15-Apr-2015 11:00 AM

Competition in Thailand’s domestic LCC sector intensifies further as Thai Lion, Nok & AirAsia expand

Analysis

Thailand’s domestic market has become a major battleground for three of Southeast Asia’s leading low-cost carriers. Thailand’s domestic LCC sector recorded passenger growth of over 30% in 2014 and could see similar growth in 2015.

But the growth has come at the expense of yields and profitability as all players have had to lower fares to compete. The outlook for 2015 remains relatively bleak as the price wars have continued.

Thai Lion has been the main provocateur, pursuing rapid expansion since launching services at the end of 2013. But Nok and Thai AirAsia have also been expanding rapidly, leading to overcapacity.

This is Part 5 in a series of reports on the Thailand market. This report looks specifically at Thailand’s domestic LCC sector. The first four reports in this series examined the outlook for Thai Airways, Thai Airways regional subsidiary Thai Smile, independent full-service carrier Bangkok Airways and Thailand’s two new long-haul LCCs – NokScoot and Thai AirAsia X.

See related reports:

Thai Lion accelerates expansion

Thai Lion is particularly shaking up Thailand’s domestic market as it is accelerating expansion in a bid to gain market share. Thai Lion launched services in Dec-2013 with an initial fleet of two 737-900ERs and added six of the type in 2014. In 2015 the Lion Group affiliate is planning to add up to 12 737s, two of which have already been delivered, as it strives to end the year with a fleet of 20 aircraft.

Thai Lion has already added capacity so far this year across almost all of its domestic trunk routes and launched Chiang Rai, which became Thai Lion’s seventh destination from its Bangkok Don Mueang hub in early Apr-2015.

Bangkok-Chiang Rai is currently served with two daily flights. A third frequency is slated to be added from 24-Apr-2015.

Thai Lion now competes on seven largest domestic routes from Don Mueang

With the introduction of Bangkok-Chiang Rai Thai Lion is now competing against Nok and Thai AirAsia on all seven of the largest domestic routes from Don Mueang (based on total seat capacity). Thai Lion has quickly established a significant presence in most of these markets. Just one year ago it was only competing on two of these routes.

Thai Lion now operates an average of nine daily flights to Chiang Mai and Hat Yai as well as up to five daily flights to Udon Thani and four daily flights to Krabi. Thai Lion’s total seat capacity on these four routes is now roughly on par with Nok and Thai AirAsia. (On Bangkok-Hat Yai Thai Lion has more capacity than both competitors while on the other three routes it has more capacity than one competitor but not as much as the other competitor.)

Thai Lion has a slightly smaller but still competitive share on Bangkok-Surat Thani, which it now served with an average of three daily flights compared to five daily flights for both Nok and Thai AirAsia. Thai Lion has a much smaller and relatively insignificant share in the Bangkok-Phuket, which is now served with two daily flights. But this is driven not by ambition but slot restrictions at Phuket.

Thai Lion was able to add second daily flight in late Mar-2015 on Bangkok-Phuket. At about the same time it added capacity to Chiang Mai, Krabi and Udon Thani although it reduced capacity to Surat Thani. The additional capacity as well as the launch of services to Chiang Rai was made possible by the addition of two 737-900ERs, which Thai Lion operates in single-class 215-seat configuration.

Thai Lion route network: as of early Apr-2015

Route	Launch date	Frequency at launch	Frequency as of early Feb-2015	Frequency as of early Apr-2015
Bangkok-Chiang Mai	Dec-2013	14 weekly	56 weekly	61 weekly
Bangkok-Hat Yai	Mar-2014	21 weekly	61 weekly	61 weekly
Bangkok-Phuket	Sep-2014	7 weekly	7 weekly	14 weekly
Bangkok-Udon Thani	Sep-2014	14 weekly	25 weekly	31 weekly
Bangkok-Surat Thani	Oct-2014	14 weekly	33 weekly	19 weekly
Bangkok-Krabi	Oct-2014	7 weekly	14 weekly	28 weekly
Hat Yai-Udon Thani	Oct-2014	3 weekly	3 weekly	5 weekly
Bangkok-Chiang Rai	Apr-2014	14 weekly	14 weekly	14 weekly

Thai Lion drops Bangkok-Jakarta, making it an-all domestic operator

Thai Lion is now focusing entirely on the domestic market, having dropped its only remaining international route, Bangkok-Jakarta in 1Q2015. Thai Lion dropped its other three international routes – Bangkok to Kuala Lumpur and Hat Yai to Kuala Lumpur and Medan – in 2014.

The two international routes at Hat Yai as well as two domestic point to point routes at Hat Yai (Hua Hin and Surat Thani) had been operated using an ATR 72, which was transferred to Indonesian sister carrier Wings Air in late 2014. After experimenting with one turboprop for less than one year Thai Lion decided to focus entirely on jet operations.

