27-Apr-2014 2:00 PM

AirAsia drives rapid growth at Malaysia’s Johor Bahru's Senai Airport, further encircling Changi

Analysis

As Kuala Lumpur's rapid LCC-driven traffic expands, AirAsia has unveiled plans for further expansion at Senai International Airport in the southern Malaysian state of Johor, just across the Causeway from neighbouring Singapore. The LCC group plans to add three international routes from Senai in Jun-2014, giving it six international routes, including five to Indonesia. AirAsia also recently launched its eighth domestic route at Senai.

Senai was the fastest growing airport in Malaysia in 2013 and one of the fastest-growing in Asia, with 44% growth, but off a low base, to 2 million passengers. Senai traffic grew by another 36% in 1Q2014 to 550,000 passengers. AirAsia, which currently accounts for about two thirds of total capacity at Senai, has been the main driver.

While Johor has its own fast-growing market, driven by rapid economic development in the state, it offers competition to some extent with nearby Singapore. The three new international routes at Senai for AirAsia, including two to Indonesia and one to Vietnam, come as the LCC group once again faces roadblocks in expanding its Singapore-Indonesia operation.

Senai was Malaysia's sixth largest airport in 2013, but the fastest growing

Senai International Airport is the only airport in Malaysia outside the purview of Malaysia Airports Holdings Berhad (MAHB). Senai has been operated by Senai Airports Terminal Services (SATS) since 2003, when control was transferred over from MAHB. SATS has been owned by Malaysian utilities and infrastructure group MMC since 2009.

Senai is about 30km from Johor Bahru, which is Malaysia's most populated city outside the Kuala Lumpur region and is the capital of Johor state. It is also about 30km from the Malaysia-Singapore border and about 50km from Singapore Changi Airport.

Senai was the sixth largest airport in Malaysia in 2013 after Kuala Lumpur International (KLIA), Kota Kinabalu, Penang, Kuching and Miri. But Senai was the fastest growing, with the 44% growth in passenger traffic easily outstripping the 19% posted by KLIA and the average 18% growth across the MAHB portfolio of airports.

MAHB has 10 airports above the 1 million passenger threshold, with passenger growth rates in 2013 ranging from 10% to 29%.

Malaysia top airports* ranked by passenger figures for 2013 vs 2012

Rank	Airport	2013 passenger traffic(millions)	2012 passenger traffic (millions)	Year-over-year % growth
1.	Kuala Lumpur International	47.5	39.9	19%
2.	Kota Kinabalu	6.9	5.8	19%
3.	Penang	5.5	4.8	15%
4.	Kuching	4.9	4.2	16%
5.	Miri	2.2	2.0	10%
6.	Johor Bahru/Senai	2.0	1.4	44%
7.	Langkawi	1.9	1.6	22%
8.	Kuala Lumpur Subang	1.9	1.4	29%
9.	Kota Bahru	1.6	1.3	26%
10.	Sibu	1.4	1.2	15%
11.	Tawau	1.2	1.0	22%

Senai growth in 2013 has followed a very slow eight years

The 44% growth recorded by Senai in 2013 came after eight years of flat growth. After recording 66% traffic growth in 2004 (the first full year after the airport was privatised) to 1.4 million passenger, Senai saw essentially flat traffic over an eight-year period until 2012 (there was a slight reduction from 1.43 million passengers in 2004 to 1.38 million passengers in 2012).

SATS invested significantly in the airport during this eight year period, expanding and modernizing the airport terminal and developing an air cargo centre. But annual passenger traffic was up and down, going as low as 1.2 million and never exceeding 1.45 million.

Senai Airport passenger traffic: 2003 to 1Q2014

While Senai ended 2012 with essentially the same passenger volumes as 2004 all the other airports in Malaysia experienced rapid growth during this period (see background information).

KLIA traffic nearly doubled in the 2004 to 2012 period, from 21 million to 40 million passengers. Langkawi, which is now a similarly sized airport to Senai, saw its traffic roughly double from just over 800,000 passengers in 2004 to 1.6 million in 2012.

AirAsia has been the driver over the last decade of growth (and declines) at Senai Airport

AirAsia was the driver of the 66% growth in passenger traffic in 2004 as the LCC opened a base at Senai at the end of 2003, which it used to expand domestically while experimenting with international routes. Senai was only the second base to be opened by AirAsia after KLIA.

