Malaysia and a 1% share for Thai AirAsia.

The Lion Group, which includes Lion Air and regional subsidiary Wings Air, has about a 14% share of international LCC capacity. This is expected to grow significantly as Lion starts to pay more attention to the international market. Over 95% of seat capacity at Lion/Wings is now allocated to the domestic market compared to only about 43% for Indonesia AirAsia and about 45% for Tiger Airways affiliate Mandala, according to CAPA and Innovata data.

The Tiger Group currently has a 10% share of international capacity in Indonesia but this is growing rapidly and could surpass Jetstar's 11% figure by the end of 2013.

Jetstar's home markets of Singapore and Australia are among Indonesia's three biggest international destinations

The current 11% share for Jetstar is respectable when taking into account that it does not have an Indonesian affiliate. But Jetstar should be able to grow this as it has subsidiaries in two of Indonesia's three biggest international markets.

Singapore is by far the largest international market for Indonesia, accounting for almost 30% of total international seat capacity to and from Indonesia. Australia is Indonesia's third largest market and Hong Kong, where the Jetstar Group is launching a new affiliate in 2H2013, is the fourth largest international market from Indonesia.

Indonesia top 10 international destinations ranked on departing seats: 6-May-2013 to 12-May-2013

Jetstar currently has a 25% share of total capacity in the Indonesia-Australia market, putting it slightly behind Garuda's 30% share and Virgin Australia's 26% share. Indonesia AirAsia has a 15% share while Jetstar's full-service parent Qantas accounts for the remaining 4% share.

Jetstar currently operates five Australia-Indonesia routes: Darwin-Bali (served with seven weekly A320 frequencies); Perth-Bali (served with 12 weekly A320 frequencies); Melbourne-Bali (served with five weekly A330 frequencies); Sydney-Bali (served with four weekly A330 frequencies); and Perth-Jakarta (served with two daily A320 frequencies). Qantas only serves one Indonesian route, Sydney-Jakarta, with four weekly A330 flights.

Indonesia to Australia capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

While Indonesia-Australia is a growing market, there are bigger opportunities in the Indonesia-Southeast Asia market. The Indonesia-Southeast Asia market also has a vastly different dynamic. Australia is mainly an inbound market for Indonesia, with the resort island of Bali accounting for 84% of all seats in the Indonesia-Australia market.

Indonesia-Southeast Asia is a much bigger local Indonesian market, with Singapore in particular a popular destination for Indonesians. Indonesia's rapidly growing middle class is expected to drive rapid growth in international travel from Indonesia, but most of these passengers will look to holiday in other Asian countries. Southeast Asia's LCCs are well positioned to capture most of this market as these are price-sensitive passengers that in many cases only recently have had sufficient discretionary income to travel abroad.

Indonesia's international market has huge potential

Indonesia is predominately a domestic market - it is the fifth largest domestic market in the world but only the 29th largest international market, based on current seat capacity from CAPA and Innovata. In 2012 there were about 72 million domestic passengers in Indonesia but only about 16 million international passengers.

While continued rapid domestic growth in Indonesia is expected, reaching a projected 100 million annual passengers in 2015, the relatively small international market will likely start to emerge as a major force over the next couple of years. Singapore and Singapore-based carriers are particularly well positioned to benefit from the rise of Indonesia's international market as Singapore is a huge origin and destination market for Indonesia and is ideally positioned as an international transit hub for all major as well as secondary cities in Indonesia. Jetstar Asia and Valuair are two of only six passenger carriers based in Singapore - the other four being part of the Singapore Airlines (SIA) group: SIA, SilkAir, Scoot and Tiger.

The Jetstar Group currently only has a 9% share of seat capacity in the Indonesia-Singapore market. AirAsia is the LCC leader in the market with a 19% share while Lion has an 11% share. The Tiger Group, including Tiger Singapore and Tiger Mandala, also has a 9% share. But as CAPA reported on 8-May-2013, the Tiger share will increase significantly in 2H2013 as several flights are added.

