17-Feb-2012 10:23 AM

Singapore Airshow 2012: Pacific Royale launch to intensify full service competition in Indonesia

Analysis

Competition in Indonesia is about to intensify further as Pacific Royale prepares to launch services next month with an initial fleet of two Fokker 50s and two A320s based in Surabaya and Batam. Pacific Royale is targeting Garuda and Indonesia's other full service carriers with a low-density two-class product on its A320s that includes lightweight fibre optics-based in-flight entertainment (IFE) systems in both cabins. The carrier's business plan envisions rapid growth including 20 to 25 A320s, which will form the backbone of Pacific Royale's fleet, within three years.

Pacific Royale will launch with domestic services but regional international services, primarily from Indonesia's second largest city of Surabaya, are planned as part of a second phase which is slated to begin by mid-2012. Medium to long-haul international services with A330s are also being considered as part of a third phase which could begin as early as late 2012. While Pacific Royale will have several routes from Jakarta, where it has established its headquarters, it will focus primarily on relatively underserved point-to-point markets which bypass the congested capital.

Pacific Royale, led by founder, chairman and part owner Tarun Trika, used the Singapore Airshow to sign contracts with several suppliers. Lumexis has been contracted to provide its new fibre-to-the-screen (FITS) IFE technology on Pacific Royale's A320 fleet. Abacus International signed a two-year exclusive distribution agreement with the carrier. Garuda Indonesia MRO subsidiary GMF AeroAsia has been awarded a maintenance contract to support Pacific Royale's A320 fleet while Singapore-based Fokker Services Asia has been awarded a maintenance contract covering the carrier's Fokker 50 fleet.

The deals were all signed on 16-Feb at the 2012 Singapore Airshow, where Indonesian carriers have been in the spotlight all week with a series of big deals. Lion Air used the first day of the show to complete its landmark deal for 230 additional Boeing 737s. Lion Air on the third day of the show, just a few hours before the Pacific Royale signing ceremonies, signed up for 27 additional ATR 72s. The turboprop order will give Lion Air regional subsidiary Wings Air, which operates 16 ATR 72s and already had 17 more on order, a fleet of 60 ATR 72s (20 ATR 72-500s and 40 ATR 72-600s) by the end of 2015, making the carrier the largest ATR operator in the world. Lion will use the new turboprops to expand its regional network and open new short island-hopping routes throughout the Indonesian archipelago.

As CAPA reported earlier this week, the new orders mean Lion is now committed to having a group fleet of at least 468 aircraft, including 348 737s at the main Lion-branded LCC operation, 60 737s at new full-service unit Space Jet and 60 ATR 72s at Wings Air. Garuda also used the Singapore Airshow to sign commitments for 18 Bombardier CRJ1000s, 12 of which will be leased and six of which will be purchased directly from the manufacturer.

Pacific Royale aims to tap into Indonesia's expanding middle and upper classes

Pacific Royale's backers are confident the fast-growing Indonesian market can support a new full service carrier given Indonesia's fast economic growth and the country's expanding middle and upper classes, which according to Mr Trika expect a full service product even on short flights. The middle and upper classes account for roughly 40 million of the 240 million people living in Indonesia.

In 2011 Indonesia only had 62.3 million passengers, including 51.5 million domestic and 10.8 million international passengers. The market has been growing in recent years at an annual clip of about 20%, a rate which is expected to be sustained over the next several years, resulting in a market of over 100 million passengers by the middle of this decade.

Budget carriers now account for a majority of Indonesia's traffic and will likely be the main beneficiaries as a fast-increasing portion of the Indonesian population can afford to fly. While the first time flyer market in Indonesia is huge, wealthy Indonesians are also expected to drive rapid growth at the top of the market and stick with full service carriers. Garuda now has most of this market to itself as Indonesia's other full service carriers, such as Batavia and Sriwijaya, generally offer low fares and single-class aircraft. Pacific Royale and Lion, with its new Space Jet unit, see room at the top end of the market, bucking a trend in the rest of the world where just about every new start-up follows the LCC model.

