04-Mar-2014 2:54 PM

As many as 10 Southeast Asian LCCs are poised to enter Australia, further pressuring incumbents

Analysis

Australia is close to attracting service by the end of 2014 from at least three new Southeast Asian carriers. Up to 10 Southeast Asian carriers, including five from Indonesia alone, could launch services to Australia by the end of 2016.

The new entrants, along with continued expansion from the 20 carriers already operating scheduled flights flights between Australia and Southeast Asia, will impact a market that is already suffering from overcapacity. Further reduction in fares will likely result, particularly as all but one of the potential new entrants are low-cost carriers.

The new competition poses yet another new challenge for the Qantas Group, which is struggling to compete in the Australia-Asia market. Other full service airlines - including Singapore Airlines (SIA), Garuda, Malaysia Airlines (MAS) and Thai Airways - will also have to adjust plans as the Australia-Southeast Asia market sees further significant increases in the LCC penetration rate beyond the current 30%.

Summary

Australia is attracting service from at least three new Southeast Asian carriers by the end of 2014.
Up to 10 Southeast Asian carriers, including five from Indonesia alone, could launch services to Australia by the end of 2016.
The new competition will impact a market that is already suffering from overcapacity, leading to further reduction in fares.
The new competition poses a challenge for the struggling Qantas Group in the Australia-Asia market.
The number of Indonesian carriers serving Australia will likely increase to six or seven over the next two to three years.
The Australia-Southeast Asia market is already dominated by Asian airlines, accounting for almost 70% of the market.

Asian airlines already account for almost 70% of Australia-Southeast Asia market

There are currently 20 carriers offering over 600 weekly return frequencies and about 344,000 weekly return seats between Australia and Southeast Asia, according to CAPA and OAG data. Capacity over the past year is already up about 17%, pressuring yields and load factors. Profitability in the market also has been impacted by the depreciation of the Australian dollar.

Four of the 20 carriers operating non-stop services between Australia and Southeast Asia are Australian - Qantas, Jetstar Airways, Virgin Australia and small regional carrier Airnorth - and account for about 23% of total seat capacity in the market. Two carriers are from the Middle East - Qantas partner Emirates and Virgin Australia partner Etihad - and one is from Europe, British Airways.

The remaining 13 carriers competing in the Australia-Southeast Asia market are from Southeast Asia and account for about 69% of total seat capacity. This includes five carriers from Singapore, two each from Malaysia and Indonesia and one each from the Philippines, Thailand, Vietnam and Brunei.

Over the next two to three years the number of Indonesian carriers serving Australia will likely increase to six or seven. A second Thai, Philippine and Vietnamese carrier could also join the mix - plus possibly a third from Thailand and a third from Malaysia.

Australia-Southeast Asia capacity (seats) and capacity share (% of seats) by carrier: 3-Mar-2014 to 9-Mar-2014

Rank	Airline/Country of origin			Total Seats	Capacity share
1	SQ	Singapore Airlines	Singapore	68,736	20%
2	D7	AirAsia X	Malaysia	40,716	12%
3	MH	Malaysia Airlines	Malaysia	40,442	12%
4	JQ	Jetstar Airways	Australia	30,622	9%
5	QF	Qantas Airways	Australia	29,532	9%
6	TG	Thai Airways	Thailand	21,324	6%
7	EK	Emirates	UAE	20,720	6%
8	GA	Garuda Indonesia	Indonesia	18,510	5%
9	VA	Virgin Australia	Australia	17,384	5%
10	QZ	Indonesia AirAsia	Indonesia	12,960	4%
11	TZ	Scoot	Singapore	10,892	3%
12	VN	Vietnam Airlines	Vietnam	7,448	2%
13	3K	Jetstar Asia	Singapore	4,680	1%
14	PR	Philippine Airlines	Philippines	4,590	1%
15	BI	Royal Brunei Airlines	Brunei	3,990	1%
16	EY	Etihad Airways	UAE	3,598	1%
17	BA	British Airways	UK	3,486	1%
18	TR	Tigerair	Singapore	3,240	1%
19	TL	Airnorth	Australia	1,368	<1%
20	MI	SilkAir	Singapore	512	<1%

