17-Sep-2013 1:39 PM

Tigerair cements position as Singapore’s largest low-cost group, overtaking Jetstar & AirAsia

Analysis

Singapore is seeing another surge in low-cost carrier capacity, led by aggressive expansion from Tigerair. LCC groups Jetstar and AirAsia are also continuing to expand in Singapore but more modestly than Tiger.

Tigerair, Jetstar and AirAsia had equal shares of the Singapore market back in 2010. But Tigerair has since grown faster and will widen the gap from its rivals as it adds five more A320s in the current fiscal year. Tigerair will account for almost 11% of total capacity at Singapore Changi by the end of 2013 compared to just under 8% for AirAsia and Jetstar.

LCCs already account for a little over 30% of seats at Singapore - an impressive figure given Changi's LCC penetration rate was virtually zero a decade ago and its lack of a domestic market. Tigerair's forthcoming expansion will drive up the LCC penetration further, to about 32%, but it comes with risks as Singapore's short-haul market could return to the over-capacity situation seen two years ago.

A remarkable first nine years for Singapore's LCC sector: from zero to 30%+

Singapore's LCC era began nine years ago with the mid-2004 launch of Valuair. Tigerair quickly followed, launching services in Sep-2004, while Jetstar Asia began operating in Dec-2004.

Three LCCs for a market which previously had only one player - Singapore Airlines and regional subsidiary SilkAir - was overkill. Much needed consolidation came as Jetstar Asia took over Valuair in mid-2005.

Valuair remains part of the Jetstar Asia Group, which is 49% owned by the Qantas subsidiary Jetstar and operates exclusively in the fast-growing Singapore-Indonesia market. An independent Valuair would have struggled to survive, particularly with AirAsia seeking a large virtual presence in the Singapore market to rival the operations built up by Jetstar and Tigerair using Singaporean air operators' certificates and traffic rights.

AirAsia succeeds at establishing a significant presence without a local AOC

AirAsia launched services to Singapore from Bangkok in 2005, using its affiliate Thai AirAsia. While Thai AirAsia gave the AirAsia brand a presence in the Singapore market during the first phase of the Singapore's LCC boom, the operation was initially much smaller than hometown carriers Tigerair and Jetstar Asia/Valuair. That changed quickly in 2008 as AirAsia Malaysia and Indonesia AirAsia launched services to Singapore. Until 2008 bilateral restrictions prohibited new entrants in the Singapore-Malaysia market while the Singapore-Indonesia market was essentially closed to LCCs. (Valuair got around Indonesian regulations as it qualified as a boutique carrier, offering some frills such as complimentary water and snacks which Jetstar retained on Valuair-operated flights.)

AirAsia expanded rapidly and by 2009 was able to capture as much of the Singapore market as the Jetstar and the Tigerair groups despite not having a local AOC. In 2009, each group accounted for 5.5% to 5.7% of seat capacity at Changi as Singapore's overall LCC penetration figure approached 20%.

In 2010 the three groups were again neck and neck as each expanded capacity at similar clips and had nearly identical seat figures for the year. Each group accounted for 6.5% of total capacity at Changi in 2010, according to OAG data.

Singapore annual capacity share (% of seats) for AirAsia, Jetstar and Tiger groups: 2005 to 2013

But over the last two to three years Tigerair has pulled ahead, initially pursuing very rapid expansion in late 2011 and early 2012. After slowing down for just over a year, Tigerair in recent months has again started to accelerate expansion in its original home market.

Tigerair capacity share to approach 11% by end of 2013

Tigerair Singapore plans to add five A320s in the fiscal year ending 31-Mar-2013 (FY2013) for a total of 26 aircraft, resulting in capacity growth of well over 20%. Tigerair Singapore currently operates 23 A320 aircraft and 650 weekly flights across 29 routes, providing about 118,000 weekly seats, according to CAPA and Innovata data.

Factoring in flights operated by sister carriers Tigerair Mandala and Tigerair Philippines, the Tigerair Group currently provides about 142,000 weekly seats on 34 routes from Singapore. This will grow to about 157,000 weekly seats by the end of 2013 as five new routes are launched by Tigerair Singapore and capacity is added on several existing routes. The group will have 39 destinations from Singapore following the Oct-2013 launch of services to Yangon in Myanmar, Chiang Mai in Thailand, Langkawi in Malaysia, Lijiang in China and Lombok in Indonesia.

In Dec-2013, the Tigerair Group will account for just under 11% of total capacity at Singapore, compared to about 8% for Jetstar and AirAsia. Currently Tigerair has about a 10% share of seat capacity compared to 8% for AirAsia and 7% for Jetstar.

Singapore capacity share by brand (% of seats): 16-Sep-2013 to 22-Sep-2013

The Tigerair Group currently accounts for 33% of LCC capacity at Changi while AirAsia accounts for 26% and Jetstar accounts for 23%. SIA long-haul low-cost subsidiary Scoot, which launched services in mid-2012 and currently serves 10 destinations with five 777s, now accounts for 7% of seat capacity at Changi. Indonesia's Lion Air accounts for 5%, Philippine carrier Cebu Pacific for 4% while three smaller LCCs account for the remaining 3%.