Mr Tika, an Indian national, has a 49% stake in Pacific Royale, the maximum permitted under Indonesian airline ownership regulations. Indonesian entrepreneur Goenarni Goenawan owns the remaining 51%. Mr Tika declines to say how much initial capital the two founders are providing. But Indonesian regulators, as part of an effort to raise the barrier to entry and avoid an influx of new airlines, now require start-ups have enough funds in the bank to cover the first 12 months of operations with zero percent load factor. Mr Tika acknowledges this requirement led to a delay in launching Pacific Royale, which was first established one year ago.

Pacific Royale received an initial licence from Indonesian civil aviation authorities in Nov-2011 and is now in the final stages of securing an Air Operator's Certificate (AOC). Mr Tika says almost all the initial paperwork has been completed and Pacific Royale will soon be ready to begin proving flights. He expects proving flights, which will be conducted with Pacific Royale's first A320, will be completed by mid-March, leading to the award of an AOC and launch of revenue services by the end of March.

Pacific Royale's first A320 to be delivered next week

Pacific Royale has finalised a deal with a US leasing company covering the carrier's first two A320s, one of which will be delivered on 22-Feb and be used for the proving flights. Both aircraft were manufactured in 2005 and previously operated by Air Berlin. Pacific Royale expects to have its third and fourth A320s, which will also be leased second-hand aircraft, delivered in June. The carrier is configuring its A320s with 12 business class and 138 economy class seats.

Pacific Royale also has already purchased two Fokker 50s and is in the process of purchasing three more of the type. The first Fokker 50 is already in Indonesia and is currently undergoing modification work while the second aircraft is slated for delivery on 26-Feb. Pacific Royale will configure its Fokker 50s with 48 seats in single-class configuration.

All five Fokker 50s are being acquired from Singapore-based Fortran Aviation and were previously operated by Ethiopian Airlines. While the ex-Ethiopian Fokker 50s are among the youngest Fokker aircraft in the world (Fokker 50 production ended in 1996), Pacific Royale expects to replace its turboprop fleet within a few years. The carrier has already had discussions with ATR.

Indonesian regulations require all new airlines operate a fleet of 10 aircraft within the first year of operations, including five owned aircraft. The five Fokker 50s ensure Pacific Royale meets the owned aircraft requirement.

The carrier's current fleet plan envisions an A330-300 with 42 business class and 250 economy class seats being its 10th aircraft. But Pacific Royale has not yet committed to leasing an A330 and could end up instead opting for a fifth A320.

Pacific Royale adopts network model with turboprops feeding jets

Pacific Royale will follow a full service network carrier model from the beginning with its short turboprop routes feeding its domestic jet routes and, soon thereafter, its international jet routes. The Fokker 50 operated routes will provide feed at three regional hubs - Surabaya, Medan and Batam. Surabaya is currently Indonesia's third largest airport after Jakarta and Denpasar (Bali), according to capacity figures from Innovata. Medan is Indonesia's fifth largest airport while Batam is the ninth largest.

Pacific Royale CEO Samudra Sukardi says Pacific Royale initially plans to have one Fokker 50 based at both Batam and Surabaya. A second Fokker 50 will be added at each base within a few months after launching services and a one-aircraft Fokker 50 base will be added at Medan.

Pacific Royale will use the turboprops to serve small regional destinations such as GunungSitoli, Meulaboh, Matak Island, Natuna Island, Dumai, Bankyuwangki, Jember and Madiun. Pacific Royale believes it can successfully differentiate by offering a full service product that connects small regional destinations with major cities in Indonesia and throughout Asia. Mr Sukardi points out that Garuda currently does not offer such connections because it does not connect with Indonesia's largest regional carrier, government-owned Merpati. Lion and its subsidiary Wings Air now offer these types of connections, but only with a low-cost product.

Pacific Royale sees growing demand for a full service product from small regional destinations as Indonesia's economy continues to grow rapidly. Garuda, however, does not see a need to serve such destinations, believing there is still a lack of high yielding passengers in Indonesia's smaller cities or towns.