Indonesia to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

The Tiger Group will likely operate over 100 weekly return flights between Indonesia and Singapore by the end of 2013, compared to only 46 currently and just 14 in early 2012. AirAsia currently operates 95 weekly return flights in the market while Lion operates 49 and Jetstar the smallest amount among the four LCC groups, at 43.

Valuair gave Jetstar first mover advantage in Indonesia-Singapore market

Jetstar was the first LCC group to serve the Indonesia-Singapore market but has not added capacity in the market since 2009. In the meantime, Indonesia AirAsia has launched several Singapore routes and overtaken Jetstar as the largest LCC in the Indonesia-Singapore market.

Tiger more recently has crept up on Jetstar and very quickly become a larger payer in the Indonesia-Singapore market, after having virtually no presence for its first eight years. Tiger and Jetstar Asia both launched services in 2004.

Jetstar had the first mover advantage in the Indonesia-Singapore market as a result of its 2005 acquisition of Valuair, which also launched services in 2004. Valuair was able to access the main Singapore-Indonesia routes before any other LCC as it was able to meet Indonesia's "boutique carrier" definition.

Indonesia restricts LCCs from operating to Singapore from the four main markets of Jakarta, Bali, Medan and Surabaya. But while it was a low fare carrier Valuair was able to get around this restriction as it offered some frills as part of its hybrid business model such as free water and snacks, thereby meeting the "boutique carrier" requirement. (Much later other LCCs were also able to access the four restricted routes by agreeing to offer passengers in these markets free water and snacks, thereby also meeting the "boutique carrier" requirement.)

Valuair's authority to operate to Indonesia was a main attraction to Jetstar. At the time of the acquisition Valuair served Jakarta as well as Bangkok, Hong Kong and Perth. Jetstar Asia took over Valuair's non-Indonesian routes while the Valuair operating certificate was retained for the Indonesian market, although over time the Valuair brand and name has been pushed to the sidelines.

Valuair was used by Jetstar soon after the acquisition to launch Singapore-Bali at the beginning of 2006. Valuair subsequently added Singapore-Medan service in 2008 followed by Singapore-Surabaya service in 2009.

Jetstar fails to exploit first mover advantage in Indonesia-Singapore market

Valuair has not launched a single new route since 2009 and has generally maintained the same level of capacity on all four of its routes. Jetstar has never used Valuair to launch service to secondary Indonesian destinations, a sector of the market AirAsia and now Tiger has successfully targeted.

Singapore-Surabaya was launched as a daily service and is now served with only six weekly frequencies, making Jetstar-Valuair the smallest of the four carriers serving the route. Tiger Mandala, Lion, Taiwan's China Airlines and Singapore Airlines (SIA) regional subsidiary SilkAir also serve the Singapore-Surabaya route, with SIA planning to take over one of SilkAir's two daily frequencies in Jul-2013. Valuair currently has a 14% share of seat capacity on Singapore-Surabaya.

Singapore to Surabaya capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Singapore-Medan was started by Valuair with six weekly flights and is currently still served with six weekly frequencies. Again Valuair is the smallest carrier in the market, behind Tiger Mandala and SilkAir. Valuair currently accounts for a 24% share of capacity on Singapore-Medan.

Singapore to Medan capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Valuair currently operates five weekly flights on Singapore-Bali while Australia-based Jetstar Airways operates an additional four weekly frequencies as part of a Darwin-Bali-Singapore rotation. The combined nine weekly frequencies gives the Jetstar Group only an 8% share of the Singapore-Bali market, compared to 31% for SIA, 26% for Indonesia AirAsia, 13% for KLM and 12% for Qatar Airways, according to CAPA and Innovata data.

Jetstar is slightly bigger in the Singapore-Bali market than Garuda and Tiger Mandala, with each accounting for about a 6% share. But both carriers are planning to add capacity on the route by the end of 2013 while market leader SIA has already announced that it will introduce a fourth daily frequency on 27-Jul-2013.