In addition to the seven domestic trunk routes Thai Lion still has one domestic point to point route, Hat Yai-Udon Thani, which it currently operates with five weekly 737-900ER flights. This service has to be maintained for Thai Lion to meet a Thai government requirement to allocate a certain amount of capacity on small regional routes which are not served by any carrier or at most one other carrier.

Thai Lion currently has about a 13% share of domestic seat capacity in Thailand compared to about 28% for Thai AirAsia and 25% for Nok. (Based on CAPA calculations for schedules commencing 6-Apr-2015; the current week commencing 13-Apr-2015 sees temporary seasonal increases for the Songkran or Thai New Year holiday.)

Bangkok Airways also has about a 13% share of domestic seat capacity. Thai Airways and Thai’s regional subsidiary Thai Smile combined has about a 20% share but individually each airline is now smaller than Thai Lion or Bangkok Airways.

Thai Lion will continue its domestic expansion

Thai Lion’s share of the domestic market could approach 20% by the end of 2015 as it continues its rapid expansion. Thai Lion is expected to continue adding capacity on existing trunk routes while also launching new routes.

A resumption of international services is also likely in 2H2015 but the focus will continue to be on domestic expansion. Thai Lion’s priority for 2015 is to build up domestic market share. ICAO’s recent finding against the Thai DCA could also make it harder for Thai Lion to launch services to some international markets as the process of securing approvals from international authorities have become more challenging.

Thai Lion has indicated it looking to launch domestic services to Ubon Ratchathani followed by Khon Kaen and Trang. As CAPA previously highlighted, services to Nakhon Si Thammarsarat would also be logical as Ubon Ratchathani, Khon Kaen and Nakhon Si Thammarsarat are the only top 10 domestic destinations from Don Mueang that Thai Lion currently does not serve.

Rapid expansion by Thai Lion, Nok and Thai AirAsia drove a 39% increase in domestic passenger numbers at Don Mueang in 2014 to 15.6 million. Domestic traffic at Bangkok Suvarnabhumi, which handles all Bangkok flights from Thai Airways and Bangkok Airways and most Thai Smile flights, declined by 7% in 2014 to 8.3 million.

Don Mueang has seen even more rapid domestic growth so far in 2015 with domestic passenger numbers up 46% in Jan-2015 and 53% in Feb-2015. More rapid domestic growth at Don Mueang is expected for the remainder of 2015 – although will likely dip below the 40% mark given the higher base figures.

Bangkok Don Mueang domestic monthly passenger numbers: Jan-2008 to Feb-2015

Bangkok Don Mueang domestic capacity share (% of seats) by carrier: 6-Apr-2015 to 12-Apr-2015

Nok continues to grow domestically despite challenging market conditions

Nok and Thai AirAsia are also continuing to focus on domestic expansion. Such expansion could also be viewed as strategic as the two LCCs see a need to respond to the rapid growth at their younger competitor.

Nok is planning to add four aircraft in 2015 including two 737-800s and two Dash 8Q400 turboprops. Nok launched scheduled services to China at the end of Mar-2015 and is planning to launch services to Vietnam by the end of 2015. But once again most of its additional capacity will be allocated to the domestic market.

Nok currently operates only two scheduled international routes, linking Bangkok Don Mueang to Yangon in Myanmar and Nanning in China. International services accounted for only THB340 million (USD10 million) in revenues in 2014, or 3% of its total revenue stream.

Nok reported an operating loss of THB53 million (USD1.6 million) on international services for 2014 and a THB357 million operating loss (USD11 million) in the domestic market. Nok’s overall operating loss of THB410 million (USD13 million) compared to an operating profit of THB1.099 billion (USD35 million) in 2013.

A 13% reduction in yield and a 2.7pps drop in load factor to 81.3% contributed to the disappointing financial performance. As Nok is almost entirely a domestic operator this reflects the extremely intense competition and overcapacity in the Thailand domestic market.

Nok Air annual operating highlights: 2011 to 2014

Thai AirAsia attempts to raise yields and load factor

Thai AirAsia also recorded a 9% drop in yield (RASK) and an 8% drop in average fares for 2014 while its average seat load factor dropped 3ppts to 80%. 2014 marked the second consecutive year of yield declines for Thailand’s largest LCC.

Thai AirAsia RASK: 2012 to 2014

The challenging market conditions drove a 54% reduction in Thai AirAsia’s operating profit in 2014 to THB1.661 billion (USD51 million). The carrier’s net profit was down 83% to only THB335 million (USD10 million).

