09-Apr-2014 12:00 PM

MEGA Maldives Airlines plans rapid expansion as it starts to diversify outside China-Maldives market

Analysis

MEGA Maldives Airlines is planning rapid fleet and network expansion as it converts its Male base into a hub and pursues potential joint venture partnerships in other markets. MEGA has pursued modest expansion since launching in early 2011 and currently operates only three scheduled routes from Male with a fleet of two 767s and one 757.

The first phase of its planned expansion will see four additional 757s and one additional 767 along with its first routes to the Middle East and Southeast Asia. The second phase will see the possible launch of services to Australia and Europe using a second type of widebody aircraft. Meanwhile the carrier plans to start pursuing transit traffic and partnerships in other underserved leisure-focused markets, starting with Nepal.

MEGA has until now focused almost entirely on services between Maldives and Greater China. While MEGA is keen to expand further in the booming Maldives-China market it aims to exploit several other potentially lucrative niches.

Summary

MEGA Maldives Airlines plans to expand its fleet and network, converting its Male base into a hub and pursuing joint venture partnerships in other markets.
The airline currently operates only three scheduled routes from Male with a fleet of two 767s and one 757.
MEGA aims to add four additional 757s and one additional 767 in the first phase of expansion, with new routes to the Middle East and Southeast Asia.
The second phase will see the possible launch of services to Australia and Europe using a second type of widebody aircraft.
MEGA plans to pursue transit traffic and partnerships in other underserved leisure-focused markets, starting with Nepal

MEGA currently focuses entirely on Greater China market

MEGA currently operates 16 scheduled weekly flights from Male, including six to Beijing, five to Shanghai and five to Hong Kong. It also operates two weekly charter flights between Hong Kong and the western Pacific Ocean island of Palau.

The Male-Hong Kong and Hong Kong-Palau route is currently operated with a wet-leased 737-800. Beijing is served with 767-300ERs and Shanghai with a mix of 767-300ERs and 757-200s.

Maldives-China has always been MEGA's target market and drove the decision by a group of US and private Maldivian investors to establish the company in 2010. Tourist arrivals from China including Hong Kong have increased more than five-fold over the last four years from about 60,000 in 2009 to 332,000 in 2013, according to Maldives Ministry of Tourism data. China is now by far the largest and fastest growing source market for tourists to the Maldives, accounting for 30% of all arrivals in 2013.

Year-over-year growth for Chinese arrivals in 2013 was 45% while the total market grew by 17% to 1.1 million. In the first two months of 2014, tourist arrivals from China were up a further 21% year-over-year to 332,000.

While Europe is still a major source market, accounting for 527,000 tourist arrivals in 2013, it grew by only 2% year-over-year and is relatively well served with seven European carriers currently operating scheduled services to Male. There are also several charter carriers serving the Maldives-Europe market and the Gulf carriers have captured an increasing share as they have expanded their operations to Male.

MEGA recognised a void in the Maldives-China market. Back when it launched services in Jan-2011 there was only one Chinese carrier, China Southern, operating non-stop services to the Maldivian capital Male, with two weekly seasonal flights from Guangzhou. There are now five carriers from China and Hong Kong operating scheduled services to Male (according to OAG data) but the capacity they provide still only addresses a relatively small portion of the total market. Currently China and Hong Kong account for 14% of scheduled international seat capacity in the Maldives, an indication that roughly half of tourist arrivals from China including Hong Kong are flying via other points.

The largest markets in terms of seat capacity - Sri Lanka, the UAE and Singapore - are mainly transit markets with SriLankan Airlines and Singapore Airlines (SIA) particularly large players in the Maldives-China market while Emirates and Etihad (along with Qatar) are large players in the Maldives-Europe market. Sri Lanka, the UAE and Singapore are all small source markets for the Maldives, combined accounting for less than 30,000 visitor arrivals in 2013 compared to the 332,000 from China and 527,000 from Europe.

