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CAPA’s Hottest Airlines to Watch in 2011: Asia Pacific

23-Sep-2010

Several airlines are making major competitive inroads into the markets they serve this year, while others have made it into this year’s CAPA’s Hottest Airlines to Watch list as they begin aggressive fleet and network expansion drives. In every region, there are airlines (of all models) that should be closely followed by airline, airport and supplier managements for competitive and business development reasons. In this first in a new series from CAPA, we look at the Asia Pacific region's Hottest Airlines to Watch in 2011.

CAPA has developed new technology to allow its Diamond Members to track news developments, data and analysis for any combination of airlines (including those listed below), or airports, suppliers and other issues. To obtain your trial of this exclusive, fully customised news service, please apply today for CAPA Alerts.

AirAsia

AirAsia is the world's lowest cost producer of airline seat kilometres, an innovator in distribution and ancillary revenues and is expanding rapidly. As such, it is perennially a mouth-watering airline to watch for airports, suppliers and competitor airlines in 2011.

AirAsia has been expanding throughout the global economic crisis, conducting major discounting promotions as part of its determination to “grow traffic, market share and profits”. The airline has achieved double-digit capacity growth across its network over the past two years. While this strategy weakened yields and ticket prices in 2009, there have been signs of recovery in 2010, supported by a gushing revenue stream of ancillaries, which has enabled the carrier to maintain strong profits.

The power of the AirAsia associate (cross-border JV) model has been revealed this year, with the benefits expected to be realised more fully in the years ahead. JV airlines in Indonesia and Thailand (and shortly in Vietnam) present a huge opportunity for the carrier to tap into ASEAN market growth. Both the Thai and Indonesian operations were in the black in the quarter to Jun-2010. With these subsidiaries on track, AirAsia can now look elsewhere, first with its Vietnam JV, and then potentially into other markets. Despite AirAsia's ASEAN preoccupation (which is based on realism of what has been achievable to date), the attractions of India and the North Asian triangle (Japan, Korea and China) for JV operations will rise, as each of these markets becomes more receptive to LCCs.

AirAsia X

Owned by a consortium including Tony Fernandes’ Aero Ventures and the Virgin Group, AirAsia X is based at Kuala Lumpur International Airport and is entering a rapid expansion phase and proving the low cost-long haul sceptics wrong.

The carrier, which was launched in 2007, has been embarking on continuous and rigorous network and capacity expansion, at a time when most carriers cut capacity in response to the economic downturn. This growth has meant the carrier has reached sufficient scale economies to stand on its own, with the carrier now eying a public listing in the 2H2011. The carrier’s growth trajectory is set to continue, with the carrier describing its agenda as “Growth! More planes, more destinations and more profits”. AirAsia X plans to grow in network to approximately 30 destinations across the Asia Pacific region by 2013 (with Tokyo Haneda operations the next major network breakthrough from Dec-2010), with a foundation fleet of 25 A330s, with this expansion to not only occur within the Asia Pacific region, but further afield in Europe and the US. International airports around the world are watching AirAsia X with interest.

All Nippon Airways

Japan has been one of the countries hardest hit by the global economic crisis, with the meltdown proving to be a catalyst for change in the North Asian nation’s aviation market. The year started dramatically, with JAL filing for bankruptcy protection, an event that will provide significant growth opportunities for ANA. ANA overtook JAL as the largest Japanese carrier in Jun-2010 and plans to boost international flights by 15% in the current fiscal year after an increase in capacity at Tokyo Narita and Haneda airports. ANA will operate five international routes from Haneda from 31-Oct-2010 to Los Angeles, Honolulu, Singapore, Bangkok and Taipei

ANA is also planning to establish an LCC based at Kansai Airport with First Eastern Investment (a self-proclaimed "pioneer of direct investments in China”). This move has been a long time coming, but reflects another part of ANA's strategy to maintain its newly found dominance in Japan. The carrier has also had success in capturing business passengers away from JAL with an increasingly improved business product and is eagerly awaiting delivery of its first and much-delayed B787 in 1Q2011. In all, ANA plans to take delivery of 52 new aircraft by the end of 2012, ranking it fifth globally, behind Air China (67), American Airlines (60), Turkish Airlines (59) and Ryanair (57).

