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Tigerair and AirAsia lead adjustments to overcapacity in the Jakarta-Singapore market

14th July, 2014

Jakarta-Singapore capacity has quickly dropped by over 20%, led by adjustments at LCC groups Tigerair and AirAsia. The declines reverse capacity increases from 2013, when a breakthrough in the Indonesia-Singapore bilateral led to a surge in capacity.

Jakarta-Singapore is the second largest international city pair route in the world but supply in late 2013 and 1H2014 far exceeded demand. As a result it emerged as one of the most obvious examples of overcapacity in the Southeast Asian market.

Airlines were overly ambitious and aggressive in applying for and using newly available traffic rights. Recent adjustments have brought much needed rationality to the market but capacity could start being added back, again putting pressure on yields and load factors.

Jakarta-Singapore slips from 11th to 14th in world’s largest route rankings

Jakarta-Singapore has traditionally been one of the largest routes in Southeast Asia and among the top few international routes globally. Jakarta-Singapore is the largest route for Singapore Airlines and is the largest international route for Indonesia AirAsia, Garuda Indonesia and Lion Air.

There are currently about 106,000 weekly seats between the two cities, making it the second largest international route in the world after Hong Kong-Taipei and the 14th largest overall (including domestic routes). In Southeast Asia only the Jakarta-Surabaya and Ho Chi Minh-Hanoi routes are larger.

Top 15 routes (domestic and international) in the world based on weekly seat capacity: 8-Jul-2014 to 14-Jul-2014

Rank Origin Destination Total Seats
1 CJU Jeju Airport GMP Seoul Gimpo International Airport 242,213
2 HND Tokyo Haneda Airport CTS Sapporo Chitose Airport 227,439
3 FUK Fukuoka Airport HND Tokyo Haneda Airport 205,411
4 SYD Sydney Kingsford Smith Airport MEL Melbourne Tullamarine Airport 190,182
5 HKG Hong Kong International Airport TPE Taipei Taoyuan International Airport 176,878
6 PEK Beijing Capital International Airport SHA Shanghai Hongqiao Airport 145,971
7 CGK Jakarta Soekarno-Hatta International Airport SUB Surabaya Juanda Airport 145,347
8 HND Tokyo Haneda Airport OKA Okinawa Naha Airport 140,329
9 DEL Delhi Indira Gandhi International Airport BOM Mumbai Airport 138,888
10 SGN Ho Chi Minh City Tan Son Nhat Airport HAN Hanoi Noi Bai Airport 138,007
11 ITM Osaka Itami Airport HND Tokyo Haneda Airport 133,321
12 SYD Sydney Kingsford Smith Airport BNE Brisbane Airport 116,733
13 SDU Rio de Janeiro Santos Dumont Airport CGH Sao Paulo Congonhas Airport 105,840
14 SIN Singapore Changi Airport CGK Jakarta Soekarno-Hatta International Airport 105,798
15 CGK Jakarta Soekarno-Hatta International Airport DPS Bali Denpasar Ngurah Rai Airport 103,699

But Jakarta-Singapore has lost three places in the global rankings since late 2013, when there were about 135,000 weekly seats between the two cities. The roughly 30,000 weekly seats that have come off the route over the last seven months represents about a 21% reduction.

Most of this reduction was implemented over the last few weeks, driven by significant cuts at Garuda and Indonesia AirAsia and the suspension of services at Tigerair Mandala.

AirAsia cuts Jakarta-Singapore capacity by 33% as Mandala exits

Indonesia AirAsia on 1-Jul-2014 cut two of its six daily flights between Jakarta and Singapore, representing a 33% decline in capacity to 5,040 weekly one-way seats. Also on 1-Jul-2014, Tigerair Mandala suspended all operations.

Jakarta-Singapore was Tigerair Mandala’s largest route and at its peak in late 2013/early 2014 was served with five daily flights. Tigerair Mandala in 1H2014 gradually cut back capacity on the route as part of broader capacity cuts and had two daily flights remaining in Jun-2014, when its main shareholders, Singapore-based Tiger Airways Holdings and Indonesian investment firm Saratoga, decided to pull the plug on the LCC joint venture.

See related report: Tigerair Mandala suspension begins needed consolidation to Indonesian & Southeast Asian LCC sectors

Garuda also has significantly cut back capacity on Jakarta-Singapore over the last month, cutting one of its nine daily flights and reverting to an all 737-800 operation. This reverses an increase that was implemented in Nov-2013, when Garuda added a ninth daily flight and began using A330s on three of the daily frequencies.