Maldives international capacity (seats) by country: 7-Apr-2014 to 13-Apr-2014

MEGA has about a 30% share of the Maldives-China market

Several carriers offer one-stop connections between Male and China with most carriers adding capacity to Male or launching services to Male since MEGA's launch. But MEGA has succeeded at carving out a niche despite the increasing competition. MEGA CEO George Weinmann told the 2014 CAPA Airline Fleet and Finance Summit in Singapore on 26-Mar-2014 that the carrier was able to capture about a 30% share of the Maldives-China market in 2013 (based on all Chinese arrivals, including passengers arriving via intermediary points). This gave MEGA a 10% share of the total Maldives international market.

Based on current scheduled capacity levels MEGA has about an 8% share of the Maldives international market, according to CAPA and OAG data. Emirates, SriLankan and SIA are larger carriers in the Maldives international market with 18%, 15% and 9% shares respectively.

Maldives international capacity share (% of seats) by carrier: 7-Apr-2014 to 13-Apr-2014

Government-owned flag carrier Maldivian is the main domestic player and fifth largest carrier in the international market as it currently accounts for about a 5% share of international seat capacity. The outlook and plans for Maldivian, which also now serves the Maldives-China market on a limited basis, will be analysed in the second in this two-instalment series of analysis reports on the Maldives market.

MEGA has tried to differentiate itself in the increasingly competitive Maldives-China market by offering schedules ideal for Chinese tourists and a full-service product tailored to leisure passengers. While MEGA operates a relatively old fleet that is not equipped with any in-flight entertainment it provides a full service that is designed to be fun and is aimed at the Chinese leisure passenger.

MEGA generally offers morning or early afternoon arrivals in Male while its departures are in the evening. This enables seaplane connections in both directions, which is important as about half of the resorts in the Maldives are only accessed by seaplanes and the seaplanes only operate during daylight hours. Several of the other carriers serving the Maldives-China market are unable to connect with the seaplane flights on the same day in both directions because their schedules are based on connections at their hubs rather than connections in Male.

MEGA looks at re-entering secondary Chinese destinations

Despite its initial success in the Maldives-China market, MEGA adjusted its network in 2013 and dropped three secondary Chinese cities - Chengdu, Chongqing and Hangzhou - all of which it had served on a seasonal charter basis. MEGA cites new charter restrictions from Chinese authorities as forcing the carrier to consolidate its operation to focus on the bigger Beijing, Hong Kong and Shanghai markets.

Chinese authorities now require foreign carriers to eventually transition charter services to scheduled operations in order to maintain their flights. MEGA did not believe scheduled operations to secondary Chinese destinations were viable at the time given the huge seasonal fluctuations in these markets.

But MEGA is relooking at some of these markets and could resume scheduled services to Chengdu and/or Chongqing in late 2014 as well as launch other secondary Chinese cities. Its current network plan identifies Changsha, Shenzhen, Xian and Xiamen as potential new destinations in mainland China well as Chengdu and Chongqing, which would represent resumed destinations.

MEGA Maldives current and its ambitious potential future network

MEGA also plans to relook at the China-Japan market, where it holds fifth freedom traffic rights. The carrier was initially planning to start serving Tokyo via Chongqing in 2012 but just after its pick-up rights were secured for the route relations between Japan and China soured due to a territorial dispute, reducing demand. MEGA continues to wait for improvements in the China-Japan market - where demand remains subdued as the dispute between the two countries linger - before launching services to Tokyo and potentially Osaka.

While MEGA's anticipated flights to Japan would carry a reasonable number of passengers to Male, MEGA needs strong local demand on the China-Japan leg for the route to work as Japan remains a relatively small source market for the Maldives. Japanese citizens only accounted for about 39,000 tourist arrivals to the Maldives in 2013, representing growth of 8% over 2012. There are currently no non-stop flights between the Maldives and Japan.

MEGA previously operated charter flights to Seoul but does not include Seoul as a potential route in its network plan. Korea is another relatively small source market, accounting for only about 30,000 tourist arrivals in 2013. The Male-Seoul route is now served by Korean Air, which launched three weekly flights to Male via Colombo in Sri Lanka in early 2013.