AirAsia first commenced operations at Senai in Oct-2003, when the carrier was less than two years old, with service from its original hub at KLIA. Service from Senai to Kota Kinabalu, Kuching, Langkawi, Miri and Penang were added in Dec-2003 as the base opened. The first international route, Bangkok, was added in Feb-2004, giving AirAsia seven routes and 10 daily flights from Senai. An initial motive was to tap the Singapore market without actually operating into Singapore. The Singapore authorities were less than cooperative with this blatant attempt to divert flows from Changi and AirAsia quickly began to focus on other opportunities in the region.

As a consequence Senai Airport's passenger traffic dropped by 13% in 2005 as AirAsia discontinued service to Bangkok and did not pursue any further domestic expansion. There was a slight recovery in Senai's traffic figures in 2006 as AirAsia resumed domestic expansion at Senai, adding service to Ipoh, Kota Bahru, Sandakan and Tawau. But none of these routes was served daily and three of the routes - Ipoh, Sandakan and Tawau - proved to be short-lived. (AirAsia resumed four weekly flights on the Senai-Tawau route on 18-Apr-2014 but currently still does not serve Ipoh or Sandakan from Senai.)

AirAsia resumed international operations at Senai in 2008, relaunching the Senai-Bangkok route in Feb-2008. But the route was again dropped in Jul-2009.

After reaching nearly 200,000 passengers in 2008, Senai's international traffic dropped to 140,000 passengers in 2009 and only 15,000 passengers in 2010. International traffic remained very low in 2011 and 2012, with approximately 20,000 passengers, as Senai only had limited international services during this period.

AirAsia sees strong demand in the Johor-Indonesia market

AirAsia again resumed international operations at Senai in 2013, this time with much greater success. Instead of returning to the twice failed Bangkok route the group decided to focus on the Indonesian market, using its Indonesia AirAsia affiliate.

AirAsia has learned that Johor-Thailand is a limited market while Johor-Indonesia has growing demand, driven primarily by migrant worker traffic. Johor's economy has been booming in recent years, driving significant construction activity. Plantations and factories in the state also have been expanding. Indonesian workers have been needed to supplement the rather limited local labour pool.

AirAsia also has carried a greater than anticipated amount of tourist traffic on its Johor-Indonesia flights. Johor has emerged as an increasingly popular tourist destination for shopping and recreation. The opening of an outlet mall and Legoland theme park near Senai has accelerated the growth in inbound tourists. Further growth in tourist arrivals is expected following the opening of new theme parks and resorts in the seaside town of Desaru, which is located on the eastern side of Johor state and is about one hour from Senai via a new highway.

Indonesia AirAsia launched service to Senai in Oct-2012 with four weekly flights from Surabaya. The route quickly proved successful, leading the carrier to launch service in 2013 to Senai from Jakarta, Medan and Bandung, while Surabaya was increased to daily.

Medan, which was served three times per week from Jun-2013, was dropped after only about four months. But Bandung and particularly Jakarta have been successful. Both routes were launched with and are currently operated with four weekly frequencies.

AirAsia will add three more international routes at Senai

In mid-Apr-2014 AirAsia unveiled plans to launch on 11-Jul-2014 two more Indonesian routes from Senai, Lombok and Yogyakarta, as well as Ho Chi Minh in Vietnam. Yogyakarta and Ho Chi Minh will initially be served four times per week while Lombok will be served three times per week.

All three new routes will be operated by AirAsia's Malaysian subsidiary, which in Dec-2013 added a third A320 to its Senai base. Lombok and Ho Chi Minh are particularly significant developments as neither is a base for any AirAsia affiliate. AirAsia currently only serves Lombok from Kuala Lumpur (Lombok is not served at all by Indonesia AirAsia). Ho Chi Minh is currently served from Kuala Lumpur and Bangkok (AirAsia does not have a Vietnamese affiliate and is not planning to add any new affiliates in Southeast Asia).

The selection of Ho Chi Minh is something of a gamble as AirAsia has never had success in the Johor Bahru market with any route outside Malaysia and Indonesia. But AirAsia believes Vietnam's international market is relatively under-served given the rapid growth of the Vietnamese economy and the rapid growth in outbound leisure travel.

With the new budget carrier link, Johor should be able to attract Vietnamese tourists. AirAsia says initial sales of the Johor-Ho Chi Minh service have been robust.

