23-May-2015 12:00 PM

Thailand’s NokScoot launches scheduled services as sister Scoot expands in the Bangkok market

Analysis

Long-haul low-cost start-up NokScoot quietly launched scheduled operations on 20-May-2015 with service from its Bangkok Don Mueang base to Singapore, the base of joint venture partner Scoot. NokScoot has also been finally cleared by Chinese authorities to launch services to Nanjing in Jun-2015 but will need to wait for Thai authorities to resolve ICAO-raised concerns before launching planned services to Japan and South Korea.

Sister carrier Scoot, however, has unveiled plans to serve the Bangkok-Osaka route from Jul-2015 as it increases capacity on Bangkok-Singapore. Scoot also has confirmed plans to serve Osaka via Kaohsiung in Taiwan.

The commencement of services to Singapore and soon Nanjing closes a difficult initial chapter for NokScoot, which has had to delay the launch of scheduled operations multiple times due to a series of regulatory holdups. Singapore will likely be a temporary destination for NokScoot as its long-term focus remains North Asia.

NokScoot has had to adjust launch plans multiple times

NokScoot was established in late 2013 as a joint venture between Thai Airways' short-haul LCC affiliate Nok Air and Singapore Airlines' long-haul LCC subsidiary Scoot. The start-up secured an air operators' certificate (AOC) from the Thailand DCA in Oct-2014 but prior to the 20-May-2015 Bangkok-Singapore launch only operated a limited number of charter flights.

After securing its AOC NokScoot lodged applications with authorities in China, Japan, South Korea and Singapore for foreign air carrier permits authorising scheduled flights. The original plan was to begin with scheduled services to Japan in late 2014, to be quickly followed with flights to Korea and China. Singapore was always considered a back-up as the market was seen by the NokScoot management team as intensely competitive and oversupplied.

But NokScoot encountered multiple delays in securing approvals from China, Japan and South Korea. While it was able to begin charter flights to Japan and South Korea in 1Q2015, in early 2015 it pushed back its target launch date for scheduled flights to May-2015.

In early Mar-2015 NokScoot was confident it was finally close to securing approvals from China and South Korea and therefore began selling Nanjing and Seoul flights. Nanjing was initially announced as a thrice weekly service beginning 5-May-2015 while Seoul was initially sold as a thrice weekly service beginning 10-May-2015, increasing to daily from 1-Jun-2015.

In Mar-2015 NokScoot also filed schedules indicating a daily Bangkok-Narita flight from 16-May-2015 and a four times weekly Bangkok-Osaka flight from 22-May-2015. But it never began selling either of these routes.

In late Mar-2015 NokScoot's plans for South Korea and Japan suddenly unravelled after authorities from both countries decided to prohibit any new flights from Thai carriers until Thailand's DCA resolved issues raised by ICAO from a Jan-2015 safety audit. NokScoot immediately cancelled the 10-May-2015 launch of Seoul and suspended plans for Japan. As CAPA wrote in Apr-2015: "The new restrictions from Japan and South Korea on Thai carriers could not have come at a worse time for NokScoot as it was close to securing final approvals from authorities in both countries."

NokScoot finally cleared for Nanjing

NokScoot has been able to continue operating charter flights to Japan but Japanese authorities have only approved these ad hoc flights through the end of May-2015 as part of a temporary waiver from the ban prohibiting new flights from Thai carriers until the ICAO issues are resolved. The lack of any scheduled routes has resulted in extremely low utilisation of NokScoot's assets, which now consists of three 415-seat 777-200s.

With the charters also coming to an end NokScoot was facing the prospect of not having any flights for any aircraft from the beginning of Jun-2015. Fortunately, NokScoot was cleared by the CAAC to launch Nanjing following a 15-May-2015 audit by Chinese authorities.

NokScoot is now expected to launch Nanjing by mid-Jun-2015. It earlier pushed back the Nanjing launch from 5-May-2015 to 2-Jun-2015 and is currently selling flights on its website from 11-Jun-2015.