Airlines with greatest number of aircraft deliveries by 2012

 

Airline

Total due to 2012

1

Air China

67

2

American Airlines

60

3

Turkish Airlines (THY)

59

4

Ryanair

57

5

ANA - All Nippon Airways

52

6

China Southern Airlines

50

7

Atlant Soyuz Airlines

49

8

easyJet

47

9

Alitalia

46

10

Lufthansa

46

11

Azul

43

12

China Eastern Airlines

43

13

Aeroflot Russian Airlines

41

14

Southwest Airlines

39

15

Hainan Airlines

38

16

Qatar Airways

38

17

airberlin

36

18

Emirates Airline

36

19

Korean Air

35

20

AirAsia

33

21

Lion Air

33

22

Qantas

33

23

Xiamen Airlines

31

24

Air France

30

25

Norwegian Air Shuttle

30

26

Henan Airlines

29

27

Tianjin Airlines

29

28

Avianca

28

29

Continental Airlines

28

30

JetBlue Airways

28

31

LAN Airlines

28

32

Malaysia Airlines

27

33

S7 Airlines

27

34

Jet Airways

26

35

Air Nostrum

25

36

Garuda Indonesia

25

37

Sichuan Airlines

25

38

Virgin Blue Airlines

25

39

Japan Airlines International

24

40

Air Europa

23

41

US Airways

23

42

Air Arabia

22

43

Cathay Pacific

22

44

Kingfisher Airlines

22

45

Shenzhen Airlines

22

46

TAM Linhas Aereas

22

47

Tiger Airways

22

48

Ethiopian Airlines

21

49

Austral

20

50

Saudi Arabian Airlines

20

Japan Airlines

2010 has proven to be a decisive year for Japanese aviation, with the changes and impact of the JAL bankruptcy expected to continue over the next few years. JAL’s restructuring plans, revealed in Sep-2010, is a significant plan involving the elimination of approximately a quarter of its debt, 40% of its fleet, 30% of its global workforce, one in eight international routes and a quarter of its domestic routes. The carrier is also considering the creation of an LCC as part of its restructuring programme. Chairman and CEO, Kazuo Inamori, announcing the reorganization commented: "JAL's flop has caused a lot of trouble to shareholders and financial institutions. Today is a new start for us."

While the rehabilitation plan is much as expected, following months of speculations and reports, there is some concern in Japan that the plan may be going too far, especially in the area of the drastic route reductions, opening up the way for ANA, and also other international carriers, to increase its presence in the market. However, the plan does assure that there is a future for the carrier, with JAL to eventually emerge from bankruptcy with a lower cost base and a more efficient operation. JAL will be on airport and supplier watchlists for cutbacks.

Chinese airlines

In addition to the Asia Pacific carriers listed here, seven Mainland Chinese airlines made this year's CAPA list: Air China, China Southern Airlines, China Eastern Airlines, Xiamen Airlines, Sichuan Airlines, Henan Airlines and Tianjin Airlines, as well as Hong Kong Airlines. Stay tuned to the upcoming Sep-2010 edition of CAPA's Monthly Essential China report for full details.

Garuda Indonesia

Surging competition on regional, domestic and short-haul international routes - from LCCs and full service carriers - has intensified the pressure on Garuda Indonesia. A long-time poor performer, Garuda has, however, enjoyed a return to form in recent years under President Director, Emirsyah Satar. Under his leadership, Garuda implemented a Business Transformation Programme in 2005, which saw losses progressively reduced in subsequent years, until net profits returned in 2007. Garuda has also benefited in that the global economic crisis had a minimal effect on the Indonesian economy, with demand remaining strong in the domestic market.

The carrier is bullish on its future, stating it is targeting a net profit of USD370 million by 2014, by aggressively increasing its fleet and expanding its route network. However, question marks remain over the sustainability of its profits over the short and medium term, as Garuda attempts to fend off rising competition from Lion Air and the LCCs (both foreign and international).