Southeast Asia-Australia market could reach 500,000 weekly return seats by 2017

The prospect of up to 10 new entrants is staggering, bringing the total number of carriers in the market to 30 including 23 from Southeast Asia. These new entrants will not account for a huge portion of the total market - they will likely operate 15 to 20 services providing very roughly 100,000 weekly return seats, equivalent to approximately a 20% share. But as nine are LCCs they will have a profound impact on fares, stimulating demand while once again challenging the legacy incumbents.

Several of the existing players in the market are also expected to add more capacity, particularly the existing LCCs but also to some extent the full-service operators. The existing players could easily expand capacity by another 15% to 20% over the next two to three years, bringing total capacity in the market to over 500,000 weekly return seats (including the 100,000 seats from new entrants), which would be about 45% above current levels. The roughly 50,000 additional seats from existing players is a relatively conservative figure and assumes some of the weaker existing players will make reductions or even exit the market.

Australia-Southeast Asia potential new entrants

Carrier	Country	Most likely Initial route	Aircraft type	Most likely launch year	Potential subsequent route
Cebu Pacific	Philippines	Manila-Sydney	A330-300	2014	Manila-Melbourne
Indonesia AirAsia X	Indonesia	Bali-Melbourne	A330-300	2014	Bali-Sydney
Citilink	Indonesia	Bali-Perth	A320	2014	Bali-Darwin
Batik Air	Indonesia	Bali-Perth	737-800	2015	Bali-Brisbane
Thai AirAsia X	Thailand	Bangkok-Melbourne	A330-300	2015	Bangkok-Sydney
NokScoot	Thailand	Bangkok-Sydney	777-200	2015	Bangkok-Perth
VietJet Air	Vietnam	Ho Chi Minh-Sydney	A330-300	2015/16	Ho Chi Minh-Melbourne
Tigerair Mandala	Indonesia	Bali-Perth	A320	2015/16	Jakarta-Perth
Malindo Air	Malaysia	Kuala Lumpur-Perth	737-900ER	2015/16	Kuala Lumpur-Darwin
Lion Air	Indonesia	Jakarta-Perth	737-900ER	2016	Lombok-Perth

The highest volume of new entrant activity is likely to take place in the Australia-Indonesia market. Indonesia is the third largest Southeast Asian market from Australia (after Singapore and Malaysia) but has huge growth potential along with the broader Indonesian international market. Indonesia will continue to be a popular and growing holiday destination for Australians while Australia's airports and tourism authorities are also keen to start tapping into the rapid economic growth in Indonesia, which is creating a new middle class with discretionary income levels sufficient to support travel abroad.

Citilink to be first in a wave of new Indonesian airlines serving Australia

Indonesia is poised to see at least three carriers enter the Australia market, starting in 2H2014 with Garuda budget subsidiary Citilink and start-up Indonesia AirAsia X. Batik Air plans to follow in late 2015 as well as potentially its parent Lion Air. If it can survive its current restructuring, Tigerair Mandala is another potential carrier for the fast-growing Australia-Indonesia market, lifting the total number of carriers in the market to 10 (includes seven from Indonesia and three from Australia).

As CAPA first reported in Feb-2014, Citilink has selected Perth as one of its initial four international destinations. Citilink currently only operates domestic services but is planning to launch international services in 2014, initially to Malaysia (Johor Bahru followed by Kuala Lumpur) and later in the year Singapore and Perth.