Being able to proceed with Nanjing is a major milestone for NokScoot as it should make it easier to pursue other China routes and, potentially, approvals from other countries. But the CAAC for now will not consider additional routes from NokScoot. The airline will have to make do with the initial three weekly flights to Nanjing and hope after it has operated the route for a few weeks it can convince the CAAC to authorise more routes.

NokScoot needed Singapore flights to fill the gap

In the meantime NokScoot needed more flights to keep its aircraft and crews busy and to meet a CAAC requirement that stipulates all new airlines have to have operated 50 sectors before flying into China for the first time. NokScoot decided in early May-2015, while it was still working towards CAAC approval, to launch scheduled services to Singapore from 20-May-2015.

While NokScoot earlier decided against serving Singapore as the market is extremely competitive and already served by sister carrier Scoot, the lack of more suitable routes forced its hand. NokScoot also was hoping its ability to secure approval from Singaporean authorities and launching scheduled flights to Singapore could potentially help its applications with other countries.

Ticket sales for Singapore began on 8-May-2015 with prices from Singapore starting at only SGD55 (USD41) one-way including taxes for economy class and SGD105 (USD79) one-way including taxes for business class. Tickets at the promotional fare were sold through 18-May-2015 for all flights through 31-Jul-2015 with no blackout dates for holidays or peak periods. Business class includes a recliner style seat, luggage, a meal and one drink while the cheapest economy fares does not include any frills or seat assignments. (NokScoot has the same product offering as Scoot but a smaller business class cabin.)

Prices increased after the pre-launch promotional period ended on 18-May-2015 to all-inclusive one-way fares from Singapore starting at SGD72 (USD54) for economy and SGD150 (USD112) for business. NokScoot is continuing to sell on its website - at least for now - daily flights on Singapore-Bangkok through Mar-2016. But NokScoot reportedly has filed a new schedule which will reduce Singapore-Bangkok to six weekly flights from 1-Jun-2015 and to four weekly flights from 1-Jul-2015. The new schedule also indicates the route will be suspended entirely from 16-Aug-2015.

Flights between Singapore and Bangkok being sold on the Scoot website are based on this new schedule with the last NokScoot-operated flight from Singapore on 16-Aug-2015. Scoot only began selling NokScoot-operated flights on the Singapore-Bangkok route on 21-May-2015. In the initial two weeks of ticket sales NokScoot-operated flights to Singapore were not sold by Scoot and were significantly cheaper than flights on the Singapore-Bangkok route operated by Scoot or its short-haul LCC partner Tigerair.

The Bangkok-Singapore market is already well supplied

NokScoot's reduction in capacity and apparent suspension of flights on the Singapore-Bangkok route is sensible, particularly if NokScoot is able to secure approval for more scheduled flights to North Asia. The Singapore-Bangkok market is already well served by LCCs. There are currently about 49,000 weekly one-way seats between the two cities, including about 25,700 seats from LCCs.

Scoot currently has a 10.2% share of LCC capacity on the route - and a 5% share of total capacity - which will increase to nearly 14% in early Jul-2015 as it adds three weekly frequencies to Bangkok for a total of 10. NokScoot now has an 11.3% share of LCC capacity on the route based on its current schedule of daily services.

Singapore to Bangkok LCC capacity by carrier (one-way seats per week): May-2014 vs May-2015

Airline	Week of 26-May-2014 seats	Week of 26-May-2014 percentage share	Week of 25-May-2015 seats	Week of 24-May-2015 percentage share
Jetstar Asia	5,040 seats	21.4%	6,300 seats	24.5%
Thai AirAsia	7,560 seats	32.1%	7,560 seats	29.4%
Tigerair	8,100 seats	34.4%	6,300 seats	24.5%
Scoot	2,814 seats	12.0%	2,625 seats	10.2%
NokScoot	N/A	N/A	2,905 seats	11.3%
Total	23,514 seats		25,690 seats

Scoot and NokScoot start to cross-sell

If NokScoot does maintain the new Singapore-Bangkok service it would likely need the support of Scoot and potentially Tigerair for the route to become viable. NokScoot has a strong presence in Thailand, where it can leverage the Nok brand. But it will be difficult to succeed on the Bangkok-Singapore route relying primarily on Thailand point of sales.