AirAsia may also see some connecting passengers from Ho Chi Minh as Ho Chi Minh does not currently have any non-stop service to Indonesia except for one Vietnam Airlines flight to Jakarta. Ho Chi Minh is also currently not served from any Malaysian city other than Kuala Lumpur.

For now AirAsia only offers its Fly-Thru connection product at KLIA but passengers are able to self-connect at Senai. If AirAsia notices significant volumes of self-connection passengers, the group could introduce a Fly-Thru option. Senai surely would give support and even potentially incentive a connection product as the airport's owners and mangers have long been keen to promote Senai as a hub.

China services could be next for Senai

China is likely the next new international destination for Senai. AirAsia is already evaluating potential Chinese routes from Senai while the airport is also talking to potential Chinese carriers.

Johor has already become a popular destination for Chinese tourists, but for now these tourists are not flying into Senai as they are combining a stop in Johor with stops in Singapore and/or Kuala Lumpur. But Senai could emerge as an alternative airport for Chinese tourists now arriving at Changi or KLIA if it succeeds at attracting non-stop services from China.

A Senai option is particularly attractive to budget tourists as hotels in Malaysia are significantly cheaper than Singapore. With the right flight connections, AirAsia believes more tourists from emerging markets such as Indonesia, Vietnam and China would base themselves in Johor state and take a day trip to see Singapore rather than the current combination of basing themselves in Singapore and taking a day trip to Johor.

AirAsia X widebodies are also a possibility

AirAsia even sees the potential of an AirAsia X widebody base at Senai. Widebody aircraft would be used to serve eastern, central and northern China as Johor-based A320s could potentially serve markets in southern China, following the same model the group uses in splitting KLIA-China routes between the two entities.

AirAsia X's only Malaysian base is now KLIA. The fact Senai has popped up above Penang and Kota Kinabalu as potential second bases speaks volumes to the rapid growth and huge potential of the Johor market.

In addition to China, South Korea and Japan would be possibilities as Johor has sizeable Korean and Japanese expatriate populations. South Korean carrier Asiana operated a seasonal twice weekly service to Senai from late Dec-2013 to early Mar-2014, using 767s.

AirAsia's hub ambitions for Senai could eventually become a reality

AirAsia has long been interested in building up a hub at Senai. But in its initial years in the Johor Bahru market AirAsia was pushing Senai more as an alternative gateway to Singapore rather than focusing on the local Johor market.

Starting in late 2003 AirAsia promoted heavily its Johor services in the Singapore market. At the time AirAsia was unable to access the Singapore-Malaysia market due to bilateral limitations which effectively gave the Singapore Airlines and Malaysia Airlines group a duopoly, leading to extremely high fares.

AirAsia saw an opportunity to give Singapore-Malaysia passengers a budget option combining a bus from Singapore to Senai with cheap tickets on domestic routes from Senai. But controversially AirAsia was unable to get approval from Singapore authorities for its own direct bus (although other bus options were still available).

While AirAsia (and to some extent Malaysia Airlines, which was able to have its own direct bus service from downtown Singapore to Senai) saw a fair number of its Senai passengers originate in Singapore, the market never took off after an initial influx in 2004. The flat traffic figures for Senai from the 2005 to 2012 period are an indication of Senai's inability to emerge as alternative gateway to Changi.

Circumstances also changed significantly for Senai in early 2008 as the Malaysia-Singapore market opened up to budget carriers following conclusion of an open skies agreement between the two countries. AirAsia, which already served Singapore from Thailand, quickly expanded in the Singapore-Malaysia market with routes to several Malaysian cities and a high frequency service to Kuala Lumpur. With the recent launch of services from Singapore to Terengganu and Kota Bahru, AirAsia now has eight routes and 132 weekly return frequencies in the Singapore-Malaysia market, according to OAG data.

Indonesia AirAsia also was able to enter the Singapore market in 2008 and quickly expanded, adding several routes from Indonesian cities (although for several years it was unable to gain access to the Singapore-Medan and Singapore-Surabaya routes). Indonesia AirAsia now serves seven destinations in Indonesia from Singapore with 112 weekly return frequencies, according to OAG data.

Thai AirAsia also currently operates 56 weekly return frequencies in Singapore on three routes, giving the AirAsia Group a current total of 300 weekly frequencies compared to 402 frequencies for the Tigerair Group and 266 weekly frequencies for the Jetstar Group, based on OAG data for the week commencing 21-Apr-2014.