MEGA plans to launch new routes to Southeast Asia and Middle East in 2014

While Japan is under consideration, expansion in China and the launch of flights to Southeast Asia and the Middle East are the focus for 2014. In Southeast Asia MEGA has been looking at Jakarta and Kuala Lumpur. Jakarta is currently un-served while Kuala Lumpur following the recent withdrawal of AirAsia X is served only by Malaysia Airlines (MAS). MAS operates a daily 737-800 service to Male and, as in the case with SIA, relies mainly on transit passengers.

Unlike its Chinese markets, Kuala Lumpur and Jakarta are not nearly large enough to support MEGA on a purely local basis. Malaysia accounted for about 11,000 visitor arrivals in the Maldives in 2013. And while Kuala Lumpur is a popular destination for Maldivians, including for education purposes, Maldivians account for a very small fraction of Male's international passenger traffic as the country's population is only about 340,000. Indonesia is a much smaller market, accounting for only about 2,500 tourist arrivals in 2013.

But MEGA is confident Jakarta and Kuala Lumpur to Male would be viable routes with connections to Saudi Arabia because of strong demand for religious travel. Kuala Lumpur or Jakarta to Jeddah would be the first transit market MEGA will likely promote in a new attempt to leverage Male's location as a potential transit hub for traffic from Asia to the Middle East, Africa and other Indian Ocean islands. While Male currently has virtually zero international transit traffic, the Maldives government and airport authority are keen to start developing hub flows.

By promoting a transit product, the Maldives can potentially support several routes which otherwise would not be viable. The new flights in turn would boost tourism figures from promising source markets such as Indonesia, Saudi Arabia and South Africa.

MEGA also keen to develop new routes to Africa and India

In addition to Saudi Arabia, Malaysia and Indonesia, MEGA believes with the right connection flows there could also be opportunities in South Africa, Tanzania, Mauritius and the Seychelles.

South Africa only accounted for about 4,500 visitor arrivals in 2013 but has growth potential as a local market if connectivity is improved. Only very circuitous routings via the Middle East are now available for South Africans keen to holiday in the Maldives. MEGA also envisions the potential Johannesburg service being supported with transit passengers from China as China-South Africa is a large and fast growing market.

The potential services to Tanzania, Mauritius and Seychelles would also tap into growing demand from China. In addition MEGA sees the potential of leisure traffic to Mauritius and Seychelles for passengers seeking to combine the Maldives with a second exotic island destination in a single holiday.

MEGA could potentially begin trialling one or two frequencies to Mauritius or Seychelles by the end of 2014 but most likely none of the potential African routes will be launched this year. The plan for 2014 would be one route to Southeast Asia, one to the Middle East and additional China services as two 757s and one 767s are added.

India is also a possibility for 2014 with Delhi and Mumbai under consideration. Southern India is already relatively well served from the Maldives by other carriers using smaller aircraft (primarily A320s as well as some Q400 regional turboprops), which are more suitable for the short flight between the Maldives and southern Indian destinations.

Delhi and Mumbai are not currently served non-stop from Male but could be viable low frequency widebody routes. Indian citizens accounted for 38,000 tourist arrivals to the Maldives in 2013, up 20% from 2012. India is also a common destination for Maldivians for education and medical treatment.

MEGA plans to add five aircraft by the end of 2014

Mr Weinmann expects one of the four additional 757s the carrier plans to add in 2014 will be allocated to the new Middle East and Southeast Asia routes. The two routes will be connected with same plane service as MEGA expects an overwhelming majority of the passengers to stay on the aircraft rather than disembark at Male.

He says the second additional 757 will replace the wet-leased 737-800 and take over the Hong Kong and Palau flights with a possible fifth frequency to Hong Kong for the peak season. The switch to the 757 and possible fifth frequency will both result in increased capacity in the Male-Hong Kong market, which is also now served by Cathay Pacific and Hong Kong Airlines.