Citilink, which operates an all-A320 fleet in single-class 180-seat configuration, plans to serve Perth from Bali. An initial schedule of one or at most two daily flights is likely but expansion is possible given the huge size of the Perth-Bali market. For example market leader Indonesia AirAsia currently serves the Perth-Bali market with 32 weekly return frequencies. Perth-Bali is also served by Virgin Australia (nine weekly flights), Garuda (10 weekly flights) and Jetstar Airways (17 weekly flights).

Smaller Australian routes are also medium-term possibilities for Citilink including Bali-Darwin and Perth to other Indonesian holiday destinations such as Lombok. (Jetstar became the first carrier to serve the Perth-Lombok market in 2013).

Citilink is less likely to serve Australia from Jakarta as this is more of a business route and it does not plan to overlap in the international market with full-service parent Garuda. As Citilink does not have any widebody aircraft (at least for now), service to the main Australian cities of Melbourne and Sydney are also not likely.

Indonesia AirAsia X to provide new long-haul low-cost option for Australian consumers

Bali-Melbourne and Bali-Sydney are two targets for Indonesia AirAsia X, the new affiliate of Malaysia-based AirAsia X. Indonesia AirAsia X aims to commence services in 2H2014 with an initial fleet of two A330-300s operating to Australia and North Asia.

Indonesia AirAsia X has not yet announced any routes but Melbourne and Sydney are logical as they are already served twice daily from Kuala Lumpur by its sister carrier. Indonesia AirAsia X would compete against Jetstar, Virgin Australia and Garuda on the Bali-Melbourne and Bali-Sydney routes.

Adelaide and Gold Coast are also possibilities for Indonesia AirAsia X as they are also served from Kuala Lumpur by AirAsia X but would probably not be the initial priorities. AirAsia X also serves Perth from Kuala Lumpur but Bali-Perth will instead continue to be served by Indonesia AirAsia as Bali-Perth is slightly below the four-hour cut-off which generally separates the AirAsia and AirAsia X franchises.

Bali-Brisbane is not a likely route for Indonesia AirAsia X as the carrier plans to consider destinations already served by its Malaysia sister, which serves Gold Coast instead of Brisbane. But Bali-Brisbane is one of two Australia routes initially targeted by Lion Air full-service subsidiary Batik Air.

Batik and parent Lion could later enter Australia-Indonesia market

As CAPA recently reported, Batik plans to launch Australia services in late 2015, starting with Bali-Perth and followed by Bali-Brisbane. Bali-Brisbane is a less competitive route as it is currently only served by Virgin Australia and Garuda, which only entered the market in 2013.

Batik's parent, Lion Air, has also previously expressed interest in serving the Australian market. Lion has so far delayed consideration of Australian routes as it is not certain it can secure approval at this point from the Australian regulator, the Civil Aviation Safety Authority (CASA). But as Lion continues to work on improving its operation and standards this becomes less of an issue.

Batik going through the CASA approval process will also make it easier for Lion if it decides to also serve the Australian market using its main low-cost brand. With a fast-growing fleet of over 100 aircraft, Lion will at some point need to spread its wings to its southern neighbour.

Perth is also the most likely potential Australian destination for Lion unless and until the carrier decides to acquire new widebody aircraft. Lion in 2012 ordered five 787s, which were intended for Batik, but the group recently decided to cancel the order and is now looking at other widebody types.

Under its current all-narrowbody strategy, the Lion Group prefers to use Batik to operate longer medium-haul routes. Batik could potentially even serve Melbourne and Sydney from Bali once it takes A320neos or 737 MAX aircraft, which come with significantly improved range over the current generation A320s and 737-800/900s. But Batik is not likely to launch long narrowbody routes such as Bali-Melbourne or Bali-Sydney until at least 2016 or 2017, at which point it may be operating new-generation narrowbody aircraft (depending on how the group allocates its future fleet between affiliates).

Tiger may also look to enter Australia-Indonesia market

Tigerair Mandala could also potentially enter the Bali-Perth route as the Tigerair Group looks to continue connecting the dots in its Asia-Pacific network. Tigerair Singapore now serves Perth while Tigerair Mandala recently opened Bali-Hong Kong, which is a longer sector than Bali-Perth.

