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Lion's Malindo breaks AirAsia-MAS duopoly in Malaysian domestic market. Next stop: Delhi...and Asia


Lion Air Group affiliate Malindo launched services on 22-Mar-2013 with seven daily flights spread across Malaysia’s two largest domestic routesKuala Lumpur to Kota Kinabalu and Kuching. With its hybrid business model and low fares, Malindo will impact both AirAsia and Malaysia Airlines (MAS), which were previously the only two carriers on domestic trunk routes within Malaysia.

Malindo is planning rapid domestic and international expansion, leveraging Lion’s huge order book for 737s. India is poised to become Malindo’s first international destination with service to Delhi starting in Jun-2013, exploiting a market which is under-served due to cuts last year at AirAsia X. Several planned destinations in India and China will allow Malindo to increase aircraft utilisation and tap into the lucrative Malaysia-India and Malaysia-China markets. It also seeks to tap the fast-growing Indonesia-India and Indonesia-China markets, which Malindo will serve by offering connections to Lion.

From a wider market perspective, Lion's entry into Malaysia almost certainly signals the sprouting of a new pan-Asian low priced competitor, something that will tilt the balance again. It is relatively late onto the scene, but a multitude of growth potential promises ample time to establish. And Lion will not be the last.

Kuala Lumpur-Kota Kinabalu is the largest route for AirAsia and MAS

Malindo is initially operating three daily flights on Kuala Lumpur-Kota Kinabalu and four daily flights on Kuala Lumpur-Kuching. Kuala Lumpur-Kota Kinabalu is currently the largest domestic route in Malaysia with about 59,000 weekly seats prior to Malindo's launch, which makes it the 12th largest route within Southeast Asia. It is the largest route based on seat capacity at both the AirAsia Group and MAS.

AirAsia’s Malaysian subsidiary currently operates 15 daily or 105 weekly flights between Kuala Lumpur and Kota Kinabalu with A320s in 180-seat single class configuration. MAS currently operates 68 weekly frequencies but is adding 12 weekly frequencies in early Apr-2013 for a total of 80 weekly frequencies, according to Innovata data.

MAS serves the route with a mix of 737-800s and 737-400s. Its 737-800s are configured with 16 business and 150 economy class seats. Its 737-400s are equipped with 128 economy and 16 business class seats.

Malindo adds 7,560 weekly return seats to the Kuala Lumpur-Kota Kinabalu market as it has configured its 737-900ERs with 168 economy and 12 business class seats. As a result Malindo’s entry has led to an 11% increase in total weekly capacity to over 66,000 return seats.

Malindo captures 11% share of Kuala Lumpur-Kota Kinabalu market

By mid Apri-2013, when MAS increases seat capacity on the route to about 25,000 return seats, there will be over 70,000 return seats in the Kuala Lumpur-Kota Kinabalu market. Malindo will account for an 11% share of capacity between Kuala Lumpur and Kota Kinabalu for the week commencing 15-Apr-2013, compared to 54% for AirAsia and 36% for MAS.

Just prior to Malindo’s launch on 22-Mar-2013, MAS accounted for a 36% share of capacity while AirAsia accounted for 64%. But back in Jan-2013, prior to AirAsia adding one daily flight for a total of 15, MAS captured a 38% share and AirAsia accounted for 62%.

Kuala Lumpur to Kota Kinabalu capacity and capacity share by carrier: 15-Apr-2013 to 21-Apr-2013

Carrier  Weekly return seats % of total seats Economy seats % of economy seats Business seats % of business seats
AirAsia 37,800 53.7% 37,800 56.2% N/A N/A
Malaysia Airlines 24,976 35.5% 22,416 33.3% 2560 83.6%
Malindo 7,560 10.7% 7,056 10.5% 504 16.4%
Total 70,336   67,272   3064  

Kuala Lumpur to Kota Kinabalu capacity by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

In terms of economy class seats, AirAsia will still have a 56% share of the market while MAS will capture a 33% share and Malindo will account for the remaining 11%. In the much smaller business class market, MAS will capture 84% and Malindo 16%.

Malindo targets both MAS and AirAsia with hybrid product

From a product standpoint, Malindo is targeting MAS. But its low fare structure is aimed more at the low end of the market. With its hybrid model and “not just low cost” marketing slogan the carrier is trying to woo passengers by offering a low fare while still providing a relatively high level of service.

Its economy class seat offers a 32in pitch, which is about 3in better than AirAsia and 2in better than MAS. Malindo offers some frills in economy, including seatback in-flight entertainment and a 15kg luggage allowance, which gives it a clear differentiator over AirAsia. MAS has seatback IFE on its 737-800s (but not its 737-400s, which will be phased out over the next couple of years).