Singapore LCC capacity share by group (% of seats) 16-Sep-2013 to 22-Sep-2013

Jetstar slows down Singapore fleet and ASK growth

Jetstar started 2013 with 18 A320s registered in Singapore (includes Jetstar Asia and Valuair). The fleet is currently again at 18 A320s, having been reduced to 17 for a few months, and will expand to 19 in Oct-2013 as an additional A320 is delivered. Jetstar Asia is not expected to further expand its fleet in FY2014, leaving it with seven fewer narrowbody aircraft than rival Tigerair Singapore.

Jetstar is also reducing the size of its Singapore long-haul low-cost operation, which it commenced in 2010. Jetstar currently operates 15 A330 weekly flights from Singapore but will only operate nine frequencies after cutting services to Osaka and Beijing in Nov-2013. The Singapore long-haul base, which is operated under Jetstar Airways, has steadily shrunk over the last year and original plans to add a fourth A330 were never implemented.

Jetstar has been able to grow its total seat capacity at Singapore over the last two years despite virtually no fleet growth since 2H2011, when it added a third Singapore-based A330 and grew the A320 fleet from 12 to 17 aircraft. But ASKs and the overall size of its Singapore network have been steadily shrinking.

For the fiscal year ending 30-Jun-2013 (FY2013), Jetstar Asia reported an 8% drop in ASKs and a 9% drop in RPKs (includes Valuair). Passenger numbers, however, were up 10% to 3.6 million as the carrier shifted focus to shorter routes within Southeast Asia. Jetstar reported that narrowbody seat capacity from Singapore was up 9% year-over-year.

Jetstar Asia operating highlights: FY2014 vs FY2013

Jetstar shrinks its Singapore network but still has a meaningful presence

Jetstar Asia/Valuair ended FY2013 with 26 destinations compared to 22 destinations at the end of FY2012. When including routes operated by Australia-based Jetstar Airways, Jetstar currently has 25 destinations from Singapore. This will decrease to 23 in Nov-2013, giving it 16 fewer destinations than Tigerair.

Jetstar will still have seven more destinations than the 16 from AirAsia but AirAsia will have more within ASEAN. AirAsia is unable to operate from Singapore to several key markets including greater China, where from Nov-2013 Jetstar Asia will have six destinations and Tigerair seven, because AirAsia does not have a local AOC.

Jetstar overall is still expanding in Singapore, recently announcing frequency additions for 4Q2013 on seven of its existing Singapore routes. The group will offer about 116,000 weekly seats from Singapore in Dec-2013. For the calendar year Jetstar will offer about 5.4 million seats from Singapore, up by about 10% from 2012, despite a reduction in ASKs.

Tigerair Singapore on the other hand has been growing ASKs at a slightly faster clip than seats as it has been adding some longer routes. Over the last 12 months (through Aug-2013), Tigerair Singapore RPKs have been up 24% while passenger numbers were up 18%. The result is a rapidly widening gap between Tigerair Singapore and Jetstar Asia when measuring monthly RPKs.

Tigerair Singapore vs Jetstar Asia monthly RPKs: Jul-2011 to Jul-2013

In terms of load factor, Jetstar Asia also has been lagging slightly behind Tigerair Singapore.

Tigerair Singapore vs Jetstar Asia monthly passenger load factors: Jul-2011 to Jul-2013

Qantas in its FY2014 results presentation stated that Jetstar Asia has maintained profitability for two consecutive years despite operating "in a competitive market". The group did not specify the size of the profit although it is believed to be modest.

The relatively conservative approach to expansion has come as Jetstar Asia is keen to minimise exposure to hyper-competition and avoid incurring losses. While Jetstar wants to maintain a significant presence in Singapore it is not chasing market share.

Jetstar is keen to instead focus on higher yielding traffic and position itself upmarket compared to its LCC competitors in Singapore. Relying more on connecting traffic with partner carriers is one clear differentiator.

Jetstar Asia increases its focus on connecting traffic

While Tigerair is also starting to pursue connections so far it has mainly only carried passengers within the Tigerair Group and a very small number of passengers coming off Scoot. Jetstar has already been successfully offering Jetstar to Jetstar connections in Singapore over the last few years and is now pursuing more connections with Qantas and other full-service partners, which come with higher yield.

Jetstar Asia currently codeshares with two carriers, parent Qantas and Myanmar Airways International (MAI), and interlines with 16 carriers: Air France, British Airways, China Eastern, China Southern, El Al, Emirates, Finnair, Japan Airlines, Jet Airways, KLM, Lufthansa, Malaysia Airlines, Qantas, Qatar Airways, SWISS and Turkish Airlines.

Of these 17 partners, 16 currently serve Singapore. The only exception is El Al, which serves Bangkok, where passengers are able to connect onto Jetstar Asia flights to Singapore.

El Al is one of six interline partners Jestar Asia has added in 2013. The other recently added patners carriers are China Eastern, China Southern, Malaysia Airlines, SWISS and Turkish Airlines.

