02-May-2013 8:00 AM

Cambodia Angkor Air plans network and fleet expansion ahead of PAL-backed Cambodia Airlines launch

Analysis

Cambodia Angkor Air is planning rapid fleet and network expansion as competition intensifies in the Cambodian market. The Cambodian flag carrier is expected to more than double its fleet by the end of 2015 and launch services to several new markets, including mainland China, Hong Kong, India and South Korea. Cambodia Angkor Air was established in 2009 as a joint venture with Vietnam Airlines but remains one of the smallest flag carriers in Southeast Asia, only operating domestically and to two neighbouring countries.

Cambodia Angkor Air has already seen its most dramatic expansion in its four-year history, launching three international routes over the last six months. Further rapid expansion of Cambodia Angkor Air and the planned launch of a second Cambodian scheduled carrier that will be affiliated with Philippine Airlines (PAL) should lead to more rapid growth in the Cambodian market. The Cambodian passenger market grew by 18% in 2012 and by 21% in 1Q2013, based on figures from Cambodia Airports.

Summary

Cambodia Angkor Air plans to double its fleet by the end of 2015 and expand its network to include mainland China, Hong Kong, India, and South Korea.
The airline currently has a small market share in Cambodia, accounting for only 15% of international capacity.
Cambodia Angkor Air is the smallest flag carrier in Southeast Asia based on fleet size and the second smallest based on seat capacity.
The airline is targeting rapid expansion in the domestic and short-haul international markets, with plans to add more ATR 72s and A321s to its fleet.
Cambodia Angkor Air faces competition from other carriers in the Bangkok-Phnom Penh and Bangkok-Siem Reap routes.
The airline is looking to tap into the growing tourism markets in China, South Korea, and India.

Cambodia Angkor Air looks to catch up with ASEAN peers

Cambodia Angkor Air currently accounts for only 15% of international capacity in Cambodia, lower than the home market penetration of any Southeast Asian flag carrier. It is also the smallest of Southeast Asia's flag carriers based on fleet size and the second smallest based on seat capacity.

Southeast Asia's flag carriers ranked by weekly seat capacity and fleet size: as of 1-May-2013

Rank	Carrier	Weekly seats	Number of aircraft	% of international seat capacity in home market
1.	Singapore Airlines	546,000	126	40%
2.	Malaysia Airlines	538,000	133	29%
3.	Thai Airways	532,000	103	30%
4.	Garuda Indonesia	478,000	88	16%
5.	Vietnam Airlines	385,000	83	39%
6.	Philippine Airlines	298,000	65	24%
7.	Lao Airlines	32,000	21	43%
8.	Royal Brunei Airlines	29,000	10	72%
9.	Cambodia Angkor Air	22,000	5	15%
10.	Myanmar Airways International	15,000	7	16%

Cambodia Angkor Air currently operates a fleet of three A321s and two ATR 72s to only three domestic and three international destinations. It has a smaller share of capacity in Cambodia's international market than close partner and shareholder Vietnam Airlines. Its 15% share is also only slightly larger than the 11% share from Bangkok Airways and AirAsia.

Cambodia international capacity share (% of seats) by carrier: 29-Apr-2013 to 5-May-2013

Cambodia Angkor Air's international network has traditionally been limited to connecting Cambodia's two major airports, Phnom Penh and Siem Reap, with Vietnam's two main cities, where it can leverage the much larger network of partner Vietnam Airlines. It added Phnom Penh to Hanoi service in Jan-2013, giving it four routes between Cambodia and Vietnam.

Bangkok was finally made the carrier's first international destination outside Vietnam, with service from Siem Reap to the Thai capital launching in Nov-2012. Phnom Penh-Bangkok service was added in Feb-2013. Cambodia Angkor Air now serves the Siem Reap-Bangkok market with two daily ATR 72s flights, which will increase two three daily frequencies at the beginning of Jul-2013, and Phnom Penh-Bangkok with one daily A321 flight.

Several new destinations and more domestic capacity planned as fleet expands

Cambodia Angkor Air is targeting mainland China, Hong Kong, India and South Korea for the next phase of its expansion plan. Most of these destinations will likely be added in 2014 and 2015 as the carrier prepares to double the size of its A321 fleet from three to six aircraft.

Some North Asian routes could be potentially launched in 2H2013 as Cambodia Angkor Air is currently under-utilising its fleet of three A321s, which are sourced from Vietnam Airlines and are still registered in Vietnam. The carrier now only operates four to five daily flights using its A321 fleet.

