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AirAsia moves to Changi Airport’s new hybrid Terminal 4. Perhaps a new hub for its Fly-Thru product

AirAsia has signed up as the anchor tenant for Changi Airport’s T4, a new hybrid terminal which is slated to open in 2017. AirAsia expects to reduce its operating costs significantly in Singapore as it moves from T1 to T4, giving it a better foundation to allow it potentially to resume expansion in Singapore.

AirAsia grew rapidly in Singapore from 2008 through 2013 but cut capacity in 2014 as market conditions became extremely challenging. Lower operating costs, driven by automation of passenger services, and incentive packages should make it easier for AirAsia to add capacity on some of its 15 existing routes from Singapore and launch new routes.

AirAsia could also potentially use T4 as a transit hub by introducing its Fly-Thru product in the Singapore market. Although it is not a hub or base Changi is AirAsia’s third largest airport. Only Kuala Lumpur and Bangkok have more AirAsia seats than Singapore.

AirAsia has about a 7% share of the Singapore market

AirAsia began operations to Singapore in 2005 using its Thai affiliate to serve Changi from Bangkok. The group’s Malaysian subsidiary and Indonesian affiliate began serving Singapore in 2008 after the Singapore-Malaysia and Singapore-Indonesia markets liberalised, opening up to LCCs.

AirAsia subsequently expanded rapidly at Changi along with Singapore-based LCCs Jetstar Asia and Tigerair, pushing up Singapore’s LCC penetration rate from only 12% in 2008 to 31% in 2014. Tigerair operated at the Budget Terminal until it was closed in 2012 to make room for T4 while AirAsia and Jetstar have always operated from T1.

AirAsia carried just under 4 million passengers to and from Singapore in 2014, representing slightly more than a 7% share of the 54.1 million passengers handled by Changi Airport. AirAsia is by far the largest foreign airline group at Changi and is about the same size as the Jetstar Group despite not having a Singapore-based affiliate.

The AirAsia Group currently operates 275 weekly departures from Singapore, providing 49,500 one-way seats as all its flights use 180-seat A320s. The 99,000 weekly return seats represent about a 7% share of total current capacity in Singapore and about a 23% share of LCC capacity, according to CAPA and OAG data.

Singapore-based LCC group Tigerair currently accounts for a leading 28% share of LCC seat capacity in Singapore while Jetstar has about a 24% share. Scoot accounts for an 11% share, giving the Singapore Airlines Group a combined 39% share - as SIA has a 100% stake in medium/long-haul operator Scoot and a majority stake in short-haul operator Tigerair. (Note: Tigerair capacity in Singapore includes Tigerair Taiwan, Scoot capacity includes Thailand's NokScoot and Jetstar capacity includes Australia-based Jetstar Airways and Vietnam-based Jetstar Pacific although all four of these non-Singapore affiliates have relatively small operations at Changi consisting of four to 12 weekly frequencies.)

Singapore LCC capacity and capacity share by group: 20-Jul-2015 to 26-Jul-2015

Rank Group Total Seats LCC Share
1 Tigerair 121,320 28%
2 Jetstar 104,896 24%
3 AirAsia 99,000 23%
4 Scoot 49,056 11%
5 Lion 29,666 7%
6 Cebu Pacific 17,478 4%
  Others 10,472 2%

AirAsia's rate of growth in Singapore has been slower than other LCCs

AirAsia's share of Singapore’s LCC market has slipped in recent years. In 2010 the AirAsia, Jetstar and Tigerair group each accounted for approximately equal 27% shares of LCC capacity in Singapore and 6.5% shares of total seat capacity.

AirAsia continued to expand in 2011, 2012 and 2013 but the overall Singapore LCC market expanded much faster, driven primarily by Tigerair. In 2014 the total number of LCC seats in Singapore grew only slightly while AirAsia cut capacity in response to the challenging conditions.

As CAPA previously highlighted, Tigerair’s share of total capacity in Singapore peaked at about 11% in late 2013 and early 2014. Changi's overall LCC capacity also peaked in late 2013 and early 2014, when it accounted for about 33% of total capacity.

LCCs currently account for about 30% of total seat capacity in Singapore.

See related reports:

AirAsia capacity in Singapore peaked in late 2013, when it operated about 315 weekly flights to 18 destinations. AirAsia capacity in Jul-2015 is down by about 12% compared to Nov-2013 levels and by about 6% compared to Jul-2013 levels.

