31-Dec-2013 11:47 AM

AirAsia and Lion Air rivalry intensifies as Thai Lion rapidly expands

Analysis

Asia's newest low-cost carrier, Thai Lion Air, is planning further expansion in early 2014 in Thailand's increasingly competitive domestic and international markets. The expansion will provide new competition for Thai AirAsia, leading to more overlap between the AirAsia and Lion groups.

All of Thai Lion's current and planned routes are AirAsia strongholds. Thai Lion has already disrupted the three routes it currently operates by bringing down fares.

The shake-up will be extended to several other routes in 2014 as Thai Lion quickly expands its fleet from two to 10 aircraft. But Thai AirAsia, which also plans to add eight aircraft in 2014, will remain a much larger carrier and is well positioned to respond to the challenge as it has a stronger and more established brand.

Summary

Thai Lion Air plans further expansion in Thailand's domestic and international markets, leading to more competition with Thai AirAsia.
Thai Lion Air has disrupted AirAsia's strongholds by bringing down fares on all of its current and planned routes.
Thai Lion Air currently operates one domestic and two international routes, with plans to expand its fleet from two to 10 aircraft.
The Lion Air Group is now competing head to head with AirAsia in all three of its main markets - Indonesia, Malaysia, and Thailand.
Thai Lion Air's low fares have stimulated new demand and attracted more Thais to fly, although it has also taken some business away from incumbents.
Thai Lion Air's rapid expansion will have some impact on Nok Air, but there is significantly more overlap with Thai AirAsia.

Thai Lion's initial network consists of one domestic and two international routes

Thai Lion launched services on 4-Dec-2013 with two daily flights between Bangkok Don Mueang and Chiang Mai using a fleet of two 215-seat 737-900ERs. Thai Lion plans to add two more frequencies between Bangkok and Chiang Mai on 6-Jan-2013, which will give the carrier about a 10% share of capacity in Thailand's biggest domestic market.

International services were added on 18-Dec-2013 with two daily flights between Bangkok Don Mueang and Jakarta and one daily flight between Bangkok Don Mueang and Kuala Lumpur. But Lion has decided to cut back Bangkok-Jakarta to one daily flight from 6-Jan-2013 and instead use the capacity to expand in the Bangkok-Chiang Mai market.

As CAPA first reported in Sep-2013, Jakarta Soekarno-Hatta and Kuala Lumpur International Airport were selected as Thai Lion's initial international routes as they are the largest hubs for sister carriers Lion Air and Malindo Air. Thai Lion has interlines in place with Lion Air and Malindo, which have already started selling tickets to Bangkok - a destination neither carrier serves on its own.

Competition between AirAsia and Lion increased significantly in 2013

The Lion Air Group launched Malindo in Malaysia in Mar-2013. With Malindo and Thai Lion, the Lion Air Group is now competing head to head with AirAsia in all three of its main markets - Indonesia, Malaysia and Thailand.

While AirAsia and Lion have been the largest LCC groups in Asia for some time, there was relatively limited overlap before 2013 as virtually all of Lion's capacity was in the domestic Indonesian market while AirAsia's Indonesian affiliate was primarily an international carrier. In 2012 AirAsia only flew 3% of domestic passengers in Indonesia while the Lion group accounted for 45% (includes 41% for Lion Air and 4% for regional subsidiary Wings Air). In Indonesia's international market Lion only accounted for a 16% share of passenger traffic among Indonesian carriers in 2012 while Indonesia AirAsia captured a leading 39%. Malaysia AirAsia is also the largest foreign carrier in Indonesia.

2013 has marked a turning point in the AirAsia-Lion rivalry as each attacks the other's domestic markets. Indonesia AirAsia has been focusing more on domestic expansion in that country, and the Lion group has meanwhile started competing with AirAsia in the Malaysian and Thai domestic markets as well on some international routes from both countries.

In Thailand, the AirAsia-Lion rivalry reaches new levels

The Lion group will likely have more of an impact on AirAsia in Thailand than in Malaysia. In Malaysia, Malindo is following a hybrid model with a two-class product with frills in both cabins that is closer to Malaysia Airlines (MAS) than AirAsia. Of the 20 routes Malindo will be operating by the end of Jan-2014, AirAsia only serves nine while the MAS group serves 17.