In Feb-2013 MAS increased its economy class luggage allowance to 30kg, in a bid to retain customer loyalty ahead of Malindo’s entrance. Both MAS and Malindo provide complimentary drinks and snacks in economy class while AirAsia follows a pure LCC model and charges for drinks, food and checked bags. A key differentiator for MAS is its strong frequent flyer programme and membership in the oneworld alliance.

Malindo’s business class product features wide leather recliner seats in two-by-two configuration with 45in pitch, seatback IFE, meals, drinks and a 30kg luggage allowance. MAS has a similar business class seat on its 737-800s with seatback IFE and a pitch of 42in (the 737-400 does not have any IFE and has a slightly smaller pitch). In Feb-2013 MAS increased its business class checked luggage allowance from 30kg to 40kg.

Malindo and MAS both operate at the main terminals at Kuala Lumpur and Kota Kinabalu. AirAsia uses the basic low-cost terminals at both airports and does not use air bridges. 

Malindo’s low fares to pressure yields at MAS and AirAsia

Malindo is offering one-way all-inclusive economy class fares on Kuala Lumpur-Kota Kinabalu as low as MYR68 (USD22) and one-way all inclusive business class fares as low as MYR588 (USD189). Malindo has said these promotional prices will continue for at least the next six months.

MAS one-way all-inclusive economy class fares on the Kuala Lumpur-Kota Kinabalu route start at MYR150 (USD48). MAS one-way all-inclusive business class fares on the route started at MYR983 (USD316) until Malindo's entry, now reduced to MYR856. MAS will want to keep most of its business class seats available to higher yielding connecting passengers, particularly premium passengers coming off its long-haul network.

MAS generally has a relatively small bucket of seats available at LCC type fares. It has a premium focus, which was reinforced as part of its new business strategy that included joining oneworld on 01-Feb-2013.

As part of its new strategy, the portion of transit passengers has increased to 65% as the carrier has rescheduled flights to maximise connections. MAS is hoping its focus on premium and high yielding economy passengers – in both the point-to-point and connecting markets – will mitigate any potential impact on yields as Malindo expands. But inevitably yield on some routes will suffer as MAS will need to compete directly with Malindo for some types of passengers.

See related article: Malaysia Airlines 2013 outlook clouded by increasing competition and launch of Malindo

AirAsia could be more impacted as it relies more heavily on local point-to-point passengers. AirAsia is currently selling one-way economy class tickets on Kuala Lumpur-Kota Kinabalu that start at MYR89 (USD29) with fares for most days starting at MYR 134 (USD43). These prices, which can be even lower during promotional periods, include taxes but extra charges apply for checked luggage, drinks and food.

While AirAsia generally sets aside larger buckets of low fares than MAS, its average fare has been increasing over the years as it has been able to take advantage of the strong position in the Malaysian market it has built up and the lack of LCC competition. AirAsia Malaysia in recent years has been one of the most profitable carriers in the world, with operating margins exceeding 20%. This clearly caught the attention of the Lion Air Group and its Malaysian partner, NADI.

Firefly’s exit left room for a third airline on domestic Malaysian trunk routes

Malindo is also taking advantage of the fact that there is no longer a budget airline subsidiary in the MAS Group portfolio. MAS subsidiary Firefly in 2011 briefly had an LCC 737 operation on trunk routes, including Kuala Lumpur to Kota Kinabalu and Kuching. At one point in 2011, Firefly had a 25% share of capacity in the Kuala Lumpur-Kota Kinabalu market.

But the Firefly-branded 737 operation was shut down in late 2011 following a partnership agreement and stock swap between MAS and AirAsia. Firefly returned to its roots as a turboprop operator following a full-service regional carrier model. The MAS-AirAsia stock swap was subsequently unbundled in May-2012 but MAS has since been adamant that it does not need to re-establish a budget brand. But with only one LCC and one FSC competing on trunk routes, the market became ripe for penetration by a new carrier.

See related article: MAS should reconsider LCC strategy as losses continue while AirAsia reports more leading profits

Sceptics believe the Malaysian domestic market is too small to support a third carrier. But domestic routes in Southeast Asia that are similar in size to Kuala Lumpur-Kota Kinabalu have several operators. For example, the similarly sized Jakarta-Yogyakarta route in Indonesia is currently served by four carriers.

In the Philippines, Manila-Davao is served by four carriers including three LCCs, while Ho Chi Minh-Danang in Vietnam is served by three carriers including two LCCs. Both these routes are similar in size to Kuala Lumpur-Kuching, which had about 51,500 weekly return seats prior to Malindo's launch, according to CAPA and Innovata data.