Jetstar needs to expand its share of Singapore-Jakarta market

On Singapore-Jakarta, which is the second largest international route in the world, the Jetstar Group currently has only about an 8% share of seat capacity, making it the fifth largest player. Valuair currently operates 20 weekly flights between Singapore and Jakarta while Jetstar Airways operates another two weekly frequencies as part of a Perth-Jakarta-Singapore rotation.

SIA has a market leading 33% share of capacity in the Singapore-Jakarta market, followed by 17% for Lion, 17% for Garuda and 15% for Indonesia AirAsia. The Tiger Group for now is slightly smaller than Jetstar, with a 7% share of capacity while Turkish and Sriwijaya Air also have very small shares.

Jetstar-Valuair has requested additional traffic rights for Singapore-Jakarta made available by a new bilateral agreement which was signed by the two countries in early 2013. The new agreement raises Singapore-Jakarta capacity by 50%, opening up plenty of opportunities for expansion for both Singaporean and Indonesian carriers, assuming the carriers are able to secure slots at both airports, which are congested particularly during peak hours.

Market leader SIA announced on 8-May-2013 that it will add a ninth daily flight in the Singapore-Jakarta market on 27-Jul-2013. Tiger, Mandala, Garuda and Jetstar-Valuair are also expected to announce within the next few weeks additional capacity for the Singapore-Jakarta route with similar 3Q2013 implementation periods.

In some cases the capacity increases will be significant. For example the Tiger and Jetstar groups could both potentially double capacity on the Singapore-Jakarta route and offer six daily frequencies, matching the six daily frequencies now offered by AirAsia and Lion.

While Jetstar-Valuair was unable, like the other LCCs, to add capacity on Singapore-Jakarta in the last couple of years as there was no room in the bilateral, Valuair should have added flights earlier. It was the first LCC in the market, beating both AirAsia and Lion with Tiger coming much later. But while AirAsia and Lion quickly expanded and reached six daily frequencies, the Jetstar Group stayed with about three daily frequencies. Its hesitation to add capacity back when there was room in the bilateral was costly as Jetstar was not able to leverage its first mover advantage in what has turned into one of the largest LCC routes in the world.

Jetstar is finally prepared to add a significant amount of capacity in the Jakarta-Singapore market in late summer 2013, with the details to be announced within the next few weeks. But its increase will come with increases from several other carriers, likely keeping its share of the total market at or below 10%.

Typically conservative Jetstar has no choice but to enter what could prove to be a prolonged and unprofitable battle, as over-capacity and irrational competition is likely in the Singapore-Jakarta market for at least the short term. It could take several months and even years before the huge influx of capacity can be fully absorbed.

Jetstar also considers capacity increases to Bali, Medan and Surabaya

Jetstar will also likely add capacity on some or all of its other three Singapore-Indonesia routes.

Surabaya and Bali will both see an increase in capacity in 3Q2013, as several carriers add flights. Tiger Mandala is expected to follow SIA in adding flights in both markets.

Garuda also plans to launch flights from Singapore to both Surabaya and Medan. Indonesia AirAsia is similarly seeking to launch both routes. Jetstar will need to respond just to maintain its relatively small share of capacity in the Singapore to Bali, Medan and Surabaya routes.

Jetstar has recognised that it needs to add capacity in the Singapore-Indonesia market to keep up with faster-growing competitors and make up for all the years it failed to grow in the market. But it is also concerned that the new Indonesia-Singapore bilateral agreement could open up the floodgates and lead to over-capacity in all four of its Indonesia-Singapore routes.

Jetstar could shut down Valuair

The Jetstar Group also has to decide whether to continue using the Valuair subsidiary in the Singapore-Indonesia market or instead use Jetstar Asia, which operates most of the group's flights from Singapore. Jetstar Asia has been looking at the option of shutting Valuair and moving all the Singapore-Indonesia flights over to its main operating certificate. It could also elect to keep Valuair active and retain the existing Valuair flights while using Jetstar Asia to operate the additional Singapore-Indonesia flights.