The carrier's 2013 network plan includes new services to Shanghai and Guangzhou in China and Seoul and Busan in South Korea. But adding all four destinations, which would more than double the size of its international network, in 2H2013 could be a stretch even if the carrier increases utilisation of its A321 fleet.

The traditional under-utilisation of Cambodia Angkor Air's fleet has been driven by the partial use of the same aircraft by Vietnam Airlines. But the carrier and the Cambodian Government have been keen for some time to transition to a dedicated fleet. Future aircraft, including some of the additional A321s and ATR 72s in the carrier's fleet plan, could be acquired independently.

For 2013, Cambodia Angkor Air is planning to focus on expanding its ATR 72 fleet, with one additional turboprop for a total of three. This will enable the carrier to expand domestically and add capacity on short-haul international routes.

Further domestic and short-haul international expansion is expected in 2014 and 2015 as Cambodia Angkor Air plans to add three more ATR 72s for a total of six. Its new three-year fleet plan envisions a fleet of six ATR 72s and six A321s by the end of 2015. Two ATR 72s and two A321s are slated to be added in 2014, followed by one more of each type in 2015.

The carrier has filed a significantly increased ATR schedule for Jul-2013, featuring 13 daily turboprop frequencies. This includes seven domestic flights, three Siem Reap-Bangkok flights and three Siem Reap/Phnom Penh-Ho Chi Minh flights. (Cambodia Angkor Air currently uses a mix of ATR 72s and A321s from Phnom Penh and Siem Reap to Ho Chi Minh.)

Cambodia Angkor to increase Siem Reap-Phnom Penh ahead of Cambodia Airlines launch

Domestically Cambodia Angkor Air is planning to upgrade the Siem Reap-Phnom Penh route to six daily flights from the beginning of Jul-2013, according to Innovata data. Traditionally the carrier has operated three to four daily flights on the route, depending on the time of the year. But in late 2012 Cambodia Angkor Air increased Siem Reap-Phnom Penh service to 32 weekly flights and during Feb-2013 and Mar-2013 this was increased further to 35 weekly frequencies. A reduced schedule is being operated throughout 2Q2013, including just three daily flights in May-2013 and Jun-2013, before the increase to six daily flights is implemented at the beginning of Jul-2013.

The prospect of new competition in the domestic market is likely driving the decision to go to six daily flights on the Siem Reap-Phnom Penh route and expand the ATR 72 fleet, which seat 67 passengers in single-class configuration. Start-up Cambodia Airlines is planning to operate domestic services between Phnom Penh and Siem Reap as part of its initial network.

Philippine Airlines (PAL) parent the San Miguel Group and large Cambodian conglomerate the Royal Group unveiled plans in early Apr-2013 to establish Cambodia Airlines. San Miguel will have a 49% stake in the start-up, matching the 49% stake Vietnam Airlines has in Cambodia Angkor Air. Cambodia Airlines will also likely follow a similar model to Cambodia Angkor Air, drawing expertise and leasing aircraft from PAL.

Cambodia Airlines is reportedly preparing to launch services in 3Q2013, with domestic routes to be operated for a few months prior to expanding into the international market. The new carrier is planning to operate domestically using Bombardier Dash 8 turboprops.

PAL sister carrier PAL Express currently operates a fleet of five 70-seat Dash 8-400 and four 50-seat Dash 8-300 turboprops, according to the CAPA Fleet Database. Most of these aircraft are owned by PAL. Two of these turboprops will likely to be moved to Cambodia Airlines.

Cambodia Angkor Air finally increases capacity to Sihanoukville

Cambodia Airlines is also planning to serve the Cambodian coastal town of Sihanoukville and is considering other smaller domestic destinations which currently do not have any scheduled service. Cambodia Angkor Air currently only serves Sihanoukville with three weekly flights on a Siem Reap-Sihanoukville-Phnom Penh-Siem Reap routing.

Daily service from Siem Reap to Sihanoukville is now slated to start at the beginning of Jul-2013, according to Innovata data. From Sihanoukville, Cambodia Angkor Air is slated to offer four non-stop weekly flights to Siem Reap while continuing the three existing frequencies via Phnom Penh.