But the Tigerair Group also has the option of using Tigerair Australia, which is now 60% owned by Virgin Australia, to enter the Bali-Perth market. Tigerair Australia for now is entirely focused on domestic operations but is expected to consider international services in the medium to long term.

There has already been about a 35% increase in seat capacity between Australia and Indonesia over the past year to about 34,000 one-way seats currently, according to CAPA and OAG data. Garuda has been the fastest carrier to expand, growing capacity by almost 50% year-over-year as it launched Jakarta-Perth, Bali-Brisbane and increased capacity on several of its existing Australian routes. But Jetstar, Indonesia AirAsia and Virgin Australia also have expanded in the market over the past year. Only Qantas' capacity has been flat (the Australian flag carrier only serves one Indonesian route, Sydney-Jakarta).

Garuda and Jetstar now share the lead in the Indonesia-Australia market with 27% capacity shares. Virgin Australia has a 23% share and AirAsia has a 19% share, although both only use narrowbody aircraft in the market. Qantas has only a 3% share.

Australia to Indonesia route total (one-way seats per week): 19-Sep-2011 to 7-Sep-2014

Cebu Pacific ready to shake up Australia-Philippines market

In the much smaller Australia-Philippines market, there is only one prospective new entrant - Cebu Pacific - but the impact could be significant as the LCC plans to use its new widebody unit to serve Australia. Cebu Pacific recently took delivery of its third 436-seat A330-300 and plans to add two more by the end of 2014.

As previously reported by CAPA, Cebu Pacific plans to launch A330-300 service by the end of 2014 from Manila to Melbourne or Sydney. An initial schedule of five weekly frequencies is expected but the carrier aims to eventually operate a daily service.

See related reports:

Over the medium term Cebu Pacific could operate daily services to both Melbourne and Sydney. Cebu Pacific currently only has enough capacity entitlements for five weekly A330 flights but is hopeful the Australia-Philippine bilateral will be expanded, allowing for a daily service to its first Australian destination and eventually also a daily service to a second destination.

The Australia-Philippines market is now relatively under-served with only 11 weekly flights from Philippine Airlines (four to Darwin with continuing service to Brisbane, four to Sydney and three to Melbourne) and four from Qantas (from Sydney). Jetstar is pulling out of the market at the end of Mar-2014 as it drops its four times per week Darwin-Manila service, leaving the Australia-Philippines market without any LCC player.

Unlike other Australia-Southeast Asia markets, one-stop products between Australia and the Philippines are relatively circuitous. Cebu Pacific should be able to stimulate demand in the inbound leisure market, catering to Australians looking for new places to holiday, and in the visiting friends and family sector, catering to Filipinos living in Australia. But legacy carriers PAL and Qantas will be impacted.

Australia to Philippines route total (one-way seats per week): 19-Sep-2011 to 7-Sep-2014

Thai AirAsia X and NokScoot will likely consider Australia - eventually

Only new entrants from the Philippines and Indonesia are expected to enter the Australia-Southeast Asia market in 2014. But in 2015 (or 2016) they could potentially be joined by carriers from Thailand, Malaysia and Vietnam.

In Thailand, two new long-haul low-cost carriers are preparing to commence operations in 2014 - Thai AirAsia X in 2Q2014 followed by NokScoot in 2H2014. Both new carriers are initially planning to only serve the Thailand-North Asia market. But it is logical for both to consider Australia in 2015 or 2016 as part of a second phase of their network build-ups.

The Australia-Thailand market is currently served by Thai Airways, Qantas, Jetstar and Virgin Australia. Jetstar only serves Melbourne-Bangkok, Melbourne-Phuket and Melbourne-Bangkok, leaving several markets without any non-stop LCC product including Bangkok to Sydney, Brisbane and Perth.