As part of the ‘2024 Quantum Leap’ programme, Garuda is planning a massive fleet rejuvenation and enhancement strategy, as part of which the carrier plans to more than double its current fleet of 67 aircraft to 116 aircraft over the next five years. Meanwhile, the carrier is completing its long-running debt restructuring paving the way for the carrier to conduct an IPO on the Jakarta Stock Exchange in late 2010. Simultaneously, the carrier’s global aspirations are slowly returning to reality, with the carrier resuming services to Europe following the lifting of an EU bans. A bigger step however would be Garuda’s future alliance plans, with the carrier expected to be the next carrier to join the SkyTeam Alliance, having secured a commitment by cooperation partner and SkyTeam founding member, Korean Air, to endorse the Indonesian airline’s application. Indonesia has been a fascinating and fast-moving domestic market over the past few years. That activity will increasingly spill over into international markets this year and next, making Garuda Indonesia one the key Asia Pacific Airlines to Watch in 2011.

Lion Air

Indonesia's largest private airline, Lion Air, currently commands a 40% domestic market share - considerably more than Garuda Indonesia. Lion Air describes itself as a hybrid low cost operator, offering both economy and business-class seating. Lion Air, wholly-owned by Rusdi and Kusnan Kirana (Indonesia’s 22nd richest people in 2009, with a net worth of USD480 million), took to the skies from Indonesia in 2000 with just one aircraft in its fleet. Within eight years of operation, Lion Air now operates to more than 36 destinations in Indonesia and other destinations in the region (including Singapore, Malaysia and Vietnam) with up to 160 daily services.

Lion Air plans to aggressively expand its international network from 2010 onwards, focusing in particular on the Chinese market. The carrier is also seeking offshore partners/bases to expand within Asia, with some development in the cross-border JV market possible in 2011. Lion Air is on track to become one of the largest airlines in Southeast Asia this decade, based on current orders, with 150 B737NGs on order (the carrier was the launch customer of the B737-900ER), with deliveries to rise from one per month in 2010 to two per month in 2011-2015. It is a breathtakingly bullish growth profile that will require considerable financing and to achieve.

IndiGo

Indigo, India’s largest LCC and the third largest carrier in the domestic market, is a solid player in the Indian domestic market. The carrier, which was the only Indian carrier to report profits in FY2008/09, is close to overtaking Air India/Indian Airlines as the second largest carrier in the domestic market, and also has its sights set on international expansion in 2011. To support this growth, the carrier plans to take delivery of more than 70 aircraft by 2015, with the government in Aug-2010 giving in-principle clearance for IndiGo to purchase 150 new aircraft over the next two to three years, for delivery after 2015. The carrier has a good reputation in the market and has a well-organised operation, which has positioned it well in the market. Airports in the Indian Subcontinent, Gulf and Southeast Asia take note: Indigo is coming.

Jet Airways

Jet Airways is the strongest of the ‘Big Three’ Indian carriers, benefiting from a revival in domestic demand in the Indian market and international demand to/from India. The carrier, which is expected to report full year profitability in FY2010/11, has witnessed a rapid recovery since 3QFY2009/10, including high load factors in domestic and international operations (international has exceeded 80% in recent months), combined with strengthening yields and the impact of cost-reduction programmes. Lufthansa is courting Jet Airways as a future Star Alliance member, although Air India is a future member of this alliance. SkyTeam meanwhile is the only alliance without an Indian airline member.

The carrier is now focusing on improving reliability of its fleet, its branding in the domestic market (JetLite and Jet Konnect will likely be combined under the Jet Konnect brand) and is evaluating new routes to increase aircraft utilisation. Encouragingly, Jet plans to resume its international expansion, as part of its ambitions to have the strongest global network from India.