Thai AirAsia is confident it can improve both its yield and load factor in 2015. It stated in its 4Q2014 results presentation that it expects average fares will improve by 3% to 5% in 2015 as well a 3ppts improvement in load factor to 83%. But such targets could prove challenging as domestic competition continues to intensify.

In addition to rapid and aggressive competition from Thai Lion, Thai Smile is looking at expanding its operation at Don Mueang, where it now operates 10 daily flights across four routes. Thai VietJet is also expected to launch operations in 2015 – although it missed its earlier target of commencing scheduled domestic services by the end of Mar-2015.

Thai AirAsia adds domestic capacity with focus on regional routes

Thai AirAsia is responding to the intensifying domestic competition by continuing to pursue rapid domestic expansion. While market conditions in Thailand’s short-haul international market have improved in recent months as inbound visitor numbers have recovered, Thai AirAsia is planning to allocate a majority of its additional capacity in 2015 to the domestic market.

Thai AirAsia is planning to add five aircraft in 2015, giving it 45 A320s. Thai AirAsia already has by far the largest fleet among Thailand’s LCCs.

Short-haul LCC fleet growth at Thailand’s LCCs: end 2012 to end 2015

Airline	Fleet as of end Dec-2012	Fleet as of end Dec-2013	Fleet as of end Dec-2014	Projected fleet as of end Dec-2015
Thai AirAsia	27 aircraft	35 aircraft	40 aircraft	45 aircraft
Nok Air	15 aircraft	17 aircraft	24 aircraft	28 aircraft
Thai Lion Air	N/A	2 aircraft	8 aircraft	20 aircraft
Thai VietJet Air	N/A	N/A	N/A	3 aircraft
Total	42 aircraft	54 aircraft	72 aircraft	96 aircraft

Thai AirAsia in recent months has launched services to several secondary domestic destinations. Services from its Bangkok Don Mueang hub to Loei, Nan and Roi Et were launched in Feb-2015 and from Bangkok to Buriam at the beginning of Apr-2015. The expansion on regional routes, which were previously only served by Nok (generally using turboprops), can be viewed as move by Thai AirAsia to improve domestic connectivity and enhance its domestic network ahead of Thai Lion.

The more comprehensive domestic network also provides feed for AirAsia’s expanding international operation at Don Mueang, including new medium-haul flights from Thai AirAsia X. But it is questionable whether there is sufficient demand in smaller secondary markets to support two LCCs, particularly as AirAsia Thai only operates 180-seat A320s

Nok has been growing faster than Thai AirAsia

The addition of Buriam gives Thai AirAsia 20 domestic destinations. Nok currently has 24 domestic destinations, according to OAG data.

Number of domestic routes from Bangkok by carrier: as of early Apr-2015

Airline	Routes from Bangkok
Nok Air	23
Thai AirAsia	19
Thai Airways/Thai Smile	9
Bangkok Airways	9
Thai Lion Air	7

Nok previously had a significantly larger domestic network but is a smaller carrier overall. Nok carried 7.6 million passengers in 2014 compared to 12.2 million for Thai AirAsia. But Nok had the faster growth – 29% year on year compared to 16% for Thai AirAsia.

Nok Air is expecting 18% passenger growth in 2015 to about 9 million. Thai AirAsia is expecting a similar growth rate in 2015 as it is targeting 14.5 million passengers.

Thai Lion reportedly carried 1.8 million passengers in 2014 – with nearly all of its passenger traffic coming in the domestic market. Almost all of Nok’s 7.6 million passengers also came from the domestic market. Thai AirAsia carried 7.4 million domestic passengers in 2014, giving it approximately an equal share of the domestic market to Nok. Its domestic passenger traffic was up 17% year over year.

Thai AirAsia operating highlights: 2014 vs 2013 and 4Q2014 vs 4Q2013

Is 30% growth for Thailand's domestic LCC sector sustainable?

In total Thailand’s domestic LCC sector carried nearly 17 million passengers in 2014 compared to slightly more than 12 million in 2013.

Nok and Thai Lion accounted for the largest share of the growth – with each carrying more than 1.5 million additional annual passengers – while Thai AirAsia carried 1 million more domestic passengers in 2014 compared to 2013.

Such rapid growth is not likely sustainable, suggesting capacity adjustments or consolidation may be around the corner.

Thailand’s domestic market is capable of potentially supporting consistent double digit growth as Thailand’s middle class continues to expand, enabling more Thais to migrate from bus journeys to budget carrier flights. Another year of LCC passenger growth exceeding 30% is also possible but only with very low fares stimulating demand. Slower growth would be healthier, particularly as LCCs already account for two-thirds of capacity in Thailand’s total domestic market.

Thailand’s domestic market has been a blood bath over the last year. At least for now there is no end in sight.