Malindo captures a 15% share of Kuala Lumpur-Kuching market as MAS adds capacity

Kuala Lumpur-Kuching is AirAsia’s second largest route with 14 daily frequencies. It is currently the third largest route for MAS with seven daily frequencies. But MAS over the next two weeks is adding three daily frequencies for a total of 10, making it the carrier’s second largest route.

By mid Apr-2013, MAS will have a 33% share of capacity in the Kuala Lumpur-Kuching market compared to 52% for AirAsia and 15% for Malindo. Just prior to Malindo’s launch, MAS had only a 30% share while AirAsia had a 70% share.

Kuala Lumpur to Kuching capacity share by carrier: 15-Apr-2013 to 21-Apr-2013

Carrier Weekly return seats % of total seats Economy seats % of economy seats Business seats % of business seats
AirAsia  35,280 52.3%  35,280 30.9%  N/A  N/A 
Malaysia Airlines  22,160 32.8%  19,952 54.6%  2208  76.7% 
Malindo  10,080 14.9%  9,408  14.6%  672  23.3% 
Total  67,520    64,640   2,880  

Kuala Lumpur to Kota Kuching capacity by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

Lion is currently offering one-way all inclusive fares between Kuala Lumpur and Kuching of only MYR38 (USD12) for economy class and MYR338 (USD109) for business class. MAS all inclusive one-way fares on the route currently start at MYR150 (USD48) for economy and MYR783 (USD252) for business. AirAsia fares start at MYR79 (USD25) including taxes.

For most dates, Malindo’s economy fare is MYR78 (USD25) compared to MYR79 (USD25) for AirAsia but when factoring in the extra charges Malindo becomes the better deal.

AirAsia accelerates expansion in Malaysian domestic market

For most of 2012 AirAsia operated 12 daily flights between Kuala Lumpur and Kuching. The additional two flights have been added since the beginning of 2013.

AirAsia is expected to continue adding capacity on domestic routes ahead of Malindo’s entrance. AirAsia’s Malaysian subsidiary is taking delivery of 10 A320s in 2013, two of which it has already received, for a total of 74. As CAPA reported on 05-Mar-2013:

Growth in Malaysia has taken a back seat in recent years as the focus has shifted more to Indonesia and Thailand to prepare the group’s second and third affiliates for IPOs. Passenger traffic at AirAsia Malaysia only grew by 9% in 2012 to 19.7 million while Thai AirAsia saw 21% growth to 8.3 million and Indonesia AirAsia saw 17% growth to 5.8 million.

With the upcoming launch of Malindo, now is the time to again pursue growth in Malaysia. The 10 A320s being added to AirAsia Malaysia’s fleet in 2013 will be used to “dominate” domestic trunk routes as frequencies are increased. The carrier says capacity will in particular be added on domestic routes to East Malaysia and Johor Bahru.

Some new international routes will also be added in a bid to further improve international connectivity. But the focus will be on maintaining AirAsia’s leading position in Malaysia’s domestic market, where it currently accounts for 52% of seat capacity.

See related article: AirAsia’s 2013 outlook marred by intensifying competition and continued losses at new affiliates

Malindo expected to launch several more domestic routes in Jun-2013

Malindo is planning to grow its fleet to 12 737-900ERs by the end of 2013. The carrier states on its website that services from Kuala Lumpur to Miri, Sandakan, Bintulu and Sibu will “start soon”. Miri, Bintulu and Sibu will reportedly be launched in Jun-2013, when Malindo expects to receive two more aircraft.

Malindo has not yet cited possible routes within peninsular Malaysia, which are shorter flights than those connecting peninsular Malaysia with eastern Malaysia. But three routes within peninsular Malaysia – Kuala Lumpur to Penang, Langkawi and Kota Bahru – are among the five largest domestic routes in Malaysia, according to Innovata data.

Kuala Lumpur-Miri is the fifth largest domestic route in Malaysia and is served four times daily by AirAsia and three times daily by MAS. Innovata schedules show MAS adding a fourth daily flight on the route in Apr-2013 and a fifth daily flight in Jul-2013. MAS is likely ramping up capacity at Miri, which is an important business destination as it has a vibrant oil and gas industry, in a bid to fend off Malindo prior to Malindo’s entry into the market.

Kuala Lumpur-Sibu is the ninth largest domestic route and is served with five daily AirAsia flights but only one MAS flight. Kuala Lumpur-Sandkan is served with three daily AirAsia flights and 11 weekly MAS flights while Kuala Lumpur-Bintulu is served with 17 weekly AirAsia and two daily MAS flights. Neither MAS nor AirAsia has filed capacity increases for Sibu, Sandakan or Bintulu although changes are likely once Malindo firms up plans to launch these routes.