The third and fourth additional 757 is expected to be used mainly for new routes to mainland China. India is also a possibility with one of these aircraft.

The one 767 MEGA plans to add in 2014 will primarily be used as a spare. MEGA now mainly uses its one 757 as a spare but this creates an issue on some routes as the 767 is larger and has more range.

Mr Weinmann told CAPA after the Fleet and Finance Summit that it is in "fairly advanced negotiations" to lease the additional 757s and that deliveries would be evenly distributed over the remaining three quarters of the year. He says MEGA is just now starting to look at sourcing an additional 767.

MEGA eyes new long-haul widebody fleet

For 2015 MEGA aims to add two more 767s, one more 757 and two other long-haul widebody aircraft. The latter will be a new type to be used to launch flights to Australia, Europe and potentially North America. MEGA plans to acquire a total of five long-haul widebody aircraft, with three more deliveries in 2016.

Mr Weinmann says MEGA is now reviewing proposals for new widebody types and it is unlikely all five aircraft will be acquired as one batch. While MEGA is looking at both new and used aircraft options Mr Weinmann points out that the carrier generally looks for mid to late life aircraft. MEGA sees itself as the last operator of aircraft with retirement coming six to nine years after it takes delivery.

MEGA Maldives fleet plan: end 2013 to end 2016

While MEGA's 767-300ERs have the range to serve Europe and Australia, the carrier believes it needs a new type for such routes to be viable. The carrier in particular is interested in widebody aircraft with more belly cargo capacity as the Maldives can be a lucrative cargo market in both directions, consisting of imported supplies for the resorts and exports of fish.

MEGA's 767-300ERs lack the range for services to North America, which MEGA is looking at serving potentially via China. Australia and Europe are the more likely initial routes if and when the new type enters service in 2015. Europe is a larger but more competitive market than Australia, which does not have any non-stop services to Male and is now mainly served via Southeast Asia.

MEGA envisions horizontal expansion through partnerships, starting with BB Airways

Meanwhile MEGA is looking at expanding outside the Maldives through a series of joint ventures and partnerships. Its first partnership, with Nepal's BB Airways, was announced on 26-Mar-2014 at the CAPA Fleet and Finance Summit.

Mr Weinmann says MEGA is now discussing potential partnerships with two other carriers and is confident it can expand laterally. "We have multiple viable expansion paths," he says.

The new partnerships are not expected to source aircraft from MEGA but operate under their own air operator's certificate with their own fleet plans. For example BB is now looking to acquire its own fleet as part of a plan to resume operations later this year with dry-leased aircraft. BB previously operated to Kuala Lumpur and Taipei using a wet-leased Boeing 757 but suspended operations over one year ago.

MEGA envisions sharing resources with BB and having various commercial agreements. While BB is now currently looking to lease its own aircraft, the two carriers could potentially share some crews and one aircraft as the peak season in Nepal is the opposite from the peak season in the Maldives. Such synergies can be pursued as South Asian regulations are aligned under COSCAP.

MEGA may also potentially invest in BB although this has not yet been disclosed and is not a requirement under the partnership model that MEGA envisions. MEGA is generally looking for partnerships in small leisure-focused markets which it sees as underserved. Carriers from such markets generally struggle to compete but Mr Weinmann sees a brighter future if such airlines band together.

Mr Weinmann sees Nepal as a potentially similar market to Maldives as it has huge growth potential for leisure travel from the same source markets including China. Palau, which MEGA has been testing with a charter flight for Towa Travel Service, is another market that MEGA believes can support a new local airline if the right partnership is in place.

In its first three years MEGA has proven there is still a role for leisure carriers in small but growing markets. MEGA is now ready to embark on much more ambitious expansion that could see the carrier increase the size of its fleet six-fold over the next three years while also pursuing partnerships in other countries.

There will be challenges as competition continues to intensify even in relatively small markets such as the Maldives and Nepal. But if it picks its routes and partners carefully MEGA could carve out a profitable, sustainable and growing niche.