The suspension at Mandala also reverses an increase from 2013 as Mandala only launched services on the Jakarta-Singapore route in Apr-2013, initially with one daily flight but steadily adding frequencies over the next eight months.

Recent reductions on Jakarta-Singapore offset capacity gains from 2013

Mandala’s entry and subsequent rapid expansion in the Jakarta-Singapore market, as well as expansion from the Garuda, Jetstar and Singapore Airlines (SIA) groups, was made possible by the signing of a new bilateral agreement between the two countries in early 2013. The bilateral increased the cap on capacity by 50%, enabling airlines to add flights for the first time in a few years as the prior cap had been reached.

See related reports:

It took several months for the capacity increases to be implemented, with the last wave of additional flights being introduced in Nov-2014. The end result was an increase of nearly 30,000 return seats – which almost exactly matches the recent reduction, meaning capacity is now back to late 2012 or early 2013 levels.

There were about 106,000 weekly return seats between Jakarta and Singapore before the new bilateral agreement was signed in early 2013, matching the current capacity level.

Jakarta-Singapore one-way seat capacity and capacity share by airline group: Jul-2014 vs Dec-2013 and Jan-2013

Airline group

Jan-2013 seat capacity

and capacity share 

Dec-2013 seat capacity

and capacity share 

Jul-2014 seat capacity

and capacity share 

Singapore Airlines*    16,374/31%  19,332/29%   18,589/35%
Garuda  8,736/17%  12,754/19%  8,736/17%
Lion  9,030/17%  9,030/13%  9,030/17%
AirAsia      7,560/14%  7,560/11%  5,040/10%
Jetstar  3,780/7%  4,500/7%   4,320/8%
Tigerair  2,520/5%  10,980/16%  3,780/7%
Turkish  2,016/4%  2,016/3%  2,016/4%
Sriwijaya  1,078/2%  1,078/2%  N/A
Batavia  1,008/2%  N/A  N/A
Philippine Airlines  624/1%  N/A  N/A
Air France N/A N/A 1,388/3%
TOTAL  52,726  67,250  52,899

In some respects the current capacity level is even below early 2013 levels as the 106,000 weekly seats for Jul-2014 includes 1,388 seats from Air France. Air France entered the Jakarta-Singapore market on 10-Jul-2014 by extending its daily 777-300ER Paris-Singapore flight to Jakarta (it also currently serves Singapore with three weekly 777-200 turnaround flights). Excluding Air France’s entry, total capacity in the Jakarta-Singapore market has decreased by 23% since late 2013, to about 51,500 one-way seats.

Turkish Airlines also serves Jakarta-Singapore as a fifth freedom carrier. Turkish has operated the Istanbul-Singapore-Jakarta route for several years and currently serves it with one daily A330-300 flight. (While Air France and Turkish have pick-up rights between Singapore and Jakarta, a large portion of the seats are allocated to passengers originating in Paris and Istanbul resepectively.)

The Jakarta-Singapore route was also previously served by Lufthansa and Philippine Airlines (also on a fifth freedom basis) as well as by Indonesian full-service airlines Batavia and Sriwijaya. Lufthansa dropped the route in late 2012 while PAL and Batavia withdrew in early 2013, with Batavia exiting as it suspended all operations. Sriwijaya operated one daily flight on Jakarta-Singapore until late 2013, according to OAG data.

Sriwijaya’s exit illustrates the challenges of competing on a major route as a smaller carrier with a low frequency schedule. All of the other Singaporean or Indonesian carriers in the market offer at least three flights per day, providing a sufficient schedule to meet the needs of business passengers. While there is significant leisure demand for Jakarta-Singapore, there are also strong business ties between the two countries and the short duration of the flight (less than two hours) allows for same day travel.

Depreciation of the Indonesian rupiah impacts demand for Jakarta-Singapore flights

Business travel between Jakarta and Singapore remains relatively strong but leisure demand has been impacted by the depreciation of the Indonesian rupiah and the strengthening of the Singapore dollar. Singapore has always been a popular holiday and shopping destination for Indonesians. But the rupiah’s value against the Singapore dollar has dropped by about 20% over the past year, leading to a reduction in outbound Indonesia demand.

