Cross-border airline JV model: is there still room in Southeast Asia?

Highlights

• There have been 13 cross-border JV airline launches in Southeast Asia since 2004; so far only two have ceased operations.
• Southeast Asia's cross-border JV airlines are based in six countries and currently operate a combined fleet of more than 230 aircraft.
• Five of the cross-border JVs from Southeast Asia are affiliated with AirAsia or AirAsia X, covering three of the main markets.
• AirAsia is keen to grow its airline portfolio further in Southeast Asia with new JVs in Myanmar and Vietnam.
• Lion and VietJet are also looking at potential new JVs in Southeast Asia; Lion currently has two affiliates and VietJet one.

Cross-border JVs will be discussed at CAPA's North Asia LCC Summit in Seoul, 11/12-Jun-2018
and at the CAPA Asia Aviation Summit on 6/7-Nov-2018 in Singapore.

Southeast Asia’s cross-border JVs operate 230 aircraft from six countries  

There are currently 11 cross-border JV airlines based in Southeast Asia. All except one (Malaysia’s Malindo) are low cost airlines. They are based in six countries and operate a combined fleet of more than 230 aircraft, accounting for 12% of the total Southeast Asian fleet.

Southeast Asia cross-border JVs in order of launch date

Airline	Country	Launch date	Overseas partner	Partner country	Fleet size: as of 23-Apr-2018
Thai AirAsia	Thailand	2004	AirAsia	Malaysia	59
Jetstar Asia (Singapore)	Singapore	2004	Jetstar/Qantas	Australia	18
Indonesia AirAsia	Indonesia	2005^	AirAsia	Malaysia	23
Jetstar Pacific	Vietnam	2008^	Jetstar/Qantas	Australia	17
Philippines AirAsia	Philippines	2012	AirAsia	Malaysia	21
Tigerair Philippines*	Philippines	2012	Tiger Airways	Singapore	N/A
Tigerair Mandala*	Indonesia	2012	Tiger Airways	Singapore	N/A
Malindo Air	Malaysia	2013	Lion Air	Indonesia	46
Thai Lion Air	Thailand	2013	Lion Air	Indonesia	31
Thai AirAsia X	Thailand	2014	AirAsia X	Malaysia	7
Thai VietJet Air	Thailand	2014	VietJet Air	Vietnam	4
Indonesia AirAsia X	Indonesia	2015	AirAsia X	Malaysia	2
NokScoot	Thailand	2015	Scoot	Singapore	4

Note: *In 2014, Tigerair Philippines was sold to Cebu Pacific and Tigerair Mandala ceased operations.
^Jetstar Pacific was a pre-existing airline known as Pacific Airlines, but adopted the LCC model and was relaunched as Jetstar Pacific in 2008.
^Indonesia AirAsia was a pre-existing airline known as AWAIR, but adopted the LCC model and was relaunched as Indonesia AirAsia in 2005. 
Source: CAPA - Centre for Aviation and CAPA Fleet Database. 

Of the seven main ASEAN countries, only Myanmar does not have a cross-border JV. Myanmar is the fifth largest ASEAN country by population and the seventh largest by GDP.

ASEAN members ranked by GDP and population 

Rank	Country	GDP (USD; 2016)	Population (2016)
1.	Indonesia	932 billion	261 million
2.	Thailand	407 billion	69 million
3.	Philippines	305 billion	103 million
4.	Singapore	297 billion	6 million
5.	Malaysia	296 billion	31 million
6.	Vietnam	203 billion	93 million
7.	Myanmar	67 billion	53 million
8.	Cambodia	20 billion	16 million
9.	Brunei	11 billion	400,000
10.	Laos	16 billion	7 million

 Source: CAPA - Centre for Aviation and WorldBank.

For several years AirAsia has been considering the establishment of joint ventures in Myanmar, as well as in Vietnam, to complete its ASEAN portfolio. VietJet has been evaluating Myanmar since 2013, and Lion Group – Vietnam since 2016. 