The decision to implement a daily service to Sihanoukville could be seen as a response to Cambodia Airlines. Sihanoukville's emerging tourism sector and Vinci-owned Cambodia Airports have been clamouring for more capacity in response to high demand since Dec-2011, when Cambodia Angkor Air began serving Sihanoukville. Cambodia Airports operates all three of Cambodia's commercial airports and opened Sihanoukville in 2007.

Load factors have been high to and from Sihanoukville but the carrier delayed several times implementing plans to make the service daily. With a monopoly in the domestic market and as the only carrier operating scheduled services to Sihanoukville there was previously little incentive for Cambodia Angkor Air to add capacity or launch new routes at Sihanoukville. The planned launch of Cambodia Airlines has changed the situation significantly.

While Sihanoukville has not seen significant growth and remains undeveloped, Siem Reap has emerged as a major tourism destination with some of the fastest growth figures in Southeast Asia. Siem Reap recorded 22% passenger growth in 2012 to 2.2 million. In 1Q2013, the airport saw further growth of 26% to over 700,000 passengers.

Siem Reap monthly passenger traffic: Jan-2011 to Mar-2013

The Cambodian capital Phnom Penh, which attracts a more even mix of business and leisure passengers, also has seen rapid albeit slightly more modest growth. Phnom Penh recorded 13% growth in 2012 to 1.8 million passengers and growth of 14% in 1Q2012 to over 500,000 passengers.

Phnom Penh monthly passenger traffic: Jan-2011 to Mar-2013

China and South Korea markets provide opportunity for Cambodian airlines

The rapid growth in Cambodia's market over the last two years has been driven partially by a large influx of tourists from throughout China. Cambodia Angkor Air and Cambodia Airlines, which is also planning to serve the international market with A321s, are both targeting potential destinations in China.

Two Chinese carriers, China Eastern and China Southern, currently operate scheduled services to both Phnom Penh and Siem Reap. But the China-Cambodia market is mainly now served by charters. Several Chinese carriers operate charters to Cambodia. China is also the main market for Cambodian charter carrier TonleSap Airlines.

The Cambodia-China market is large enough to potentially support scheduled services from Cambodia Angkor Air and Cambodia Airlines. But both carriers will need to secure strong support from Chinese travel agents as most of the Chinese visit Cambodia as part of packages.

Cambodia Angkor Air is initially targeting service to Guangzhou and Shanghai, markets already served by China Southern and China Eastern. There should be sufficient demand to potentially support service to several mainland Chinese destinations.

Hong Kong is also part of a planned future network for Cambodia Angkor Air with service targeted to begin in 2014. Cathay Pacific regional subsidiary Dragonair currently serves Phnom Penh from Hong Kong but currently no carriers operate non-stop scheduled flights between Hong Kong and Siem Reap.

South Korea is another large and growing source for tourists in Cambodia, although does not quite have the huge growth potential of China. Asiana and Korean Air both currently serve Siem Reap as well as Phnom Penh (primarily from Seoul but Korean also operates Busan-Siem Reap). Cambodia Angkor Air's network plan includes both Busan and Seoul with service potentially launching by the end of 2013.

Korean carriers including Eastar Jet also operate charters to Cambodia while Cambodian charter carrier SkyWings Asia Airlines serves the Siem Reap-Seoul route. Cambodia Angkor Air previously operated charters between Siem Reap and Seoul, making the market less risky as the carrier looks to add scheduled services in the market.

Like China, a large proportion of the tourists coming from South Korea buy package deals. As a result Cambodia Angkor Air will need to forge close relationships with Korean agencies to make the route viable.

India potentially poses a bigger risk as there are currently no services between Cambodia and India. But low frequency services from Mumbai and or Delhi could be viable as India has the potential to develop as a big source market for Cambodia's tourism sector.

Cambodia Angkor Air faces its biggest test yet

For nearly its entire life Cambodia Angkor Air had not been tested by competition as it has been the only carrier in the domestic market and partner Vietnam Airlines has generally been the only other carrier serving its international routes. Cambodia Angkor Air has benefitted significantly on its Vietnamese routes from its close relationship with Vietnam Airlines. As CAPA previously reported:

The two carriers have such a close relationship the two can essentially be viewed as one. Not only do the two carriers have a comprehensive codeshare arrangement, Vietnam Airlines has traditionally owned or leased all of the Cambodian carrier's aircraft and have rotated the aircraft between the Vietnam Airlines and Cambodia Angkor Air networks. The two carriers combined dominate Cambodia's largest international market, Vietnam.