The NokScoot business plan envisions all NokScoot flights being sold by Scoot and Nok and NokScoot selling Scoot-operated flights. But the Nok website is not yet selling NokScoot-operated flights and Scoot also did not initially sell NokScoot-operated flights to Singapore.

Scoot is now selling NokScoot-operated flights and fares are now generally aligned between the two carriers. During the period only NokScoot was selling the flights the fares were significantly less than the fares available on Scoot.

NokScoot is also now selling Scoot's new Bangkok-Osaka route, which will launch with three weekly flights on 8-Jul-2015. NokScoot began selling Scoot's Bangkok-Osaka flight on 21-May-2015, the same day Scoot announced the route and began sales on its own website.

NokScoot is not (yet) part of the Scoot-Tigerair alliance

As the Singapore Airlines group gradually sorts out a genuine group strategy, rationalisation is emerging, with increasing connectivity between the various elements of the group. With each new entity added, the need for this becomes more commercially pressing.

So, for example, it will also be sound sense for NokScoot to join the Scoot-Tigerair alliance, particularly if it maintains, or in future resumes, service on the Bangkok-Singapore route. Scoot and Tigerair secured anti-trust immunity from Singaporean competition authorities in Aug-2014 to cooperate on the Singapore to Bangkok, Hong Kong and Taipei routes. Scoot and Tigerair now coordinate pricing and schedules on these routes and cross-sell, enabling passengers to fly on Scoot one way and Tigerair back or vice versa.

Tigerair currently operates 35 weekly flights from Singapore to Bangkok Suvarnabhumi. Combined Tigerair and Scoot account for 35% of LCC capacity in the Singapore-Bangkok market. A Tigerair-Scoot-NokScoot combination would result in a 46% share of total LCC capacity in the Singapore-Bangkok market (based on current schedules). Thai AirAsia accounts for an 29% share of LCC seat capacity in the Singapore-Bangkok market while Jetstar Asia accounts for the remaining 25%, according to CAPA and OAG data.

While a NokScoot-Scoot-Tigerair three-way partnership would be ideal this would require competition authority approval. Scoot and Tigerair may also see the capacity provided by their joint venture as already sufficient, particularly given the capacity that is also provided by competitors. (The competition attitude may harden as the respective groups coalesce, as Singapore Airlines and Thai Airways mainline operation constitute some 45% of total capacity on the sector, according to CAPA and OAG data.)

The ideal scenario for both shareholders is for NokScoot to secure enough North Asia routes to make the Singapore route unnecessary. NokScoot can still sell Singapore if it withdraws from the Singapore-Bangkok route by using coded Scoot-operated flights.

NokScoot could also potentially sell Scoot-operated flights beyond Singapore to Australia as well as Tigerair-operated flights to destinations such as Indonesia and the Philippines. A Tigerair partnership could be beneficial to both NokScoot and Nok, which currently has an interline partnership with Scoot but not with Tigerair. Such a partnership is logical even if NokScoot does not maintain its own Singapore service.

NokScoot has huge opportunities in the North Asia market; China is growing at a staggering rate

Eventually NokScoot should be able to mount flights to several destinations in mainland China as well as Japan and South Korea. Thai authorities are confident they can quickly resolve the concerns raised by ICAO, which would lead to Japanese and South Korean authorities lifting the current ban on additional flights from Thai carriers within the next few months.

All three markets are seeing rapid growth. Thailand's tourism industry has quickly recovered after a drop in visitor numbers in 2014 due to the civil unrest in Bangkok.

As CAPA highlighted in two other recently published reports on the Thai market, Thailand reported a 24% increase in total visitor numbers in 1Q2015, more than offsetting an 11% drop from 1Q2014. Other countries in East Asia accounted for all of this growth, driving a significant improvement in profitability in 1Q2015 at Thai AirAsia, Bangkok Airways and Thai Airways' regional operation.

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China, which is Thailand's largest source market, saw the fastest growth with visitor numbers nearly doubling in 1Q2015. Several carriers have responded to the resumption of rapid growth in the China-Thailand market by adding flights or lodging applications for additional flights.