SpiceJet

SpiceJet is expected to deliver consistent profitability in FY2011 as demand continues to recover in the growing Indian market. 2010 is proving to be a banner year for the carrier: a new owner in Sun TV Network Ltd Chairman Kalanithi Maran; a return to profitability; a much-anticipated launch of international operations in Oct-2010 and an order with Boeing for 30 B737-800/900 aircraft for delivery from 2014, as part of the carrier’s target to operate a 50-aircraft fleet by 2014. SpiceJet is also likely to be a key player in the expected consolidation in the industry, and has been driving this agenda.

Korean Air

Korean Air has been buoyed in 2010 by surging cargo demand and rising international passenger traffic and yields. In the short term, the now strongly profitable carrier recently stated its cargo business has "returned to normal to make a profit" and the passenger business has "recovered to well above where it was before the crisis started". Cargo accounted for 36% of total revenue in 2Q2010 (its cargo operation is the third largest in the world) and it now plans to explore new markets in Scandinavia, Central Asia and the "untapped" Latin American market.

The carrier’s passenger business is also witnessing record traffic levels and Korean Air is in expansion mode once again. The airline also has an LCC subsidiary, Jin Air, at its disposal to support operations in the domestic and short-haul international markets. Looking forward, Korean Air is well positioned to respond to rising competition and capacity in China/Japan and it should benefit from its strong international network, which covers 130 cities in 45 countries (the carrier for example is the largest Asia-North America operator).

Malaysia Airlines

Malaysia Airlines, the national carrier of Malaysia, is one of Asia's largest airlines, handling more than 14 million passengers p/a (or nearly 50,000 passengers per day) to over 100 destinations across six continents, with its network focused predominantly in the high-growth ASEAN/Middle East/North Asian/Oceania region. After keeping a lower profile during the financial crisis and enduring a painful restructuring exercise, MAS is again positioning itself to capture growth in light of signs of recovery.

MAS has again entering a rapid fleet and network growth phase (the carrier has around 40 aircraft on order, including 27 by the end of 2012). The new fleet mainly comprises B737s, but also six A380s, to increase the carrier’s operational flexibility and reduce its average fleet age from 15 years at present. Emboldened by fresh funding support under a well-supported rights issue and a return to profitability, MAS is taking the fight up to AirAsia/AirAsia X.

Thai Tiger

Thai Airways and Tiger Airways in Aug-2010 announced plans to form a JV, “Thai Tiger”, to operate international and domestic Thailand point-to-point services (within a five hour flying radius of Bangkok), with services scheduled to commence in Mar-2011. The new JV, to be owned 51:49 by Thai Airways and another "Thai entity", plans to acquire 15 A320s in 2011 and 2012 to support its expansion in the fast growing Thai market.

The proposed JV, which is facing some government opposition, raises the bar in low cost airline competition in Asia and could have a major impact on the pace of airline liberalisation in the region. Meanwhile, the future of Nok Air, in which Thai currently holds a 39% stake, remains uncertain, with Thai Airways stating Nok Air was unable to develop a marketing strategy to expand its operations and was not in a position to expand internationally.

Tiger Airways

Tiger Airways is very well positioned in a competitive marketplace, reporting a solid set of financial results in the three months to Jun-2010. The Tiger Australia operation now appears to be starting to pull its own weight, enabling the carrier to focus on its new Thai JV with Thai Airways, Thai Tiger. As the carrier has duly noted, “spreading our paw-print means greater economies of scale for Tiger Airways, which in turn enables us to lower costs and fares even further." Importantly the JV will give Tiger Airways far more options in allocating the large number of A320 aircraft due for delivery over the next few years. Not only does establishment of a new base mean more operating options for the airline, it also spreads the carrier’s risk much more effectively, allowing it the luxury of allocating aircraft as its markets vary in opportunity and growth rates.

Tiger is still a relatively small operation in comparison with the big two (AirAsia and Jetstar), with only 10 A320 family aircraft in service in each of Singapore and Australia (for a total of 20 aircraft). But it has big plans, with another 50 aircraft arriving between now and 2015. The carrier has been seeking to speed up this delivery process to support its growth plans.