Thai AirAsia X and NokScoot will be both based in Bangkok while Sydney and Perth are already served by their sister carriers in Malaysia and Singapore respectively. While the two carriers prefer to initially focus on North Asia, they are expected to eventually look at Australia as they expand.

VietJet could serve Australia with new A330 fleet

In Vietnam, Australia could become an option for VietJet as the fast-growing LCC expands into the long-haul operations. VietJet currently operates 10 A320s with 63 A320 family aircraft on order with Airbus but the carrier has also been discussing acquiring A330s - both from the manufacturer and from leasing companies.

As in the case with Thailand's new long-haul LCCs, Australia is not in VietJet's initial network plan for its potential long-haul operation. VietJet instead initially plans to target the Vietnam-Russia market, including services from Vietnamese beach resort Nha Trang. Nha Trang has emerged as a popular holiday spot for Russians and Vietnam-Russia is a growing market that VietJet's parent company is familiar with given its other businesses. There are already charter flights connecting Nha Trang and several Russian cities.

If VietJet moves forward with its A330 plan, becoming the fifth long-haul LCC in Asia-Pacific, Australia would be a natural second market after Russia for the new widebody operation. Australia after all will soon be served by all four of the region's long-haul LCCs - Jetstar, Asia, X, Scoot and (starting later this year) Cebu Pacific.

The Australia-Vietnam market is currently only served non-stop by Vietnam Airlines as Jetstar Airways stopped serving Ho Chi Minh in early 2012. The market could be stimulated with a low fare entrant. As in the case with the Australia-Philippines market, there is huge potential to grow Australia as a source market for the Vietnamese tourism sector and to cater to Australia's large Vietnamese community.

Malaysia's Malindo could be the 10th new Southeast Asian airline for Australia

In Malaysia there is the potential of service to Australia from Lion affiliate Malindo. The hybrid carrier has opened over the last few months several new medium-haul international routes in South Asia and plans to begin serving North Asia by the end of 2014. Perth would also be within range of its 737NGs.

Australia-Malaysia however has become an intensely competitive market as AirAsia X has nearly doubled capacity to Australia over the last year while MAS also has expanded capacity year-over-year by about 40%, according to CAPA and OAG data.

Australia to Malaysia route total (one-way seats per week): 19-Sep-2011 to 7-Sep-2014

The Australia-Malaysia and Australia-Singapore markets are particularly now suffering from overcapacity. While SIA capacity has been relatively flat over the last year, it expanded by about 20% between Mar-2012 and Mar-2013. Its long-haul low-cost subsidiary Scoot also launched services to Australia during this period, initially launching Sydney and Gold Coast from mid-2012. Scoot added a third Australian destination, Perth, in late 2013.

Qantas has in theory cut its Australia-Singapore capacity over the last year as a result of moving the stopover of its London flights to Dubai, but the number of seats available to the local Australia-Southeast Asia market increased significantly as previously a large portion of its Australia-Singapore seats were set aside for passengers continuing to Europe.

Qantas and Scoot make capacity adjustments. Will others follow?

Qantas and Scoot are now making some adjustments, a reflection of the overcapacity in the Australia-Singapore market. Qantas recently decided to drop Perth-Singapore, a route it already reduced in 2013 from two to one daily flight. Other cuts for Qantas are likely.

Scoot for now is only making temporary reductions, with Sydney cut from daily to five weekly flights from early Mar-2014 to late Jun-2014 and Gold Coast being reduced from five to four weekly flights from early Mar-2014 to early Jun-2014. Perth will continue to be operated with five weekly flights with the exception of a brief reduction to four weekly flights in May-2014.