AirAsia has cut capacity on Singapore-Kuala Lumpur and Singapore-Jakarta

The reduction over the past two years is driven primarily by frequency cuts to Kuala Lumpur and Jakarta, which are the largest two routes from Singapore and the two largest international LCC routes in the world. AirAsia reduced Singapore-Jakarta from six to four daily flights in Jun-2014.

Kuala Lumpur has been cut from a high of 13 daily flights in 2013 to an average of 10 daily flights currently. Some reductions to Kuala Lumpur were implement in 2H2013, when Malaysia AirAsia stopped overnighting an aircraft at Changi, and some in 2014 but AirAsia has restored a portion of this capacity over the last eight months.

AirAsia also suspended Singapore-Manila from Aug-2013 and Singapore-Makassar from Dec-2013. Other more modest capacity cuts include a reduction to Kuching from early 2014 and to Semarang from Jun-2014.

All the reductions over the past two years have been offset partially by increases in three other markets and two new routes. Bangkok was increased from five to six daily flights in late 2013, Penang was increased from three to four daily flights in early 2014 and Bandung was increased from two to three daily flights also in early 2014. Krabi was launched in Nov-2013 with one daily flight while Solo was launched in late Jan-2015 with three weekly flights.

The other six markets AirAsia currently serves from Singapore has seen flat capacity over the last two years. This includes five routes that are served once per day and Miri in Malaysia, which is served four times per week.

AirAsia destinations from Singapore ranked by weekly departures: Jul-2015 vs Jul-2014 and Jul-2013

Current Rank Destination Jul-2015 Jul-2014 Jul-2013
1 KUL Kuala Lumpur International Airport 73 65 91
2 DMK  Bangkok Don Mueang International Airport 42 42 35 
3 CGK Jakarta Soekarno-Hatta International Airport   28 28 42
4 DPS Bali Denpasar Ngurah Rai Airport 28 28 28
5 PEN Penang International Airport 28 28 21
6 BDO Bandung Husein Sastranegara Airport 21 21 14
7 KCH Kuching Airport 9 7 14
8 JOG Yogyakarta Adisucipto International Airport 7 7 7
9 LGK Langkawi Airport 7 7 7
10 BKI Kota Kinabalu Airport 7 7 7
11  HKT Phuket International Airport 7 7
12  KBV Krabi Airport 7 7 N/A
13  SRG Semarang Achmad Yani Airport 4
14 MYY Miri Airport 4 4 4
15 SOC Solo City Adi Sumarmo Airport 3 N/A N/A 
Suspended KNO Medan Kuala Namu International Airport N/A 7 N/A 
Suspended  SUB Surabaya Juanda Airport N/A  7 N/A 
Suspended CRK Clark International Airport N/A N/A 7
Suspended UPG Makassar Sultan Hasanuddin Airport N/A  N/A 4
Suspended KBR Kota Bharu Sultan Ismail Petra Airport N/A  4 N/A 
Suspended TGG Kuala Terengganu Sultan Mahmud Airport N/A  3 N/A 
TOTAL     275 283 294

AirAsia has struggled with new routes from Singapore

Over the last two years AirAsia also launched five short-lived routes from Singapore – Kota Bahru and Kuala Terengganu in Malaysia and Lombok, Medan and Surabaya in Indonesia. Medan and Surabaya were launched in Aug-2013, Kota Bahru and Kuala Terengganu were launched in Apr-2014 while Lombok was launched in late Jan-2015 at the same time as Solo.

Medan was cut in Jul-2014 and Surabaya in early 2015. Medan was launched with two daily flights and Surabaya with one daily flight but cut to seven and four weekly frequencies respectively prior to being suspended. 

Kota Bahru and Kuala Terengganu were dropped in Oct-2014, only six months after being launched. Lombok was even more short-lived and was only operated for one month, according to OAG data.

AirAsia linked Singapore with 15 destinations in Jul-2013 – the same as Jul-2015 with Krabi and Solo essentially replacing Clark and Makassar. But in Jul-2014 it served 18 destinations.

Solo is expected to become another short-lived route as Indonesia AirAsia (IAA) is planning to drop it within the next few months. But IAA is planning to launch another new Indonesian route, Padang, and is seeking to resume Singapore-Surabaya pending approvals from Indonesian authorities.

See related report: AirAsia adjusts Indonesian operation but should be able to maintain leading international position

AirAsia is keen to continue trying new routes from Singapore

Malaysia AirAsia (MAA) is also now looking at launching services from Singapore to Sibu in east Malaysia. Meanwhile, Philippines AirAsia (PAA) is considering resuming services to Singapore with a new route from Manila International.