In a 15-Feb-2012 press conference announcing its CRJ1000 order, Garuda CEO Emirsyah Satar said the carrier will continue to stay away from domestic routes now served with turboprops because they tend to be low yielding routes lacking passengers that are willing to pay high fares. He says Garuda's CRJ1000s will instead be used to add frequencies on some of its existing 737 routes, where there is significant full service and premium demand, and open some new routes.

Garuda's smallest aircraft is now the Boeing 737-500, but the carrier last year identified a need for a large regional jet in two-class configuration to meet growing demand for services on thin point-to-point routes. Garuda will receive its first batch of five CRJ1000s in 4Q2012 and is committed to taking another 13 of the type by 2015. It also has options for an additional 18 CRJ1000s. Mr Satar says the first five CRJ1000s will be based at Makassar and other regional bases will open over time in Balikpapan and Medan. Garuda will use its CRJ1000s both domestically and on some international routes such as Makassar-Singapore.

Pacific Royale to use A320s on point-to-point routes bypassing Jakarta

With its A320 routes, Pacific Royale will mainly compete against Garuda, Lion and Indonesia's other two main domestic carriers - Batavia and Sriwijaya. While Batavia and Sriwijaya follow the full-service model, their fares tend to be low and they generally operate ageing aircraft in single-class configuration. Pacific Royale aims to position its A320 product, with state-of-the-art IFE screens at every seat, above these carriers and capture some of the market now almost entirely catered to by Garuda. Space Jet, however, will also be pursuing this market segment when it launches dual-class 737-900ER services in 2013 and Sriwijaya has similarly been considering going more upmarket by adding a business class.

Pacific Royale plans to base its A320s in Batam, Medan, Surabaya and Jakarta Terminal 3. About half of Pacific Royale's initial A320 routes will be to or from Jakarta and it will compete on the major trunk routes such as Jakarta to Medan and Surabaya, both of which are served by Garuda, Lion, Batavia and Sriwijaya with several daily frequencies. But as Pacific Royale expands it plans to focus mainly on point-to-point domestic routes that bypass Jakarta. For example, it plans to operate A320s from its non-Jakarta bases to Balikpapan, Makassar and Padang.

By not focussing on Jakarta, Pacific Royale will avoid having to compete with Garuda on every route. Garuda and full service carriers generally have a relatively small market share at Surabaya, Medan and Batam. According to Innovata data, Garuda currently only accounts for 18% of total capacity at Surabaya, 17% at Medan and 14% at Batam. Lion is the largest player in all three markets by a wide margin, with a 55% share at Surabaya, 44% share at Medan and 56% share at Batam (includes Wings-operated capacity).

Surabaya capacity share by airline (% of seats): 13-Feb-2012 to 19-Feb-2012

Medan capacity share by airline (% of seats): 13-Feb-2012 to 19-Feb-2012

Batam capacity share by airline (% of seats): 13-Feb-2012 to 19-Feb-2012

Surabaya is Indonesia's second largest city with a population of about three million. Surabaya is located 800km from Jakarta and sits on the opposite end of the island of Java from Jakarta. Medan (population of about two million) is Indonesia's fourth largest city and the biggest city in the island of Sumatra. Batam (population of about one million) is in a small island just south of Singapore.

Pacific Royale plans to operate several international routes from Surabaya

Pacific Royale also plans to operate most of its international services at Surabaya, which has relatively few international services given its large size. Currently only 13% of capacity (seats) at Surabaya is allocated to the international market.

Over half of the international capacity at Surabaya is offered by LCCs, primarily the AirAsia Group which accounts for 41% of the airport's total international capacity. Garuda currently doesn't operate any international services at Surabaya, leaving a potential void in the market for an Indonesian full service carrier.