In Thailand, AirAsia serves all three of Thai Lion's existing routes and all three routes which Thai Lion is preparing to add after taking two additional 737s in Feb-2014 - Bangkok-Hat Yai, Bangkok-Singapore and Chiang Mai-Krabi. Thai Lion also has a one-class no frills product that is more similar to AirAsia as it has not followed the Malindo model in offering meals, drinks and seatback in-flight entertainment monitors (although Thai Lion does offer 15kg of complimentary baggage, mimicing the model used by Lion Air in Indonesia).

Thai Lion's first route, Bangkok-Chiang Mai, is the largest route for Thai AirAsia along with Bangkok-Phuket. Thai AirAsia currently operates 12 daily return flights on both routes. Bangkok-Hat Yai is Thai AirAsia's third largest route with nine daily return frequencies while Bangkok-Krabi is the fourth largest with eight daily return frequencies.

Thai AirAsia top 10 domestic routes ranked by seat capacity: 30-Dec-2013 to 5-Jan-2014

Thai Lion will soon account for 10% of capacity in Thailand's largest domestic city pair

Thai AirAsia currently has a 25% share of capacity in the Bangkok-Chiang Mai market (includes both Bangkok airports), according to CAPA and OAG data. Thai Airways has a leading 30% share (includes widebody flights operated by Thai Airways and narrowbody flights operated by Thai Airways regional unit Thai Smile).

Thai Lion became the fifth player in the market and the third to serve Chiang Mai from Don Mueang. Thai Airways LCC affiliate Nok Air, which is also based at Don Mueang, currently has a 21% share while independent full-service carrier Bangkok Airways has a 15% share. Bangkok Airways, Thai Airways and Thai Smile are all based out of Bangkok's newer airport, Suvarnabhumi.

Thai Lion currently has about a 5% share of capacity in the Bangkok-Chiang Mai market. This will double to about 10% as a third and fourth daily flight are added on 6-Jan-2013.

Bangkok to Chiang Mai capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jul-2014

Thai Lion seeks to stimulate demand by lowering fares

Thai Lion aggressively entered the Bangkok-Chiang Mai market with promotional low fares starting at about THB500 (USD15) including taxes. Thai Lion's pricing strategy also includes selling everyday low fares, even on peak days and for last second bookings when its competitors typically do not offer low fares. Thai Lion's normal (non-promotional) fare for Bangkok-Chiang Mai is about THB1000 (USD30) to THB1800 (USD55) one-way including taxes.

Competitors have responded in by lowering fares for some seats. Thai AirAsia also nearly doubled capacity between Bangkok and Chiang Mai in the two months prior to Thai Lion's launch, although some of the increase could be viewed as seasonal adjustments. (Most carriers typically add flights to Chiang Mai during the winter season, when northern Thailand is dry and cool.)

But it is not simply a zero sum game. Thai Lion's low fares also have succeeded in stimulating new demand. While the Bangkok-Chiang Mai market already had two LCCs offering nearly 60,000 weekly return seats a large number of Thais travelling between Thailand's two largest cities were using buses and trains. With more low fare seats available, more Thais are now flying - although inevitably Thai Lion also has taken some business away from the incumbents.

Thai Lion will also start competing against AirAsia on Bangkok-Hat Yai

Thai Lion is expected to begin serving Thai AirAsia's third largest route, Bangkok-Hat Yai, after taking delivery of two 189-seat 737-800s in Feb-2014. But Thai Lion has not yet begun ticket sales for any new route beyond the three it is currently operating.

Thai Lion would be the fourth carrier in the Bangkok-Hat Yai market after Thai AirAsia, Nok Air and Thai Airways. Thai AirAsia has a leading 40% share of capacity in the market followed by Nok Air with 33% and Thai Airways with 23%.

Bangkok to Hat Yai capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jul-2014

AirAsia beats Thai Lion in launching Chiang Mai-Krabi

Thai AirAsia's fourth largest route, Bangkok-Krabi, is currently not in the Thai AirAsia plan for 1Q2014 but would be a logical addition particularly as Thai Lion has applied to serve the Chiang Mai-Krabi route. Chiang-Mai-Krabi had been un-served until 15-Dec-2013, when Thai AirAsia launched one daily flight on the route.