Shutting Valuair was previously not a possibility because Valuair holds the traffic rights for Indonesia and Jetstar did not want to risk losing these rights. But with the new Indonesia-Singapore bilateral there would be sufficient traffic rights for Jetstar Asia to take over the current Valuair schedule and add frequencies as it sees fit.

Valuair's two A320s are also coming up for lease renewal in 2013, providing an opportunity to simply close Valuair and have the replacement aircraft be delivered to Jetstar Asia. One of Valuair's A320s has already been removed from service and is currently undergoing maintenance ahead of its return to Bank of China. Its other A320 is expected to be removed from service within the next few months. Both A320s were delivered new to Valuair from Bank of China in 2004, according to the CAPA Fleet Database.

Jetstar, however, may in the end decide to keep the Valuair air operator certificate (AOC) active given the value of a Singaporean AOC. Singapore has effectively closed the door on issuing new passenger airline AOCs. Holding onto the Valuair certificate could give Jetstar options down the road should it or its parent Qantas decide to launch a new Singapore-based airline. The AOC could also be sold although that would be unlikely given potential buyers of an existing Singaporean AOC, such as the AirAsia Group, would be competitors.

The Valuair certificate could also potentially be used for Jetstar's new Singapore-based 787 operation. Jetstar Airways has been basing three A330s in Singapore, which will be replaced within the next couple of years with 787s that are expected to be placed on the Jetstar Asia or Valuair certificate. The group could elect to split the operations and have Jetstar Asia continue to focus on A320s while Valuair takes on the 787. The group currently has 18 A320s based in Singapore, with two more slated to be added by the end of 2013, providing capacity to add flights to Indonesia and potentially other markets.

Valuair has become a forgotten airline as it has been swallowed by Jetstar Asia, with Jetstar Asia's management team responsible for Valuair and the Valuair brand or name rarely used. Valuair also has not grown in several years as Jetstar failed to pursue expansion in the Singapore-Indonesia market. Valuair's current capacity is roughly the same level as in 2010 and only slightly more than 2008 and 2009, when it launched its last two routes.

Valuair annual seat capacity (rounded to nearest 10,000): 2004 to 2013

Year	Seats
2004	370,000
2005	710,000
2006	560,000
2007	480,000
2008	620,000
2009	610,000
2010	650,000
2011	590,000
2012	670,000
2013*	690,000

Valuair's four routes ranked by capacity (seats): 6-May-2013 to 12-May-2013

Jetstar has squandered opportunities in Indonesia; is it too late to make up for lost time?

Jetstar had the foresight to acquire Valuair in 2005, recognising the value of its access to the Indonesian market. But after initially using Valuair to expand in the Indonesian market, Jetstar has sat idle with Valuair and the Singapore-Indonesia market for the last four years.

Jetstar also erred in passing up potential opportunities to establish an affiliate or joint venture in Indonesia, which would have given the group access to what has turned into the world's fifth largest and fastest growing major domestic market. Several years ago Jetstar was even approached about potentially investing in Lion Air, which now controls almost 50% of the Indonesian domestic market and has one of the world's largest aircraft order books.

Jetstar still has an opportunity to carve out a decent sized niche in Indonesia and use a larger Indonesian operation to help grow its Singapore hub, where it offers a successful connection product. But its forthcoming expansion in the Indonesia-Singapore market could end up proving to be a case of too little too late. Jetstar has lost the first mover advantage it gained in acquiring Valuair and it will be a challenge for the group to now establish a meaningful presence in Southeast Asia's largest market.

Part Two

In the next part in this three-part series on Jetstar's Singapore-based operations, CAPA will analyse Jetstar's position in the Singapore-China market. In the last part CAPA will analyse Jetstar's overall position in the Singapore market and the outlook for Jetstar Asia.