The Thailand-China market has witnessed an 85% increase in seat capacity over the past year, a staggering figure but absorbable given the huge increase in visitor numbers.

Thailand to China total capacity (one-way seats per week): Sep-2011 to Oct-2015

NokScoot will compete against Thai AirAsia in the Bangkok-Nanjing market

NokScoot sees an opportunity to potentially serve secondary destinations in north and east China while sister short-haul carrier Nok is looking at several potential destinations in southern China that are less than four hours from Bangkok. Nok launched services in late Mar-2015 to Nanning, its first scheduled destination in mainland China.

Nanning is only two and a half hours from Bangkok while Nanjing is about four hours. Bangkok-Nanning is a smaller market that is currently only served non-stop by Nok three times per week.

Bangkok-Nanjing is currently served by Thai AirAsia with one daily A320 flight. Maldivian also operates one weekly A320 flight from Male to Nanjing via Bangkok with pick-up rights on the Bangkok-Nanjing sector. NokScoot will initially offer 1,245 one-way seats, which will nearly double total capacity in the Bangkok-Nanjing market.

NokScoot and Nok challenge Thai AirAsia X and Thai AirAsia in the Thailand-China market

Another sign of the dynamics of the emerging cross-border JV groups is the increasingly group oriented expansion of competition in the Thailand-China market. Thai AirAsia X (TAAX) is also aiming to launch services to secondary cities in China in 2H2015 as it expands its fleet from three to seven A330-300s. TAAX currently serves Osaka, Tokyo and Seoul, beating NokScoot to all these markets.

TAAX was fortunate to launch scheduled operations on Thailand-Korea and Thailand-Japan ahead of NokScoot, which enabled it to enter these key markets before both countries implemented the current ban - which only prevents adding new flights and does not impact established scheduled services.

With Nanjing NokScoot will now be able to beat TAAX to the Thailand-China market. But TAAX sister carrier Thai AirAsia is already serving eight destinations in mainland China compared to only one for Nok. Thai AirAsia is the second largest carrier after Thai Airways in the Thailand-China market, with about an 18% share of total capacity.

NokScoot is eager to serve Japan and Korea

The Thailand-South Korea and Thailand-Japan markets have also recovered, although do not have the same staggering growth figures as China. Thailand recorded a 19% increase in visitor numbers from South Korea in 1Q2015 and a 17% increase in visitor numbers from Japan.

South Korea and Japan are the second and third largest source markets for Thailand. Both are similarly sized but China is more than five times large with about two million visitors in 1Q2015 compared to slightly less than 400,000 for both South Korea and Japan.

There are currently about 51,000 weekly one-way seats from Thailand to Japan and about 37,000 weekly one-way seats from Thailand to South Korea. The Thailand-Japan market has seen 12% seat capacity growth over the last year while the Thailand-South Korea market has seen a slight reduction.

Thailand to Japan total capacity (one-way seats per week): Sep-2011 to Oct-2015

Thailand-Japan is a bigger overall market than Thailand-Korea despite having similar inbound numbers, because Japan is a significantly more popular outbound destination for Thais. The Thailand-Japan market has undergone a surge in outbound demand since 2013, when Japan began waiving visa restrictions for Thais. The outbound growth also has driven faster growth overall in the Thailand-Japan market compared to Japan-Korea, which is relatively more mature.

NokScoot is well positioned to tap into continued growth in the outbound Thailand-Japan market as Nok has established a strong local brand in Thailand. Nok's passenger mix has traditionally been almost entirely Thai while Thai AirAsia has always carried a large portion of foreigners.

But NokScoot will need to work to establish its brand in North Asia as the Thailand-China and Thailand-South Korea markets are primarily inbound - while Thailand-Japan is now relatively evenly balanced. Scoot will be able to help NokScoot establish a presence in North Asia as Scoot has now been serving China and Japan since 2012 and South Korea since 1H2013.

Scoot will serve the Bangkok-Osaka route

Scoot currently links Singapore with four destinations in mainland China including Nanjing. It also serves Seoul and Tokyo Narita via Taipei and is adding Osaka on 8-Jul-2015.