Thai Lion claims it applied for the Chiang Mai-Krabi route before Thai AirAsia (domestic route approvals in Thailand are essentially just a formality although securing slots can be a challenge at some airports). Thai AirAsia's subsequent application and quick move to launch the route is seen as a competitive response as the Chiang Mai-Krabi market is probably too small to support two carriers on a year-round basis. Thai Lion for now seems committed to proceeding with adding the route but could still change its mind as it has not yet begun ticket sales.

Krabi is a popular and fast-growing beach destination located just east of Phuket. The Krabi airport has traditionally only been served domestically from Bangkok and by a relatively small number of international flights from Singapore and Kuala Lumpur. Even the Bangkok-Krabi route over the years has seen carriers enter and exit including Bangkok Airways and Nok Air. Bangkok Airways re-entered in Mar-2013 while Nok is resuming service on 1-Jan-2014. Bangkok-Krabi is also served by Thai Airways/Thai Smile and Thai AirAsia. Thai AirAsia accounts for a leading 42% of seat capacity on the route.

Krabi is becoming a more attractive destination as it has seen considerable resort and holiday home development. Congestion at Phuket Airport also adds to Krabi's appeal as the Krabi airport does not have any infrastructure constraints.

Thai Lion has been looking at potentially establishing a second hub at Krabi after Bangkok Don Mueang. Thai AirAsia could make Krabi its fourth base (after Bangkok Don Mueang, Chiang Mai and Phuket). In addition to Krabi-Chiang Mai Thai AirAsia recently added flights from Krabi to Singapore. The AirAsia Group now has four routes from Krabi and accounts for almost half of the airport's current seat capacity.

Krabi Airport system-wide capacity share (% of seats) by carrier: 30-Dec-2013 to 5-Jan-2014

Thai Lion is unable to access Phuket

Thai Lion was keen to operate Bangkok-Phuket as one of its initial routes but a lack of available slots at Phuket have so far made it impossible for Thai Lion to enter the Phuket market. Terminal and runway expansion projects are under way that should allow Phuket's airport to end its current moratorium on new flights with the exception of overnight hours - which is suitable for medium and long-haul international flights but not domestic operations.

But it could be two to three years before Thai Lion gets the green light for gates and slots at Phuket. In the meantime AirAsia has an advantage as it accounts for about 63% of LCC capacity at Phuket and is able to use its Phuket base to add international flights, particularly to China, during overnight hours.

The only other Thai airport with capacity constraints is Samui, which is owned by Bangkok Airways and is not served by any LCC. Bangkok-Samui is the fifth largest domestic market in Thailand after Bangkok-Chiang Mai, Bangkok-Phuket, Bangkok-Hat Yai and Bangkok-Krabi (based on current seat capacity and counting flights from both Bangkok airports).

Thai Lion does not face constraints at other Thai airports. Don Mueang has ample space to accommodate rapid growth for all four LCCs based there as all full-service carriers and most foreign LCCs serving Bangkok use Suvarnabhumi. The re-opening of Don Mueang in 2012 to international LCC flights (it was already open to domestic LCC flights) has relieved congestion at Suvarnabhumi and made Bangkok an attractive base for potential new LCCs. Bangkok's two-airport policy means the city has sufficient airport capacity while most other major capital cities in Southeast Asia lack the slots to support new carriers.

In addition to Thai Lion, Thai AirAsia and Nok, smaller LCC/leisure carrier Orient Thai operates from Dom Mueang. New medium/long-haul LCCs Thai AirAsia X and NokScoot also plan to be based from Don Mueang when they launch services in 2014. But Thai VietJet, which is seeking to become Thailand's fifth short-haul LCC in 2014, plans to be based at Suvarnabhumi.

See related reports:

Lion (for now) only accounts for 2% of LCC capacity in Thailand

LCCs currently account for about 57% of capacity in Thailand's domestic market and 21% of international capacity, according to CAPA and OAG data. The AirAsia Group accounts for about 53% of total LCC capacity in Thailand while Nok accounts for about 26%.