Tiger, one of the lower cost operators in the region, is establishing itself as a major future force in the region, with the potential eventually to become one of three large non-flag carrier operations, along with AirAsia and Jetstar. The carrier acknowledges that its expansion regionally will be a key to long term success. While Tiger has had one false start in the North Asian market (in Incheon Tiger Airways) it is possible that the carrier may again try to access the North Asian market, possibly under a Thai Airways-style partnership with another established North Asian carrier.

Tiger Airways Australia

The entry of Tiger Airways Australia into the Australian market in late 2007 put, and continues to create, significant pressure on all incumbents. Tiger is now well established in the price-leadership position in the Australian market. The carrier, which currently operates a ten A320 fleet, plans to continue its expansion in the market, stating there is still a "huge opportunity" for the carrier to grow in Australia. The carrier also benefits from having what is claims is the “lowest cost base in Australia”.  The carrier has also stated it is examining routes within a five-hour flying range from Australia for its A320 aircraft, including destinations in Indonesia, New Zealand and the Pacific islands.   

Jetstar/Qantas

Qantas' strategy and development is watched closely by airline managements around the world, particularly its two-brand flying strategy with its Jetstar LCC offshoot and its massively successful frequent flyer programme. Qantas Group’s low cost carrier, Jetstar, is a growing jewel in the Qantas crown. The LCC, established in 2003, plays a pivotal role within the Qantas Group to defend and expand its share of the market, while providing effective segmentation to shield the mainline carrier’s yields. The two brand strategy has helped the Qantas Group maintain an optimal 65% Australian domestic market share and provides the platform for expanding its international network - much to the interest of airports in Asia, and increasingly the Middle East, Europe and North America.

Jetstar has diversified its operations since launch and now operates an extensive domestic network. It is now one of the world's largest long-haul LCC, operating to destinations in the Pacific and Asia. The airline also operates domestic services in New Zealand (which were given a boost through Pacific Blue's planned withdrawal), and the brand is also operating in Singapore (as Jetstar Asia) and Vietnam (as Jetstar Pacific). The carrier will also likely be involved in the establishment of a potential Japan Airlines LCC, with Qantas in late 2009 pledging to advise the struggling Japanese carrier in successfully establishing a low-cost offshoot. Another key area of profitability and prospect for Qantas Group is its FFP (which achieved a record Underlying EBIT of AUD328 million in the 12 months to Jun-2010, up AUD102 million over the comparative full-year”). Qantas' mainline operation, which contracted again last year, is seeing improved yields as the global economy recovers and corporate travel returns. The strong Australian dollar meanwhile positions it and Jetstar well for solid growth in outbound travel over the near term, although the slump in inbound tourism look set to continues.

Virgin Blue

Australia’s second largest airline, Virgin Blue, will be an interesting carrier to watch in the next 12 months, as it develops into a more corporate entity under new leadership. The carrier has transformed from being Australia’s first LCC when it launched in 2000 to become a hybrid-LCC now targeting higher-yielding corporate traffic. Virgin Blue has changed its business model accordingly, and the airline now extensively codeshares, has a frequent flyer programme, three-class offerings, lounges, an international subsidiary, among others. The carrier, along with affiliates Polynesian Blue, V Australia and Pacific Blue, has had a tough time through the financial crisis, although the carrier, under new management, is attempting to turn this situation around. In one of the more dramatic announcements in a never-peaceful Australian aviation market, Virgin Blue’s new CEO (and former Qantas exec, John Borghetti) in Aug-2010 announced an array of measures that could go a long way to equalising the balance with major competitor Qantas. A “game changing” partnership with Abu Dhabi’s powerful Etihad Airways and a declaration of war in next year’s domestic market (with an increased focus on the corporate market) add up to a statement that Virgin Blue will become a much more powerful domestic and international force in the next 18 months. The carrier also has deals in the offing with Delta - on the Pacific, US routes - and with Air New Zealand covering the trans-Tasman market, although these now appear to be under serious threat from competition authorities. Based on the apparent focus of the new management, Virgin Blue would also likely be seeking similar agreements to tap into fast growing Asian markets.


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