AirAsia and Lion Group keen to expand its ASEAN portfolio

Lion founder Rusdi Kirana stated at a 10-Apr-2018 signing ceremony with Boeing for 50 737 MAX 10s that the group aimed to secure approval to launch an airline in a new Southeast Asian market later this year. Mr Kirana did not specify the country, nor whether the airline would follow an LCC or FSC model.

The Lion Group's initial plan for Vietnam was to use the full service Batik brand. Its full service airline in Malaysia, Malindo, has also been planning to adopt the Batik brand, but in Thailand the group's affiliate, Thai Lion Air, is an LCC using the Lion brand. Malindo and Thai Lion both launched in 2013, becoming the first overseas airlines in the Lion Group portfolio.

In Mar-2018 interviews with multiple media outlets, AirAsia Group CEO Tony Fernandes stated that the group was in talks with an existing airline in Myanmar but it was too early to provide a timeline for the launch of a new JV. In Vietnam, Mr Fernandes stated that he expected the JV the group had forged with a local partner just over a year ago to launch operations by the end of 2018.

Southeast Asia has six countries large enough to support cross-border JVs

AirAsia started in its original home market of Malaysia in 2001 and launched its first joint venture, in Thailand, in 2004. Indonesia followed in 2005 and the Philippines in 2012. Myanmar and Vietnam are the only other significant domestic aviation markets in ASEAN.

Of the four other countries in ASEAN, Brunei and Singapore do not have a domestic market, while Cambodia and Laos have very small domestic markets. A local affiliate is not needed to serve the international markets in Brunei, Cambodia, Laos or Singapore. AirAsia already serves these countries using existing affiliates and under ASEAN open skies it could launch international routes between two ASEAN countries that do not have an affiliate.

ASEAN open skies does not allow cabotage, or a foreign airline to operate any domestic services. Therefore a local JV is needed to access each domestic market. 

AirAsia’s third attempt to establish in Vietnam moves slowly  

Just over a year ago, on 31-Mar-2017, AirAsia launched its third attempt at establishing an affiliate in Vietnam. In the initial announcement AirAsia stated that it was aiming to launch the new airline, which is 70% owned by Vietnamese company Gumin, in early 2018.

Mr Fernandes stated in a 19-Mar-2018 interview that the new airline was preparing to launch services in Oct-2018. However, this seems to be a very ambitious target, given the slow pace so far in securing approvals from the Vietnamese government. In the first year of the project there was virtually no progress, and there is still no indication that the Vietnamese government is open to the idea of issuing any new airline licences.

Vietnam has not issued any new airline licences since 2010, when Vietstar Airlines secured a licence. Vietnam initially opened its aviation market in 2008 when it granted licences to three private companies – Air Mekong, Indochina Airlines and VietJet Air.

At about the same time, Pacific Airlines was rebranded as Jetstar Pacific and adopted the LCC model. A year earlier, in 2007, Australia’s Qantas had purchased a 27% stake in Pacific Airlines, marking the first time a private company (local or foreign) was able to invest in any Vietnamese airline. 

Indochina Airlines launched services in late 2008, followed by Air Mekong in late 2010 and VietJet Air in late 2011. Indochina and Air Mekong were short-lived, whereas VietJet has expanded rapidly and is now as large as Vietnam Airlines in the domestic market. Vietstar is still in the pre-launch phase and has been working for several years towards securing an operator's certificate, but is now finally aiming to launch later this year.

Vietnam’s domestic market may not have room for another start-up

AirAsia Vietnam, if it succeeds at launching, would have to overcome competition from Vietstar, VietJet, Jetstar Pacific and Vietnam Airlines (as well as potentially Batik Air Vietnam if Lion Group also succeeds at launching an affiliate in Vietnam). Vietnam’s domestic market has nearly tripled in size since 2012, but is now approaching saturation.

Domestic passenger growth in Vietnam slowed from 25% in 2016 to 13% in 2017. Domestic growth is expected to slow further in 2018, to approximately 10%, and is not likely to return to the 20% to 30% annual growth rate achieved in 2013 to 2016. 

There is limited room for another start-up, particularly considering the congestion at Ho Chi Minh, where there are no longer any available slots during most times of the day. Point-to-point domestic routes are an option for any start-up, but are very low yielding and most are already served by at least one LCC. 