The reductions at Scoot are expected to be temporary as the carrier is overall bullish on Australia. Its Australia routes are expected to be among the first to transition to 787s when Scoot takes its first 787-9 in late 2014. Over the medium to long term more destinations in Australia are possible along with the increase of Gold Coast and Perth to daily. The delivery of smaller 787-8s in mid-2015 in particular will give Scoot the flexibility to increase Gold Coast and Perth to daily and launch potentially new thin routes to Australia.

Australia also remains a strategically important market for SIA, which is the market leader in the Australia-Southeast Asia market with a 20% share of total capacity. But with market conditions souring in recent months SIA is not likely to increase mainline capacity to Australia in the near term.

The Australia-Malaysia market will also not likely see significant capacity increases in the near term. AirAsia X's network plan for 2014 only includes increasing Adelaide, which was launched in Oct-2013 with four weekly flights, to daily. The carrier already introduced in 2013 second daily frequencies to Melbourne, Sydney and Perth and upgraded Gold Coast to daily.

MAS, meanwhile, added in late 2013 a third daily flight to Melbourne and Sydney. All the additional capacity has impacted yields between Australia and Malaysia and in the broader Australia-Asia market as both MAS and AirAsia X also compete aggressively on price in one-stop markets. AirAsia X recently reported that its EBITDAR operating profit on Australia routes dropped by 12ppt in 4Q2013 from 18% to 6% as its revenue per ASK to/from Australia dropped by 24% year-over-year.

Southeast Asian airlines to push more Australia-North Asia connections

AirAsia X is aiming to improve its Australia performance in 2014 by increasing traffic between Australia and North Asia. The carrier estimates it accounted for 10% of the Australia-North Asia one-stop market in 2013 and is aiming to increase this to 20%. As Australia-North Asia remains relatively under-served compared to Australia-Southeast Asia, several other Southeast Asian carriers will also likely try to push more connections to North Asia.

The Southeast Asian carriers serving Australia can also try to promote more regional connections with Southeast Asia as well as medium-haul connections to South Asia and long-haul connections to Europe. But all these markets have become fiercely competitive.

With the Australia-Southeast Asia market likely to see another surge of capacity, led this time by a flood of new entrants, there will be even more carriers fighting over the same pie. Competition will become even fiercer, further pressuring yields.

There are huge opportunities, particularly for LCCs, despite the challenges

There are still opportunities to stimulate more demand in the Australia-Southeast Asia market. Significant levels of demand have already been stimulated in recent years as Australia has benefitted from the expansion of the long-haul LCC model in Asia-Pacific. But there are still more opportunities to stimulate the Australia-Southeast Asia market further as the LCC penetration rate continues to inch up from the current 30%.

LCCs now account for nearly 60% of capacity within Southeast Asia. While 60% would be an extremely high figure for a medium-haul market, as Asia's LCCs add more widebodies and as the range of narrowbody aircraft increase the Australia-Southeast Asia market could potentially see an even 50/50 LCC/FSC split. This would spell a major balance shift in market dynamics.

Airports and tourism authorities will welcome the latest wave of Asian LCCs with open arms. The Australia-Indonesia and Australia-Philippines markets are particularly poised to benefit, with Indonesian and Philippine LCCs planning to enter Australia by the end of 2014.

The impact on the legacy carriers in the Australia-Southeast Asia market will be profound - as has been the case as AirAsia X has rapidly expanded, capturing a 12% share, second largest after SIA. With Qantas struggling and its long-haul low-cost unit Jetstar also now deferring plans for fleet expansion, the group's market share in the Australia-Southeast Asia market almost certainly will continue to fall from the current 19%.

This is not a mere passing fashion. There will be no turning back as the Australian international market opens up to more and more new entrants. Painful overcapacity may result on some routes and some airlines will have to make adjustments. But ultimately Australia's tourism sector, airports and consumers will benefit - and the incumbents will be forced to adapt, with the more innovative ones even potentially benefitting from the changes and the growth.

Background Information

Australia to Southeast Asia route total (one-way seats per week): 19-Sep-2011 to 7-Sep-2014