Malindo plans to launch Kuala Lumpur-Delhi in June-2013

Malindo also plans to enter Malaysia’s international market in the coming months. The carrier has said it is considering international destinations within Southeast Asia as well as China and India. During CAPA’s Aviation Finance Asia Summit 2013 in Singapore on 20-Mar-2013 the COO of Lion Air Group subsidiary Transportation Partners, John Duffy, stated that Malindo is planning to launch services from Kuala Lumpur to Delhi in Jun-2013. The Kuala Lumpur-Delhi flight will be operated during overnight ("back of the clock") hours, allowing Malindo to increase utilisation of its initial fleet of four 737-900ERs.

AirAsia X dropped service between Kuala Lumpur and Delhi in Mar-2012, leaving MAS as the only carrier on the route. MAS currently operates 12 weekly flights on the route, including seven with 777s and five with 737-800s.

Kuala Lumpur to Delhi capacity share by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

While AirAsia currently serves four cities in southern India and Kolkata in eastern India from its Kuala Lumpur hub, the Malaysian carrier is not interested in central, western or northern India as it tries to keep the duration of its flights to four hours or less. AirAsia is however in the process of establishing an Indian-based JV airline, which will, if approved, change the LCC's operating dynamics. Malindo has a different perspective as it operates narrowbody aircraft in dual-class configuration and offers a more spacious economy class product with IFE.

Malindo is looking at several destinations in India and other medium-haul destinations in Asia, particularly greater China, that would be served in the overnight hours. Such operations are ideal as the fleet can be used to focus on shorter flights in the domestic market during daylight hours.

Malindo can also make medium-haul routes such as Delhi work by offering connections within its own network and to flights to and from Indonesia operated by sister carrier Lion. India-Indonesia is a particularly attractive market as it is growing rapidly but not served non-stop by any carrier.

Lion currently serves Kuala Lumpur from Jakarta with three daily flights. Lion and Malindo are expected to launch services over the next year on several routes connecting Kuala Lumpur with secondary cities in Indonesia.

Malaysia-Indonesia is a big local market now dominated by the AirAsia Group, which accounts for 59% of seat capacity between the two countries, according to CAPA and Innovata data. The Lion Group (including regional carrier Wings Air) now accounts for only 7% of capacity in the Malaysia-Indonesia market while MAS (including regional carrier Firefly) accounts for 21%.

Now that it has launched an affiliate in Malaysia, the Lion Group will look to close this gap and exploit network synergies between the Lion and Malindo operations.

Malindo will be able to woo passengers but profits may prove to be elusive

Malindo should succeed at carving out a niche in the Malaysian domestic and international markets by differentiating itself from the two incumbents and by using an aggressive pricing programme. Malindo’s product and strategy will allow the carrier to open up new routes that are not currently served by any LCCs while competing on a majority of its routes with both AirAsia and MAS.

Prior to Malindo’s launch AirAsia and MAS (including regional subsidiaries Firefly and MASWings) accounted for over 98% of domestic seat capacity in Malaysia. The AirAsia and MAS groups (including AirAsia sister carrier AirAsia X) accounted for about two-thirds of international seat capacity to and from Malaysia. The market was ripe for a shake-up.

Succeeding at carving out a profitable niche, however, will be challenging. Malindo has stated it expects to break even or be slightly in the black by the end of 2013. But even if it is able to meet its target of 90% load factors, it will be hard to be profitable given Malindo’s combination of offering frills and very low fares.

Inevitably Malindo will need to raise fares if it is to cover its costs. Malindo’s 737-900ERs have 33 fewer seats than the same aircraft operated in Indonesia by Lion. Malindo may struggle to generate sufficient yields and revenues to cover its higher unit costs and pay for the frills it provides. Trying to undercut AirAsia may not be a sustainable strategy alone and it has yet to be seen whether added frills will attract travellers who are extremely price sensitive. Where it does have a potential advantage is in attracting higher yielding business travellers and here such features as FFP and connectivity will be important.

AirAsia meanwhile will not welcome the added competition in markets which had more or less settled into competitive but profitable operations. Its extremely high profit margins will suffer from added capacity and fare wars but the LCC has the benefit of high brand recognition and loyalty, along with plenty of cash to help ride out the storm.

But, from a wider market perspective, Malindo's arrival signals the fact that Asia is about to see another major new low priced operator, with expansive ambitions. The Malaysian entry with Malindo is in that respect little more than a toe in the water for this looming giant.

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