AirAsia risks being too late to the party. Had it succeeded in its initial two attempts to establish an airline in Vietnam the situation would have been very different, as it would have been an early mover.

AirAsia initially forged a joint venture with the Vietnamese company Vina in 2007 but the project quickly fizzled. In early 2010 AirAsia announced the acquisition of a 30% stake in VietJet, which at the time had already secured a business licence, but in Oct-2011 the deal was scrapped after VietJet was not able to secure Vietnamese approval to use the AirAsia brand. VietJet’s local owners proceeded to launch the airline in Dec-2011 on its own.   

Myanmar may not be ready for an LCC

In Myanmar, AirAsia would be the only LCC. However, the challenge is that the market is not yet ready to support the LCC model.

Only three airports in Myanmar can currently accommodate A320s. The domestic market is predominantly served with turboprops.  

While some Asian LCCs have added turboprops in recent years, AirAsia has been adamant about sticking entirely with A320 family aircraft. Adding a separate type for a potential venture in Myanmar would mean the new JV would not be able to benefit from some of the synergies enjoyed by the other JVs.

A turboprop operation would also not differentiate AirAsia from the existing domestic competitors. There are now seven airlines in Myanmar operating ATR 72s – all with the same all-economy configuration and product.

An LCC would not be able to improve on aircraft utilisation significantly, since most of the domestic airports do not have lights. An LCC would not be able to achieve significantly lower costs, as most suppliers enjoy monopolies and charge all of the domestic airlines the same fees.

Myanmar’s domestic market is small

Airfares for Myanmar citizens are already relatively low, providing limited room for stimulation. Fares for foreigners are relatively high, but cannot be significantly lowered due to high taxes imposed by the government. 

Myanmar’s domestic market consists of less than 3 million passengers. Malaysia and the Philippines each had 25 million domestic passengers in 2017, and Vietnam had 32 million. 

The proportion of Myanmar's population that can afford to fly should increase over time as the economy and middle class grows. Myanmar has a population of more than 50 million, making it larger than Malaysia and about half the size of the Philippines and Vietnam.

However, there are already nine airlines competing in Myanmar’s domestic market, compared to essentially three domestic competitors in Malaysia, the Philippines and Vietnam. Lower fares would stimulate some growth, but are not viable until there is a breakthrough in the regulatory and airport environments.

The LCC model has been tested in Myanmar by Golden Myanmar, a start-up which followed a pure LCC model when it launched in 2013. Golden Myanmar switched to a full service airline model in 2015 as it was not able to achieve lower costs than its local competitors. Golden Myanmar was also unsuccessful at securing investment from a foreign LCC.

Southeast Asia market has become crowded and very competitive

VietJet, which has ambitions to establish a pan-Asia airline group, considered acquiring a stake in Golden Myanmar. VietJet instead selected Thailand as its first JV, which began operations in late 2015. Thailand is a much larger market, but VietJet is the fourth domestic LCC and has so far struggled to establish a significant presence. 

While the Southeast Asian market continues to grow rapidly, there is an unsustainable number of competitors in most countries. Competition is at times irrational, since strategic expansion and market share are often the priority over profitability. The profitability of the Southeast Asian airline sector has been well below global average in the past few years.

Six Southeast Asian countries are big enough to support local LCCs, but not more than two or three competitors. At this point, the other four markets (Brunei, Cambodia, Laos and Myanmar) would struggle to support any local LCCs.

Investors should be wary about the risk involved with any new LCC affiliates in Southeast Asia. Even AirAsia has struggled financially with its most recent JV in the region. Philippines AirAsia was in the black (barely) for the first time in 2017 after accumulating losses of more than USD100 million in its first five years.

Lion Group’s two overseas ventures have not turned a profit since launching in 2013. Tigerair’s two JVs in Southeast Asia, in Indonesia and the Philippines, had to be shut down and sold in 2014 after two years of stiff losses.

Southeast Asia needs more consolidation rather than more new airlines. The cross-border JV model has had a good run in Southeast Asia over the past 14 years but it is hard to fathom the market supporting a significant number of new JVs – if any.