Thailand LCC capacity share (% of seats) by carrier: 30-Dec-2013 to 5-Jan-2014

Lion currently only accounts for about 2% of LCC seat capacity in Thailand, making it the fourth largest group after AirAsia, Nok, Tigerair and Jetstar. Orient Thai, which had a large share of the domestic market before closing LCC subsidiary 1-2-Go in 2008, is now pretty much a non-factor with about a 1% share of LCC capacity in Thailand. Orient Thai currently only operates two scheduled routes - Bangkok to Phuket and Hong Kong - and is primarily a charter carrier.

Although Thailand is one of Asia's largest markets, Thai Lion is the first Lion group carrier to serve Thailand. Thai Lion should be able to grow its share of the market significantly over the next year as its fleet expands from two to 10 aircraft, with the anticipated delivery of two 737-800s and six additional 737-900ERs. But even 10 aircraft will likely not be sufficient to capture more than a 10% share of Thailand's LCC market as the overall market is growing at a rapid clip.

Thai AirAsia and Nok respond to increasing competition by accelerating growth

Thai AirAsia has grown passenger traffic by about 25% in 2013 as it added eight A320 to its fleet for a total of 35 aircraft. The carrier plans to add another eight A320s in 2014, enabling more rapid growth in the 20% to 25% range.

Nok Air grew even faster in 2013, with passenger traffic up by about 40%. The carrier currently operates 14 737-800s and plans to add four to six additional 737s in 2014. Nok also has a regional operation that currently consists of two ATR 72s and five wet-leased Saab 340 turboprops.

Thai Lion's rapid expansion will have some impact on Nok as the two carriers will start competing on more domestic trunk routes. But there is significantly more overlap with Thai AirAsia as Thai Lion is allocating a large chunk of its capacity to the international market and has decided against entering the regional market.

Thai Lion looked at taking some of the ATR 72s from the Lion group order book but for now only plans to only operate jets, leaving Nok as the only LCC on regional routes. (Thai Lion's management team instead has its sights on the five 787s in the Lion group order book, which would enable the carrier to compete with Thai AirAsia X and NokScoot. But Lion Group CEO Rusdi Kirana has made it clear that he has no intention of entering the medium/long-haul LCC sector and the group has initially allocated the 787s to its Indonesian full-service subsidiary Batik.)

Nok has Thailand's largest domestic network with 25 routes compared to 18 for Thai AirAsia. But Nok's international network consists of only three routes to neighbouring Myanmar while Thai AirAsia has 25 international routes with several more planned for 2014. Nok has ambitions to add a handful of international services including to Vietnam but it is intentionally staying away from the Thailand-Malaysia, Thailand-Indonesia and Thailand-Singapore markets.

Nok expects a potential bloodbath in the Thailand-Malaysia and Thailand-Indonesia markets as Lion starts to battle with AirAsia. Thai Lion has entered these markets with fares starting at less than USD60 for the two hour flight between Bangkok and Kuala Lumpur and USD100 for the three and a half hour flight between Bangkok and Jakarta.

Thai Lion sees opportunities in Jakarta-Bangkok but drops one of two initial frequencies

Jakarta-Bangkok is an under-served market given that Jakarta and Bangkok are Southeast Asia's two largest cities. Even with Thai Lion's entrance, there will less than 10 daily flights between Jakarta and Bangkok in Jan-2014 including five LCC flights - two from Indonesia AirAsia, two from Tigerair Mandala and one from Thai Lion (the Mandala flights operate from Suvarnabhumi). From the full-service airline sector, there are three daily flights from Garuda and just one from Thai Airways along with four weekly flights from EgyptAir which are operated as a tag from Cairo.

Thai Lion is currently operating a double-daily service which gives it about a 25% share of capacity between Jakarta and Bangkok compared to 17% shares for AirAsia and Tigerair. But Thai Lion has decided to cut back to one daily frequency from 6-Jan-2014, giving it the smallest share among the five main players.

Bangkok to Jakarta capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jul-2014

Thai Lion was perhaps over-ambitious in entering with more capacity than rival LCCs. But Thai Lion will almost certainly try at some point in 2014 to add back the second flight as demand in the Thailand-Indonesia market expands and as Thai Lion works on leveraging its relationship with Lion Air. Lion, which has a strong network of travel agents in Indonesia, can help with sales ex-Jakarta as well as provide feed from domestic destinations throughout the country.