The Group is also hoping start-up AirAsia India (AAI) will be able to launch services to Singapore pending the potential lifting of a requirement in India which now blocks new carriers from operating international flights in their first five years. If AAI is able to launch international operations earlier, there could be five AirAsia Group carriers serving Changi T4 when it opens in 2017.

AirAsia is not shy about experimenting with new routes. Other Singapore routes dropped during earlier phases include Chiang Mai in 2012 and Tawau in 2010. While there have been several failures, AirAsia has succeeded in several secondary markets from Singapore. Of the 15 routes AirAsia now serves from Singapore it is the only LCC on seven.

AirAsia will continue to experiment with new routes after it moves to T4 in 2017. Some of the routes it tried previously could be retested as AirAsia expects at least a 40% reduction in its variable operating costs compared to its current costs at T1.

On marginal routes lower operating costs could make the difference between a profit and a loss. Incentives from Changi which are offered for routes not currently served by any carrier as well as overall growth incentives may also help entice AirAsia to continue launching new secondary routes. For example, Padang and Sibu would both qualify for marketing subsidies as neither is currently served non-stop from Singapore.

AirAsia is the largest LCC on most of the routes it serves from Singapore

AirAsia is also keen to boost frequencies on some of its core Singapore routes. Of the eight routes from Singapore that AirAsia now competes against other LCCs it is the market leader in six.

Over the last year AirAsia has been reluctant to expand in these markets due to intense competition and overcapacity. But as demand improves and its operating costs at Changi are reduced it will be keen to revisit capacity growth, which will enable AirAsia to maintain its leading position in these markets.

AirAsia current capacity share (% of seats) by route from Singapore

Destination

Total

share 

LCC

share

LCC

competitors 

KUL Kuala Lumpur International Airport 24%* 50% Jetstar (20%), Tigerair (17%), Malindo (14%)
DMK Bangkok Don Mueang International Airport 15%* 30% Jetstar (25%), Tigerair (25%), Scoot (21%) 
CGK Jakarta Soekarno-Hatta International Airport   9% 22% Lion (43%), Jetstar (19%), Tigerair (16%) 
DPS Bali Denpasar Ngurah Rai Airport 21% 50% Jetstar (25%), Tigerair (25%) 
PEN Penang International Airport 34% 50% Jetstar (25%), Tigerair (25%) 
BDO Bandung Husein Sastranegara Airport 79% 100% None 
KCH Kuching Airport 49% 100% None 
JOG Yogyakarta Adisucipto International Airport 70% 100% None
LGK Langkawi Airport 56% 70% Tigerair (30%) 
BKI Kota Kinabalu Airport 51% 100% None
HKT Phuket International Airport 10% 18%  Jetstar (48%), Tigerair (35%) 
KBV  Krabi Airport 50% 50% Tigerair (50%)
SRG Semarang Achmad Yani Airport 55% 100%  None 
MYY Miri Airport 100% 100% None
SOC Solo City Adi Sumarmo Airport 100% 100% None 

AirAsia’s ability to secure larger market shares than Jetstar and Tigerair on overlapping routes highlights the strength of the AirAsia brand in Singapore. As a result AirAsia has been able to develop a significant presence in the Singapore market despite not having nearly as many destinations as its rivals.

Jetstar currently has 23 destinations from Singapore while Tigerair has 37, according to OAG data. These larger networks are made possible as Jetstar and Tigerair both have Singapore operating certificates while AirAsia is limited to serving Singapore from its home markets of Indonesia, Malaysia, Thailand and the Philippines

AirAsia could potentially close this gap and start to compete on more routes from Singapore after ASEAN implements open skies at the end of 2015. Large routes such Ho Chi Minh and Yangon, which are currently served by Jetstar and Tigerair, could become possibilities. Previous attempts by Malaysia AirAsia to secure fifth freedom rights for Kuala Lumpur-Singapore-Yangon were unsuccessful but ASEAN open skies should in theory make it easier to pursue such routes.

AirAsia expects lower operating costs in Singapore

While routes such as Singapore-Ho Chi Minh and Singapore-Yangon are already extremely competitive they could become more attractive if AirAsia succeeds at reducing its variable operating costs in Singapore. AirAsia expects a reduction of at least 40% driven primarily from the automation of passenger services as new technologies are introduced in the departure hall and at the boarding gates.

Self-service will enable AirAsia to cut down significantly on staffing costs. AirAsia is also banking on generating savings from reduced taxi times and shorter turnarounds.

Airport fees and charges will be the same in T4 as the existing three terminals. AirAsia is also not factoring in a reduction in ground handling fees. AirAsia uses its own check-in and gate staff at Changi but is not able to have its own staff on the tarmac.