The LCCs primarily cater to this segment of the market and have noticed a drop in demand; this unfortunately coincided with the increases in capacity. The airlines tried to stimulate demand by offering aggressive fares, but the expense of staying and shopping in Singapore has dissuaded some Indonesians regardless of the fare level.

The recent reduction in LCC capacity should allow all airlines on the route to better match capacity with demand and potentially improve yields to more sustainable levels.

LCCs currently operate 115 weekly flights on Jakarta-Singapore, providing 22,170 one-way seats. This represents a 31% capacity reduction compared to the 170 weekly flights and 32,070 one-way seats provided at the end of 2013 and beginning of 2014.

Current LCC capacity is also slightly below early 2013 levels (prior to the new bilateral agreement), when there were 119 weekly flights and 22,890 one-way seats.

Even with the recent reduction Jakarta-Singapore is still the world’s largest international LCC route, based on current seat capacity data. The other top four routes are also within Southeast Asia, which illustrates the unmatched success LCCs have had in Southeast Asia in penetrating international markets.

Top 10 international LCC routes: 8-Jul-2014 to 14-Jul-2014

Rank Origin Destination Total Seats
1 SIN Singapore Changi Airport CGK Jakarta Soekarno-Hatta International Airport 44,340
2 SIN Singapore Changi Airport KUL Kuala Lumpur International Airport 40,968
3 KUL Kuala Lumpur International Airport DMK Bangkok Don Mueang International Airport 30,730
4 SIN Singapore Changi Airport BKK Bangkok Suvarnabhumi International Airport 30,142
5 BCN Barcelona El Prat Airport LGW London Gatwick Airport 28,158
6 SJU San Juan Luis Munoz Marin International Airport MCO Orlando International Airport 26,502
7 BCN Barcelona El Prat Airport ORY Paris Orly Field 26,394
8 MNL Manila Ninoy Aquino International Airport SIN Singapore Changi Airport 22,276
9 SIN Singapore Changi Airport SGN Ho Chi Minh City Tan Son Nhat Airport 20,982
10 AGP Malaga Airport LGW London Gatwick Airport 19,124

Given the large size of the Jakarta-Singapore market current LCC capacity levels are reasonable. But capacity levels in 2013 reached unreasonable proportions, particularly given the economic conditions in Indonesia.

LCCs should be able eventually to expand again - but need to be patient

Over the medium term there should be opportunities to again increase LCC capacity on the Jakarta-Singapore route, particularly if the rupiah appreciates. It is still a huge point to point market with a large and growing price sensitive segment. Jakarta-Singapore has a large volume of leisure passengers including Indonesian student traffic, visiting friends and family and medical tourism as well as shopping trips and holidays.

But the four LCC groups in the market (AirAsia, Jetstar, Lion and Tigerair) will in future probably be more conservative and add capacity slowly. A resurgence similar to that recorded in 2013 would again lead to overcapacity, impacting all players as yields and load factors inevitably come under pressure.

It seems the LCCs in the market are now exercising added restraint. So far Tigerair Singapore has elected not to take over the capacity previously provided by its now defunct sister carrier Tigerair Mandala. Tigerair Singapore currently operates 21 weekly flights on Jakarta-Singapore. OAG data shows Tigerair Singapore will operate a schedule consisting of 24 weekly flights from Sep-2014 and 28 weekly flights from Nov-2014. The modest increase is reasonable given that Tigerair Singapore previously had up to 26 weekly flights on the route and the fact that Mandala has up 35 weekly frequencies.

Four daily flights gives the Tigerair Group a sufficient schedule to compete without risking overcapacity, matching AirAsia’s newly reduced schedule of four daily flights. Both groups will monitor demand carefully and could add a fifth daily frequency – but for now it seems they will not add capacity for purely strategic rather than commercial reasons.

The Jetstar Group currently has 24 weekly flights and will add a 25th frequency in early Sep-2014, according to OAG data. This is also a rational amount of capacity. As Jetstar pursued only modest expansion on Jakarta-Singapore in 2013 there is no need for the group to make a correction. (All Jetstar flights on the route are operated by Jetstar Asia sister carrier Valuair.)