It is unclear if the four additional ATR 72s and three additional A321s in Cambodia Angkor Air's three year fleet plan will also be sourced from Vietnam Airlines. The carrier could potentially lease aircraft directly from leasing companies or buy second hand aircraft. But Cambodia Angkor Air will almost certainly continue to have a very close relationship with Vietnam Airlines, which has always had a significant role in managing the Cambodian carrier.

Cambodia Angkor Air was established with USD100 million in capital from its two shareholders - Vietnam Airlines and the Cambodian Government. There has been no recapitalisation since the initial tranche of funds. The carrier likely now has a slightly higher cash position than USD100 million as it has been profitable every year, cashing in on its monopoly position.

Cambodia Angkor Air is reportedly budgeting small losses for 2013 and 2014 as it incurs costs for entering new markets and does not expect its new routes to immediately be profitable. Unlike the routes to Vietnam it relied on during its first three plus years, the carrier's two new Bangkok routes as well as its potential routes to Hong Kong, mainland China and South Korea are all competitive.

Competition in Cambodia-Thailand market is intense

Cambodia Angkor Air now competes with Bangkok Airways, Thai Airways and Thai AirAsia on the Bangkok-Phnom Penh route. The Cambodian carrier has been offering promotional tickets starting at only USD50 excluding taxes for return tickets on the Bangkok-Phnom Penh route.

While Bangkok-Phnom Penh is a big market, it is a challenging route for Cambodia Angkor Air given it does not have a well known brand outside Cambodia and it cannot leverage off Vietnam Airlines like it has in the Ho Chi Minh and Hanoi markets. The Bangkok-Phnom Penh market also consists mainly of passengers originating in Thailand.

Competition is less intense between Bangkok and Siem Reap as it is currently only served by Bangkok Airways and Cambodia Angkor Air. Cambodia Angkor Air return tickets on the route start at USD120 excluding taxes, highlighting the relatively low level of competition compared to Bangkok-Phnom Penh.

Cambodia Angkor Air's rapid increase in capacity between Bangkok and Siem Reap indicates the market has likely been initially successful. After launching with one daily flight at the end of Nov-2012 a second flight was added at the beginning of Apr-2013 and a now a third frequency is planned from the beginning of Jul-2013.

Cambodia Angkor Air after the introduction of the third daily flight will still only have 32% of seat capacity in the Siem Reap-Bangkok market, according to CAPA and Innovata data. Bangkok Airways operates five daily flights on the route, using a mix of ATR 72s and A319s.

But in comparison Cambodia Angkor Air only has a 13% share of capacity in the Phnom Penh-Bangkok market.

Siem Reap to Bangkok capacity by carrier (one-way seats per week); 19-Sep-2011 to 20-Oct-2013

Phnom Penh to Bangkok capacity by carrier (one-way seats per week); 19-Sep-2011 to 20-Oct-2013

North Asia presents more opportunities for Cambodian airlines

Cambodia Angkor Air is clearly benefitting from the lack of LCC competition between Siem Reap and Bangkok. The flag carrier is likely also targeting North Asia and South Asia for its next phase of growth due to the much higher LCC penetration rate between Cambodia and other Southeast Asian countries.

LCCs currently account for a majority of capacity from Cambodia to Malaysia and will account for a majority of capacity from Cambodia to Singapore from mid-2013, making both markets potentially unattractive to Cambodia Angkor Air. Philippines is also an unlikely destination for Cambodia Angkor Air as the Cambodia-Philippines market is currently only served by Philippine LCC Cebu Pacific with likely future service from PAL or Cambodia Airlines given PAL's involvement in the start-up.

But there are currently no LCCs serving Cambodia from North Asia or Vietnam. Cambodia Angkor Air will look to build up a presence in the North Asian market while maintaining its already strong position in the Vietnamese market. There will be competition from North Asian carriers but this competition will primarily be from other full-service carriers and the market should be large enough to also support at least one Cambodian carrier.

Cambodia to North Asia capacity by carrier (one-way seats per week); 19-Sep-2011 to 20-Oct-2013

Ultimately the biggest threat for Cambodia Angkor Air will likely come from Cambodia Airlines. It is questionable if the Cambodian market is big enough to support multiple local scheduled carriers, particularly given the strong position of foreign carriers in the market. But the market is growing rapidly and backing from Vietnam Airlines and PAL should help Cambodia Angkor Air and Cambodia Airlines survive any rough patches.