AirAsia has been keen for several years to expand its self-handling operation in Singapore to include below wing services. AirAsia is concerned ground handling costs will continue to increase in Singapore including after it moves to T4. Ground handler costs continue to rise in Singapore, driven primarily by a tight labour market, and the providers do not expect to be able to achieve any reduction in costs at T4, despite aspirations from Changi.

Changi remains reluctant to give AirAsia a handling licence. But Changi should reconsider the AirAsia request as a self-handling licence would enable the group to control its costs better and pursue even faster growth.

Changi Airport needed AirAsia to move to T4 - and grow

Changi needs growth from AirAsia to kick start a new phase of growth in the Singapore LCC sector. AirAsia has done Changi a huge favour by agreeing to move to T4 as Singapore’s other main LCC players were reluctant to move due to a lack of connectivity with the rest of the terminals.

AirAsia did not have to move. It could have achieved most - if not all - of the targeted 40% in variable operating cost savings by staying in T1. Changi is planning to introduce the same technology that it is rolling out with T4 in the existing terminals. In fact some of the savings AirAsia is banking on will be realised as early as Aug-2015, when it introduces self-bag drop and starts using new common use kiosks as part of an on-going upgrade project in the T1 departure hall. But with T4 AirAsia has an opportunity to offer an even better passenger experience while improving its relationship with Changi.

Changi particularly needed a larger narrowbody operator for T4 as 17 of the 21 of the gates in the new terminal can only handle narrowbody aircraft. AirAsia, Tigerair, Jetstar and SilkAir are the four main narrowbody operators at Changi but only AirAsia was willing to consider T4.

In addition to AirAsia, Cathay Pacific, Korean Air and Vietnam Airlines have so far agreed to move to T4. Cathay and Korean only operate widebody aircraft to Singapore. Vietnam Airlines operates narrowbody aircraft to Singapore but is for now only a relatively small player in the Singapore market, with 37 weekly return flights.

The new terminal, which is already 70% complete, is designed to handle up to 16 million passengers per annum. The four airline groups that have so far committed to T4 carried almost seven million passengers to and from Singapore in 2014, including almost four million for AirAsia.

The terminal will likely open operating at about 50% capacity and spool up in phases as more airlines are added. Additional narrowbody operators will eventually be needed but AirAsia will undoubtedly be the largest tenant.

Singapore is a critical market for AirAsia

While Changi clearly needed AirAsia to commit to T4, AirAsia should also be able to benefit from being the anchor tenant of a new terminal in a strategically important market. Changi is AirAsia Group’s third largest airport after Kuala Lumpur International (KUL) and Bangkok Don Mueang (DMK), which are the main hubs for Malaysia AirAsia and Thai AirAsia.

AirAsia currently has a bigger operation in Singapore than several of its hubs, including Kota Kinabalu (BKI), Jakarta (CKG), Manila (MNL), Penang (PEN), Kuching (KCH) and Bali (DPS).

AirAsia Group top 10 hubs or destinations based on seat capacity: 20-Jul-2015 to 26-Jul-2015

AirAsia now treats Singapore entirely as a destination but has previously looked at introducing its Fly-Thru connecting product at Changi. Currently Fly Thru is available in Kuala Lumpur, Bangkok, Jakarta, Bali and Kota Kinabalu.  

See related report: AirAsia and AirAsia X to exceed 3 million Fly-Thru transit passengers in 2014 as model evolves

AirAsia could use T4 as a transfer hub

Using T4 for transit traffic would be sensible as it is a relatively small terminal, making connections fast and simple. Connections with flights at other Changi terminals will be more complicated because T4 will only be connected with the existing terminals by bus. But the current AirAsia strategy does not envision pursuing connectivity with any carrier outside the AirAsia family.

A transit product could enable AirAsia to unlock further growth as Singapore is a relatively mature market. It could also allow AirAsia to compete more effectively against Jetstar Asia and Tigerair, which are increasing their focus on transit traffic.

AirAsia’s Singapore operation will never rely heavily on transit traffic as Singapore will not achieve the same breadth and frequency of connections that AirAsia is able to offer via Kuala Lumpur and Bangkok. But it could provide valuable incremental traffic and revenue, particularly as Changi is incentivising growth in transit passengers.

By making its commitment now, AirAsia will be able to put its stamp on T4, strengthening its brand in the key Singapore market. Growth is hardly guaranteed as the market remains highly competitive. But over time there should be opportunities to expand, applying AirAsia's strategy of route dominance.

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