By 2010 the AirAsia Group had built up a 6% to 7% share of total capacity in the Singapore market, roughly matching the shares of rival LCC groups Tigerair and Jetstar. While AirAsia has since continued to grow in the Singapore market, its rate of expansion has slowed. As CAPA has previously described, Tigerair over the last two years has been able to pull ahead of both AirAsia and Jetstar as it pursued much more rapid capacity expansion in the Singapore market than its two rivals.

Singapore LCC seat capacity by carrier: 21-Apr-2014 to 26-Apr-2014

Rank	Airline		Total Seats
1	TR	Tigerair	129,672
2	3K	Jetstar Asia	73,620
3	AK	AirAsia*	47,520
4	QZ	Indonesia AirAsia*	40,320
5	TZ	Scoot	35,010
6	JT	Lion Air*	20,874
7	FD	Thai AirAsia*	20,160
8	5J	Cebu Pacific Air*	18,828
9	VF	Valuair	16,560
10	RI	Tigerair Mandala*	12,600
11	JQ	Jetstar Airways*	7,386
12	IX	Air India Express*	2,646
13	6E	IndiGo*	2,520
14	Y5	Golden Myanmar Airlines*	2,520
15	DG	Tigerair Philippines*	2,160
16	8L	Lucky Air*	400

Growth in the local Johor market prompts recent AirAsia's Senai expansion but there are still Singapore ramifications

During the 2008 to 2010 period as it expanded rapidly in Singapore, AirAsia stopped expanding at Senai and postponed any ambitions to turn Senai into a hub or alternative gateway to Singapore.

The resumption of expansion at Senai in late 2012 and 2013 was driven primarily by the changing dynamics of the local Johor market. The rapid growth in Iskandar, a large region of Johor about 30km from Senai that has been earmarked for commercial and residential construction, in particular has been driving rapid growth in demand for services at Senai.

While the recent expansion of the Senai network, which continues with the new batch of three international routes from Jun-2014, is predominantly in response to local demand there is still some implications for Singapore Changi. AirAsia has had applications in with Singaporean authorities for several months to add flights on five Singapore-Indonesia routes. Indonesia AirAsia has the required Indonesian approvals for the additional flights but Singapore authorities appear to be sitting on the applications as an attempt to try to secure more slots at Jakarta for Singaporean carriers.

Indonesia AirAsia faced similar hold ups for over a year on applications for Singapore to Medan and Surabaya before it was finally able to launch services on the Singapore-Medan and Singapore-Surabaya routes in 2013. The decision to launch Johor-Surabaya in late 2012 was partly driven by the hold up in the Singapore-Surabaya application. But AirAsia quickly discovered there was significant local demand for Johor-Surabaya and the volume of passengers on the route that were travelling from Singapore on its bus service was initially relatively low. (AirAsia was able to start offering a direct bus service from Singapore to Senai in 2012, several years after an initial attempt was blocked.)

While the Johor market now consists primarily of local passengers, AirAsia is keen to point out to Singapore authorities that the new holds-ups on Singapore-Indonesia expansion is also a driver in the latest Johor-Singapore expansion. AirAsia currently does not serve Lombok from Singapore and is currently unable to increase Singapore-Yogyakarta above the current one daily frequency although the market has been performing well.

In reality the new services from Johor to Yogyakarta and Lombok (and Ho Chi Minh) will not see large volumes of Singaporeans. But Changi should be concerned as additional capacity and aircraft that could be allocated to Singapore is instead being allocated to Johor Bahru.

There are also wider ramifications for Singapore with the expansion of Senai's international network as it could impact Changi's ability to draw Malaysian passengers. While AirAsia has tried over the years with relatively limited success to market Senai as an alternative airport to Singapore, Changi has always drawn significant traffic from Johor as Senai has largely been only a domestic airport. There is currently a direct bus from Johor Bahru to Changi which offers free rides to passengers on some carriers including Jetstar and Tigerair.

As Senai attracts more international services, the airport should be able to sway some passengers that reside or are heading to Johor but are using Changi. With Changi's passenger growth slowing, the airport needs to try to avoid any potential loss of passengers to Senai. While Senai passenger traffic grew by 44% in 2014, Changi's traffic grew by only 5%. In 1Q2014, Changi's growth slowed to only 1% year over year while Senai's traffic grew by 36%.