Lion is also expected to start offering its Indonesian passengers destinations beyond Bangkok as it uses its new affiliates in Malaysia and Thailand to virtually expand its otherwise limited international network. Lion and all its sisters are network carriers, offering a complimentary transit product and fares priced on an origin and destination basis.

AirAsia and most other LCCs are point to point carriers with connections sold on a sum of sector basis and a transit product, including through check-in, available as a paid for add-on. In Dec-2013 Thai AirAsia began selling for THB650 (USD20) a connecting product for passengers transiting Don Mueang. The AirAsia Group's Fly-Thru product has already been available for several years in Kuala Lumpur but until recently passengers transiting in Bangkok had to self-connect.

Thai Lion has a very small share of the Bangkok-Kuala Lumpur market

Thai Lion was more conservative in entering the Bangkok-Kuala Lumpur market, where it currently only has a 5% share of capacity. But this will also almost certainly grow as Thai Lion looks to add frequencies beyond its current one daily flight with support from Malindo Air. Malindo, which has no plans to serve Bangkok on its own, will be able to feed Lion using its domestic and international networks.

The AirAsia Group currently accounts for a leading 47% of capacity between Bangkok and Kuala Lumpur. As it was the only LCC in the market, fares were often not too low, giving an opportunity for Lion to enter and stimulate demand.

Bangkok to Kuala Lumpur capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jul-2014

Thai Lion seeks to serve Singapore

Thai Lion has said it intends to launch Singapore as its third international destination but has not yet firmed up plans for this route or begun sales. The carrier will likely have to settle on operating in and out of Singapore Changi during middle of the day hours as Changi does not have available peak hour slots.

Bangkok Don Mueang-Singapore is currently Thai AirAsia's largest international route with six daily flights. Thai AirAsia is the only carrier now serving Singapore from Don Mueang. But seven carriers link Bangkok Suvarnabhumi with Singapore - Thai Airways, Singapore Airlines, Tigerair, Jetstar Asia, Scoot, Cathay Pacific and Ethiopian (in order of largest to smallest capacity share).

Bangkok to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 16-Jul-2014

While Bangkok-Singapore is a huge market it could be challenging for Thai Lion to carve out a niche as the slot constraints mean it will not be able to match the high frequency schedule operated by rival LCC groups AirAsia, Tigerair and Jetstar. Thai Lion could have similar challenges securing slots at desirable timings at destination airports as it looks to add services to Hong Kong and mainland China later in 2014.

Schedule and brand are challenging shortcomings for Thai Lion

Even with its upcoming quadruple daily schedule for Bangkok-Chiang Mai Thai Lion lacks the schedule to compete for business traffic. All four flights will depart Don Mueang between 10:20am and 3:40pm with the return from Chiang Mai departing between 12:20pm and 5:35pm. All of the other carriers on the route offer a much wider range of flights, from early morning to late in the evening, allowing it to meet the demand of business travellers which often make the return trip in a single day.

Lion also does not have a strong or well recognised brand in Thailand. Lowering fares will help stimulate demand and build its brand but at the expense of yields. All Lion group carriers have a low cost structure but its main competitors in Thailand, Thai AirAsia and Nok, also have a very low cost base.

As its Indonesian operation is profitable the Lion group has the cash to cover start-up costs and initial losses as Thai Lion offers very low fares in an attempt quickly to build up its brand. A quick spool-up to 10 737s will lead to improved economy of scale and a competitive cost base which could position the new carrier for profits from 2015.

But there will be risks as Thai Lion is pursuing rapid expansion at a time the Thailand market is seeing unprecedented competition. Thailand will have seven LCCs by the end of 2014 - more than any other country but the US, which has eight LCCs.

Consolidation is one possible outcome as capacity threatens to outstrip demand, particularly with the cloud of political uncertainty again hanging over Thailand. Losses are certainly on the horizon as the airlines battle for market position, but most have deep pockets and wider Asian service strategies, so the Thai consumer - and tourism - is likely to be the beneficiary.