Osaka will initially be served with six weekly flights including three frequencies via Kaohsiung in Taiwan and three frequencies via Bangkok. A fourth weekly frequency via Bangkok could be added within the first few months, which would give Osaka a daily service. As CAPA highlighted in a 17-Apr-2015 report, Scoot initially applied for fifth-freedom rights to serve Sapporo in northern Japan via Bangkok. At the time Japanese authorities were requiring TAAX to withdraw from Sapporo-Bangkok shortly after the planned 1-May-2015 launch.

Japanese authorities have since authorised TAAX to continue offering service to Sapporo through at least Jun-2015 as long as the flight is operated using aircraft wet-leased from sister carrier Malaysia AirAsia X (MAAX). MAAX cannot operate the route on its own as Malaysian carriers do not have access to fifth freedom rights between Thailand and Japan, as is the case with Singaporean carriers.

Bangkok-Sapporo is a relatively small and seasonal market that is also currently served by Thai Airways. It is easier from a crew and marketing standpoint for Scoot to focus on Osaka from two destinations (Bangkok and Kaohsiung) rather than add two Japanese destinations at once.

Bangkok-Osaka is also a larger market than Bangkok-Sapporo and is strategically more important to the Scoot group. It is sensible for Scoot to serve this market at least temporarily as it could be several months before NokScoot is able finally to secure approvals to launch its own services to Japan.

Bangkok-Osaka is currently served with two daily flights from Thai Airways and one daily flight from both TAAX and Japan Airlines. TAAX had been intending to add a second daily flight to Osaka in 2H2015 but is no longer able to add this flight due to the current restrictions, giving Scoot a potential opening. Scoot will initially have about an 11% share of seat capacity in the Bangkok-Osaka market.

Bangkok* to Osaka capacity by carrier (one-way seats per week): 19-Sep-2011 to 8-Nov-2015

Scoot could pursue further expansion in Bangkok market

Scoot continues to assess other potential fifth freedom routes from Bangkok. Scoot has the spare capacity to potentially expand further in Bangkok as it is growing its fleet from six to 11 aircraft over the next year.

The first of these growth aircraft is being used to launch new Singapore-Kaohsiung-Osaka and Singapore-Bangkok-Osaka routes. Scoot has earmarked another growth aircraft for Singapore-Melbourne, which it plans to launch in Nov-2015. But it has not yet decided on new routes for a growth aircraft which is slated to be placed into service around Sep-2015. Scoot also has growth aircraft which are expected to be placed into service around Jan-2016 and Apr-2016.

Scoot currently operates a fleet of three 402-seat 777-200s and three 375-seat 787-9s. The three remaining 777-200s will be phased out over the next few months and Scoot will end the fiscal year ending 31-Mar-2016 with an all-787 fleet consisting of six 787-9s and five 335-seat 787-8s.

Of Scoot's original fleet of six 777-200s, two have been sold, two are currently still for sale, one has been returned to SIA and one is being bought back by Boeing. The aircraft that was returned to SIA has been leased to NokScoot following reconfiguration. NokScoot is leasing all three of its 777-200s from SIA.

NokScoot needs to be patient as Thailand's regulatory challenges are resolved

NokScoot at least for now has no plans to expand its fleet beyond three aircraft, a sensible move given the uncertainties on when it will be able to finally launch scheduled services to Korea and Japan. It has been significantly under-utilising its aircraft, resulting in bigger than projected losses during the start-up phase.

The new Singapore and Nanjing flights will only slightly improve average utilisation levels, still at a meagre 2.5hrs per aircraft per day. Average aircraft utilisation levels could sink even further if the Singapore service is reduced or suspended. But NokScoot can at least finally get its feet wet with scheduled operations after a frustrating lengthy delay.

There are huge long-term growth opportunities for medium/long-haul LCCs in the Thailand-North Asia market, which still remains relatively unpenetrated. Once it gets over the initial hurdles, NokScoot should be well positioned to seize on these opportunities. In the meantime it is getting a head start with Scoot-operated fifth freedom flights.