AirAsia accounts for about two-third of total capacity at Senai

The upcoming AirAsia expansion in the Johor market is potentially just the tip of the iceberg for Senai. The expansion will give Senai an unprecedented six international routes and 32 international weekly frequencies, with 25 international frequencies from the AirAsia Group. The other seven weekly frequencies are from Garuda budget subsidiary Citilink, which launched a daily flight to Senai from Surabaya on 15-Mar-2014.

With the recent launch of four weekly flights to Tawau, AirAsia now has 94 weekly domestic return frequencies at Senai to eight destinations. (Of the 10 largest airports in the MAHB network, AirAsia now serves all but two from Senai. It is unable to serve Kuala Lumpur Subang as Subang is only open to turboprop flights and it suspended services on the Johor-Langkawi route several years ago.)

AirAsia currently accounts for about 65% of the domestic seat capacity at Senai. Based on system-wide capacity AirAsia's share is also currently about 65%, increasing to 67% in Jun-2014 as the three new international routes are added.

Senai Airport domestic capacity share (% of seats) by carrier: 21-Apr-2014 to 27-Apr-2014

Senai is also served by Malaysia Airlines (MAS), MAS regional subsidiary Firefly and Lion Air Group Malaysian subsidiary Malindo Air.

Malindo and Firefly are the other main operators

Lion Air affiliate JV Malindo drove some of Senai's recent domestic traffic growth, which was up 37% in 2013 to 1.85 million passengers and by 29% in 1Q2014 to just over 500,000 passengers for the quarter. But AirAsia accounted for most of the gains and Malindo has struggled on Senai routes which are also served by AirAsia, focring it in Jan-2014 to discontinue service from Senai to KLIA and Kota Kinabalu.

Malindo continues to operate ATR 72-600 turboprop service from Senai to Kuala Lumpur Subang, which it launched in Jun-2013 with two daily flights. A third daily flight was added in Aug-2013 followed by a fourth daily frequency in Jan-2014. Double daily 737-900ER service to KLIA and one daily 737-900ER flight to Kota Kinabalu were added in Oct-2013 but both routes were suspended after only three months.

On the Senai-Subang route Malindo only competes against Malaysia Airlines subsidiary Firefly, which operates six daily flights with a reduced schedule on Saturdays. The sixth frequency was added in Dec-2013.

Firefly also operates three weekly flights from Senai to Kota Bahru, a route also served by AirAsia with three weekly frequencies. Firefly launched Senai-Kota Bahru in Apr-2012. Firefly also experimented with international services from Senai, launching four times per week service to Pekanbaru in Indonesia in Aug-2013, but the route was dropped in early 2014 after only about six months.

MAS currently only serves Senai from its KLIA hub, operating between four and six flights per day. MAS previously operated East Malaysia routes from Senai, including to Kuching and Kota Kinabalu. But these routes were handed in 2Q2011 to Firefly, which at the time had just begun operating 737s under an LCC model. At about the same time Firefly launched services from Senai to Penang and Langkawi, giving new competition to AirAsia.

Senai has had a lot of ups and downs but its outlook is now bright

But Firefly dropped its 737 operation in late 2011 following the MAS-AirAsia stock swap, leaving Firefly only with its original ATR 72 operation, which follows a regional full-service model. The stock swap was unwound in 2012 but MAS elected not to return to its multi-brand strategy of using Firefly for the budget end of the market.

This decision impacted Senai as well as other regional airports in Malaysia. In 2012 passenger traffic at Senai was flat while across the MAHB portfolio of airports there was growth of only 5%.

Clearly Senai has had its challenges over the last several years. But those challenges seem to be firmly behind it following the rapid growth in its passenger numbers in 2013 and 1Q2014. The outlook for Senai International Airport is bright as its anchor tenant AirAsia looks to further expand in the Johor market. For now most of the new traffic is O&D to Senai; but the availability of new routes and capacity will become increasingly attractive to Singapore residents and visitors.

Singapore may not have a need to be too concerned as Changi is still about 25 times bigger than Senai. But Senai's rapid growth will surely be noticed by its much larger neighbour. That will in turn continue to drive the quest for innovative responses.

As the various LCCs establish around the region and as new forms of airline evolve, the challenges for longer established hub airports to make a transition to a more versatile model - while simultaneously catering to the needs of conventional network carriers - become more intense. Changi has always shown a propensity to experiment in forward looking ways; now that process is no longer a luxury, but a necessity.