Lion Air could potentially reduce Jakarta-Singapore as Batik Air enters market

Lion Air is now the largest LCC in the Jakarta-Singapore market as it has maintained its six daily flights. Lion also uses larger aircraft, 215 seat 737-900ERs, while the other three LCCs use 180 seat A320s. Lion has maintained its current six flight schedule on Jakarta-Singapore for several years and did not apply for more traffic rights after the new bilateral agreement was forged in early 2013.

Lion could potentially reduce its Jakarta-Singapore schedule as its full-service sister carrier Batik Air is planning to enter the Jakarta-Singapore market in late 2014. Handing two of its six flights to Batik, including slots at Singapore, would be sensible as the market may struggle to absorb the additional capacity should Batik’s flights be completely supplemental.

See related report: Lion Air's Batik Air plans major domestic push followed by ambitious international expansion

The planned Batik launch could impact Garuda and SIA as it will result in a third full-service carrier competing in the market. (Excludes Air France and Turkish as these carriers have only one daily flight in the route, making it difficult to compete for local business traffic.)

SIA maintains Jakarta-Singapore capacity; Garuda's cuts could be temporary

SIA has so far maintained its Jakarta-Singapore schedule of nine daily flights (the ninth was added in Jul-2013). But a majority of the carrier’s Jakarta passengers consists of sixth freedom traffic travelling beyond Singapore. Most of its local passengers are also from the business and upmarket leisure sectors, which insulates it from the drop in Indonesians taking holidays in Singapore.    

For several months SIA has been seeking slots at Jakarta to support a 10th daily flight. While it is likely a 10th flight will eventually be added for now SIA may be better advised to wait for market conditions to improve. SIA’s share of capacity on Jakarta-Singapore has already increased from about 29% to 35% as a result of the recent capacity reductions by other carriers.

Garuda has been the only full service competitor on Jakarta-Singapore to cut capacity but relies more than SIA on local traffic, particularly Indonesians travelling to Singapore. According to forward schedules in OAG, Garuda is planning to reintroduce the ninth daily flight and A330s on two frequencies by early Aug-2014. But Garuda could end up postponing some or all of the increase. Garuda may want to resume the ninth daily flight to preserve its slots and match SIA’s schedule, but using widebodies could result in too much capacity.

Garuda could also potentially hand off some of its Jakarta-Singapore flights to budget subsidiary Citilink. In a previous CAPA analysis, we noted Citilink is preparing to enter the Singapore market by the end of 2014. The current plan is for Citilink to take over the Singapore-Surabaya and Singapore-Bali routes from Garuda.

See related report: Garuda’s Citilink to expand into international market, starting with Malaysia, Singapore & Australia

The Garuda Group uses both its budget and full service brands side by side on domestic trunk routes but has wanted to refrain from any overlap on international routes. But Jakarta-Singapore is a large enough market with sufficiently different segments to potentially support two brands - just as Qantas and LCC subsidiary Jetstar operate side by side on the large Sydney-Auckland market for example.

Using Citilink for two or three of its nine weekly frequencies would allow Garuda to compete more effectively against LCCs while maintaining a strong Garuda presence (with six or seven frequencies) to compete against SIA and Batik.

Jakarta-Singapore capacity reduction reflects the new high growth/new competition seesaw

The Jakarta-Singapore market poses an intriguing dynamic for both LCCs and FSCs. To some extent it also offers a microcosm of what is transpiring in the broader Southeast Asian market, which has become intensely competitive across both the LCC and FSC sectors as the big LCC groups fight for a strong presence.

Overcapacity has emerged as a common theme around the region. The Jakarta-Singapore market is a clear example of a route becoming oversupplied, as airlines were overly aggressive and ambitious.

A much needed correction has now been implemented and may well be imitatated on other major routes within Southeast Asia which continue to suffer from overcapacity.

But the combination of three factors:

- a uniquely rapid-growth Asian market, where matching demand with supply is challenging;

- the battle for position among emerging new and powerful low cost groups; and

- the relentless progress of increased liberalisation,

mean that reconciling demand with capacity will be a highly dynamic process for the foreseeable future.

A lot of the collateral damage will continue to be the incumbent airlines, as yields fluctuate, with sometimes significant capacity shifts. For the time being, there appears to be a pause for breath but it would be unwise to see that as a pointer to future behaviour.

It is more likely simply the end of the first phase of competition, where lessons have been learned. The next phase will not neccessarily remember all those lessons, especially as the power balance shifts.

The seesaw is likely to prevail for some time to come.

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