The increase in interline partners should significantly boost the portion of connecting passengers on Jetstar Asia-operated flights and boost yields. But the biggest gain in high yielding passengers will almost certainly come from its parent Qantas, which earlier this year re-timed its Singapore-Australia flights to maximise connections within Asia.

Jetstar Asia has the opportunity to work more closely with Qantas

Previously there were limited connection opportunities in Singapore between Jetstar and Qantas because Qantas' flights were timed for onward flights to Europe. Qantas stopped using Singapore as the stopover for its London and Frankfurt flights in late Mar-2013 and Apr-2013, when it moved its London stopover point to Dubai and dropped Frankfurt altogether as part of a new partnership with Emirates.

Jetstar Asia has stated it has seen a three-fold increase in passengers bookings from Qantas for the first eight months of 2013 compared to the first eight months of 2012. Jetstar Asia did not say how many passengers it carried from Qantas although the base was certainly small as in 2012 there were limited connection opportunities.

Jetstar Asia currently carries the Qantas code on flights from Singapore to only four destinations - Bangkok, Ho Chi Minh, Kuala Lumpur and Phuket. There should be opportunities to extend the codeshare to more of the 20 destinations served by Jetstar Asia and Valuair, particularly the 12 within Southeast Asia.

Qantas intends to use Singapore as the connecting point for Southeast Asia and South Asia while Hong Kong is positioned as the hub for North Asia including China. Jetstar Asia has been increasing its focus on Southeast Asia as longer flights to North Asia have been cut back. Jetstar Asia and Valuair currently allocate about 73% of its seat capacity to Southeast Asia. (Jetstar Asia does not serve South Asia but Qantas connects in Singapore with India's Jet Airways.)

Jetstar stated back in early 2011 that 15% of its Singapore passengers were transit passengers. It has not since provided an updated figure although Jetstar's transit traffic in Singapore is clearly on the rise as two years ago it was relying predominately on Jetstar to Jetstar connections. As Jetstar Asia starts working more closely with Qantas and other partners its transit traffic will continue to grow along with average yields.

Tigerair Singapore has been modestly profitable - but is it sustainable?

Tigerair is now open to working with other carriers following a change of management and adjustment in strategy. But it remains a purer LCC and at least for now is unlikely to follow Jetstar in partnering with full-service carriers.

Tigerair has been much more aggressive at adding capacity and expanding its network from Singapore, with over 10 destinations added over the last year while the Jetstar network has shrunk. But in recent months Tigerair has been almost constantly launching sales and promotions, offering extremely low fares that in many cases have triggered similar sales from Jetstar and AirAsia.

Tigerair Singapore has been profitable for five consecutive quarters, with an average operating profit margin over the 15-month period of 8%. Prior to its current profit streak Tigerair Singapore was in the red for three consecutive quarters, running from 1-Jul-2011 to 31-Mar-2012, due to over-capacity in the Singapore market. While Jetstar also expanded rapidly in Singapore in 2H2011, the over-capacity was primarily driven by Tigerair as the group accelerated fleet growth in Singapore following the grounding at Tigerair Australia and delays in launching affiliates in other Asian markets.

There is now again a risk that Singapore's LCC market could revert back to an over-capacity situation, impacting the profitability of all the carriers. Recent figures from Tigerair Singapore are rather discouraging.

While the carrier remained in the black in its most recent quarter (1QFY2014), yields were down 5%. After relatively healthy traffic figures in 1QFY2014, Tigerair Singapore was unable to drum up enough demand to keep up with a 29% increase in ASKs for Jul-2013 and a 30% increase for Aug-2013. RPKs for those two months were up 22% and 23% respectively, resulting in an almost 5ppt drop in load factors.

Tigerair Singapore operating results: Aug-2013 vs Aug-2012

Singapore is a relatively mature market with a population of only about five million. While there are opportunities for LCCs to grow transit traffic from a current low base, stimulation opportunities in the local market are becoming limited. LCCs already account for over 50% of capacity between Singapore and other Southeast Asian countries - a very high figure given that Singapore is an entirely international market and short-haul routes still have a large share of passengers connecting onto long-haul services, which plays into the strength of the powerful Singapore Airlines/SilkAir duo.

LCCs have accounted for nearly all the growth in Singapore over the last decade. The Tigerair, Jetstar and AirAsia groups will provide almost 18 million seats in the Singapore market in 2013 (see background information below). In the 10 years since the entrance of LCCs, the Singapore market has grown by 27 million seats, meaning the Tigerair/Jetstar/AirAsia trio has accounted for about two-thirds of the growth at Changi over the last decade.

There are still opportunities for further LCC growth, particularly in the medium/long-haul sector. But narrowbody growth will inevitably slow down. Any short-haul LCC pursuing growth exceeding 20% per annum could face challenges.

Tigerair has a strong position in its home market, having overtaken Jetstar and AirAsia to become the clear market share winner. Achieving long-term and sustainable profitability will be more difficult.

Background information

Singapore annual capacity (thousands of seats) for AirAsia, Jetstar and Tiger groups: 2005 to 2013