Surabaya Airport international capacity by airline (seats): 13-Feb-2012 to 19-Feb-2012

Pacific Royale, however, will have to fend off competition from some foreign full service carriers if it follows through in its plan to launch international services from Surabaya. For example, its planned Surabaya-Singapore route is now served by SilkAir and China Airlines (this route is also served by three budget carriers - Lion Air, Indonesia AirAsia and Jetstar Asia subsidiary Valuair). The Surabaya-Hong Kong route, which Pacific Royale also plans to launch, is now only served by Cathay Pacific Airways.

Pacific Royale is also looking at launching service from Surabaya to Perth, a route which is not currently served by any carrier. Mr Trika says while Pacific Royale will focus on Surabaya in developing its international network, it expects to operate some international services from a second undecided base.

The carrier aims to have a large international network by 2015, when ASEAN open skies takes effect. Mr Trika believes open skies in Southeast Asia will lead to increased competition and the "timing is right" to now launch an airline as Pacific Royale will have three years to develop the market before open skies takes effect.

Pacific Royale considers operating A330s to India

In addition to serving several international destinations with its A320 fleet, Pacific Royale envisions acquiring A330s, primarily for Mumbai and Delhi. But Mr Trika says he does not yet want to commit to serving India, which currently has no non-stop links with Indonesia, and is still studying the Indonesia-India market. "We don't want to experiment just now," he says, adding the carrier will first focus on domestic and then regional international services.

Mr Trika says Pacific Royale is also looking at serving India via Singapore using A320s. If the carrier decides against launching non-stop flights to India, it will likely delay its plans for adding A330s. Pacific Royale is studying some other long-haul markets such as Jeddah in Saudi Arabia but for now all the destinations in its business plan except India can be served non-stop from Indonesia with A320s.

Mr Trika owns several real estate and travel businesses in India. He also has established a new online travel agency, bookmytrip.com, which will initially be launched in India and the Philippines later this year and later be launched in the Indonesian market. Mr Trika says he decided to establish an airline in Indonesia after evaluating several other Asian countries because Indonesia has one of the world's fastest growing economies and a favourable geography.

Mr Trika says the Abacus deal will help Pacific Royale access travel agencies throughout Asia as well as online channels. He expects GDSs to initially account for about 60% of Pacific Royale's bookings. The remaining 40% will come directly from the carrier's website, although Mr Trika expects this figure will increase over time as the Pacific Royale brand starts to gain more traction.

Pacific Royale believes Abacus will help it get into the business-to-business market immediately and help raise brand awareness. Abacus says the agreement with Pacific Royale will take effect on 20-Feb-2012 and give travel agents within the Abacus network exclusive access to the carrier's full range of fares and inventories.

The Lumexis deal makes Pacific Royale the Asian launch customer for FITS and the first A320 operator to use the technology. flydubai signed up as the launch customer for FITS in 2010 and has now been using the seatback IFE screen on some of its Boeing 737-800s for over one year.

Pacific Royale faces challenges including an improved Garuda

Indonesia is a huge growth market with tremendous potential for existing and new carriers. But Pacific Royale will have to overcome stiff competition, particularly from fast-expanding Garuda, which has a powerful brand and strong positioning at the top end of the market. Garuda is now investing in improving its premium product as well as its full service economy offering as it renews its fleet and upgrades its IFE offering. The flag carrier's long-haul network and upcoming entrance into the SkyTeam global alliance, which is now expected in 1Q2013, will also give Garuda an advantage over any new Indonesian carrier with a premium offering.

Indonesia has historically been a market with a large amount of start-up activity as well as frequent airline causalities. This has slowed down in recent years as Indonesia has tightened regulations and increased the barriers to entry. But there are still 16 certified airlines in Indonesia (excludes about 35 regional carriers which only operate small turboprops) with several new airline applications pending, according to Indonesian DGAC director general Herry Bakti.

There are opportunities for new airlines to come in and outmuscle some of Indonesia's second tier carriers, especially for those airlines that can identify profitable niches away from the crossfire of the Garuda and Lion groups. But overall the number of players will almost certainly decrease as the two market leaders, Garuda and Lion, exploit their dominating positions.

This is the third in a series of articles on Indonesia, which has emerged as a key aviation growth market. See also the first two articles in this series: