09-Oct-2013 5:55 PM

Golden Myanmar plans domestic and international expansion as fleet grows from one to four aircraft

Analysis

Golden Myanmar Airlines is preparing for a major expansion phase as the low-cost start-up carrier adds over the next five months a second A320 and two ATR 72-600s.

The additional capacity will be primarily used to expand Golden Myanmar's domestic network, which currently consists of just one route. The carrier will also add capacity on its only two international routes, Yangon to Bangkok and Singapore, but has decided against launching new scheduled international services in this phase of its development.

As Myanmar's first LCC, Golden Myanmar is well positioned to take advantage of the huge opportunities in its local market. But there are also challenges as intense competition in the Myanmar market has resulted in over-capacity in most domestic and international routes.

Summary

Golden Myanmar Airlines is expanding its fleet with a second A320 and two ATR 72-600s.
The additional capacity will be used to expand Golden Myanmar's domestic network and increase capacity on its international routes to Bangkok and Singapore.
The Yangon-Singapore market has seen capacity more than double over the past two years, with three LCCs now serving the route.
Golden Myanmar is set to become the largest Burmese carrier in the Singapore market, overtaking Myanmar Airways International.
The Yangon-Bangkok market has also seen a significant increase in capacity, with four LCCs now serving the route.
Golden Myanmar has decided against launching services to Kuala Lumpur and Hong Kong due to intense competition and a reliance on inbound traffic.

Golden Myanmar launched services in Jan-2013 with one 12-year-old A320 leased from ILFC in single-class 180-seat configuration. The carrier started domestically, operating between Yangon and Mandalay - which is by far Myanmar's largest domestic route.

International services were added in early Apr-2013 with a daily service to Singapore. Daily service to Bangkok Suvarnabhumi was added in May-2013, giving the carrier about 13hrs of utilisation for its only aircraft.

Golden Myanmar ready to take ex-Air Astana A320

The original business plan envisioned a second A320 being added by mid-2013 with Yangon to Hong Kong and Kuala Lumpur targeted as new routes. The second A320 is finally expected to be delivered within the next two weeks and be placed into service at the end of Oct-2013.

The additional A320 has been sourced from CIT on a four-year operating lease and is now in the UK, where it has gone through a heavy maintenance check and been retrofitted. The aircraft is seven years old, making it slightly younger than the carrier's original A320 and was previously operated by Kazakhstan's Air Astana.

Golden Myanmar has decided to use the second A320 to add from the end of Oct-2013 a second daily flight from Yangon to Bangkok and expand Yangon-Singapore from seven to up to 13 weekly frequencies. It will also add a second domestic route, operating daily from Yangon to the new capital city of Nay Pyi Taw. The carrier is also considering operating charters from Yangon to Gaya in India, a popular Buddhist pilgrimage site.

The additional flights to Bangkok and Singapore will boost Golden Myanmar's share of capacity in the two largest markets from Myanmar and provide its passengers with a more convenient and competitive schedule. The second Bangkok flight will operate in the morning, complementing the current evening flight. The second Singapore frequency will operate in the evening, arriving back in Yangon just before midnight, complementing the current flight which is a mid-morning departure from Yangon and a mid-afternoon departure from Singapore.

But both markets have become intensely competitive and challenging with load factors below average compared to other major short-haul international routes within Southeast Asia. Yangon-Singapore is now served by three LCCs, following the 1-Oct-2013 launch of daily services from Tigerair. Yangon-Bangkok will also soon be served by three LCCs, following the 1-Nov-2013 launch of service from Nok Air.

Yangon-Singapore capacity has now doubled in less than two years

The Yangon-Singapore market has seen capacity more than double over the past two years from about 4,400 weekly one-way seats in Nov-2011 to about 10,000 weekly seats in Nov-2013. On a year-over-year basis capacity is up more than 50% compared to about 6,500 weekly seats in Nov-2012, according to CAPA and Innovata data.

Yangon to Singapore total capacity (one-way seats per week): 19-Sep-2011 to 30-Mar-2014

In addition to the recent Tigerair launch, Singapore Airlines entered the market at the end Oct-2012 taking over seven of the 16 weekly flights operated by SilkAir. The SIA regional subsidiary currently operates nine weekly flights and will add two more from the end of Oct-2013, according to Innovata data.

Jetstar Asia also upgraded its Yangon service in stages during 2012 from three weekly flights to daily. Jetstar Asia has maintained a daily service since late 2012 and has loaded into its online reservation system two more weekly flights from late Nov-2013 for a total of nine.

Jetstar Asia also codeshares with Myanmar Airways International (MAI) on the Yangon-Singapore route. MAI has reduced its own capacity to Singapore and currently operates 10 weekly flights on the route. The flag carrier previously operated two daily non-stop flights to Singapore and also offered a third flight to Singapore via Bangkok until earlier this year.

Golden Myanmar to become largest Burmese airline in Singapore market

With its additional flights Golden Myanmar is poised to overtake MAI as the largest Burmese carrier in Singapore. MAI's 10 weekly A320 flights will give the flag carrier only about a 16% share of total capacity in the Yangon-Singapore market from Nov-2013, according to CAPA and Innovata data. This compares to about a 36% share in Nov-2012 and a 43% share in Nov-2011 (does not include one-stops via Bangkok) as MAI has cut capacity while the total market has more than doubled in size.

The SIA Group also has seen its share of the Yangon-Singapore market decline as other carriers have entered. But SIA/SilkAir has mitigated the reduction by also adding capacity. The group will have a leading 35% share of capacity on the Yangon-Singapore route in Nov-2013 compared to a 45% share in Nov-2011, when only SilkAir operated the route.

Based on the 13 weekly flights filed, Golden Myanmar would capture about a 23% share of capacity compared to about 18% currently. But Golden Myanmar is now looking to refine its schedule and will likely ultimately operate 12 weekly flights. On days the carrier has one frequency it is considering having its aircraft sit at Changi for several hours, allowing it to operate the morning flight from Yangon and the late evening flight from Changi. This is not a typical move for a LCC but would maximise demand.

The additional flight will also give Golden Myanmar the largest share of the market among LCCs and the latest LCC departure from Singapore. But it will be challenging to absorb the additional capacity, given the intense competition in the market and the fact that the initial flight has not yet matured from a load factor perspective.

Myanmar-Singapore market has grown rapidly but not fast enough to keep up with capacity

The Myanmar-Singapore market has grown significantly with Changi Airport reporting 23% year-over-year growth in 2012 to 406,000 passengers. But demand has not grown as fast as capacity.

Based on current schedules, there will be over one million seats on the route in 2014. But even assuming 25% passenger growth in 2013 and again in 2014 the number of passengers would reach 634,000 in 2014, resulting in average load factors of about 60%. This is not a sustainable figure and 25% annual traffic growth, while feasible given Myanmar's rapidly growing economy, may not be realised. Ultimately there may be a correction in the market.

Singapore-based carriers have an advantage over Myanmar-based carriers as they are able to offer connecting services, taking advantage of increasing demand for Myanmar from countries which do not have non-stop services to Yangon, such as Indonesia, the Philippines and Australia. Tigerair and Jetstar Asia both now have connecting products and for the local market cater more on outbound Singaporeans while Golden Myanmar relies predominately on Burmese passengers.

Golden Myanmar does have the advantage of offering domestic connections on the Myanmar end, particularly after its two ATR 72s are placed into service in 1Q2014. But there is limited demand from Singapore for other destinations in Myanmar.

Golden Myanmar has been offering Singapore-Mandalay as a one-stop product but has not seen much traffic on this route, which is not served non-stop by any carrier. After initially offering an immediate connection, Golden Myanmar now serves the Singapore-Yangon-Mandalay route with an overnight stop on the outbound as a few months ago it changed its Yangon-Mandalay schedule and started basing its A320 at Yangon rather than Mandalay. From Mandalay to Singapore an immediate one-stop service is still provided.

Yangon-Bangkok is a large but intensely competitive market

The Yangon-Bangkok market is bigger but has seen a similar influx of capacity over the last two years. From Jan-2014, there will be over 21,000 weekly one-way seats between Yangon and Bangkok, according to CAPA and Innovata data. This represents an increase of about 44% compared to Jan-2013 and about 90% compared to Jan-2011.

Yangon to Bangkok* total capacity (one-way seats per week): 19-Sep-2011 to 30-Mar-2014

The latest increase is being driven by the introduction of service from Nok Air, which will start with four weekly flights on 1-Nov-2013 but according to Innovata data will quickly ramp up to one daily frequency at the beginning of Dec-2013 and two daily frequencies at the beginning Jan-2014. Meanwhile Bangkok Airways is adding a fourth daily frequency and Golden Myanmar a second daily frequency from the end of Oct-2013.

Bangkok Airways only added its third daily flight to Yangon about one year ago. Thai AirAsia and Thai Airways also introduced a third daily flight to Yangon in 2H2012. As Thai Airways operates all three of its flights with widebodies, it is the market leader with a 38% share of capacity which will reduce to 30% in Jan-2014 as three of its competitors expand.

MAI currently operates two daily flights to Bangkok but has seen its market share slip as its capacity has been relatively stable over the last two years. As in the case with the Singapore market, Golden Myanmar will become the largest Burmese carrier to Bangkok as it adds a second daily frequency, giving the LCC 2,520 weekly one-way seats compared to less than 2,300 for MAI.

Golden Myanmar will account for about 12% capacity in the Yangon-Bangkok market in Jan-2014. Nok will also capture about 12% while Thai AirAsia will account for about 17%, giving LCCs a combined 41% share. In addition to Thai's 30% share, the other legacies in the market -Bangkok Airways and MAI - will account for 18% and 11% of seat capacity respectively.

As in the case with Yangon-Singapore, the Yangon-Bangkok market has benefitted from growing demand. But supply has increased faster, leading to relatively low load factors, particularly during off-peak periods.

Thai Airways and Bangkok Airways rely heavily on the connecting market, which gives them somewhat of an advantage over the carriers relying entirely on the local Myanmar-Thailand market. Thai AirAsia also benefits from a large volume of self-connections and is expected to eventually start offering a connecting product, following the model used in Kuala Lumpur by its sister carrier.

Myanmar-Thailand has seen huge influx of additional capacity

Some traffic also has been diverted away from Yangon-Bangkok as direct services have been launched to Bangkok from Mandalay and Nay Pyi Taw. Thai AirAsia, Bangkok Airways and Thai Smile have all launched services to Mandalay over the past year. Bangkok Airways also has just launched service to Nay Pyi Taw with Thai AirAsia to also launch Bangkok-Nay Pyi Taw from the end of Oct-2013.

Nok recently also started services connecting regional destinations in Thailand with Myanmar. As a result the total capacity in the Myanmar-Thailand market has increased even faster than Yangon-Bangkok, with a 62% increase from Jan-2012 to Jan-2013 to about 26,000 weekly one-way seats.

Golden Myanmar will offer a one-stop connection between Nay Pyi Taw and Bangkok in both directions. But with Thai AirAsia and Bangkok Airways both offering non-stops in this market and to Mandalay, the opportunities for Golden Myanmar in the one-stop or connection market will be limited.

Ultimately Golden Myanmar could downgauge capacity to Bangkok by switching some or all of its flights to the ATR 72-600. The short duration of the flight (slightly more than one hour) makes it a more economic turboprop route, particularly if demand is not sufficient to fill 180-seat A320s given the intense competition. Bangkok Airways already operates some of its Yangon flights with ATR 72s.

Having the ATR 72 operate the evening flight to Bangkok will also improve utilisation of Golden Myanmar's turboprop fleet as a lack of lighting at regional airports in Myanmar make it difficult to fully utilise aircraft with a pure domestic operation. But using the ATR 72 on Bangkok would require Golden Myanmar to find another international route for the A320 fleet. That would be challenging given current market conditions. Other-short-haul routes are already over-supplied. Markets with more potential such as Seoul are out of range.

Golden Myanmar decides against Kuala Lumpur and Hong Kong

Golden Myanmar originally intended to launch services to Kuala Lumpur and Hong Kong using its initial fleet of two A320s. But the carrier has decided at least for now not to compete on the Yangon to Kuala Lumpur and Hong Kong routes.

While Kuala Lumpur and Hong Kong are now among the largest routes from Yangon they have already seen an influx in capacity and rely heavily on inbound traffic, a sector of the market Golden Myanmar could struggle with given it does not yet have a recognised brand outside Myanmar.

Yangon top 10 international route ranked by seat capacity: 7-Oct-2013 to 13-Oct-2013

Golden Myanmar so far has catered mainly to outbound traffic with a mix of leisure, business and migrant workers. Kuala Lumpur is not as popular a destination for the Burmese population and there has been a reduction in migrant worker traffic following a crackdown by Malaysian authorities.

Malaysia Airlines and AirAsia have both added over the past year a second daily frequency to Yangon (although the second AirAsia frequency does not operate certain times of the year). With MAI already on the route (although with a less than daily service) it would be difficult to sustain a fourth carrier. While there is relatively strong inbound business and leisure demand from Malaysia, this is a sector catered to by AirAsia and MAS.

The Yangon-Hong Kong market is now served with four weekly A321 flights by Cathay Pacific regional subsidiary Dragonair, which launched the route in Jan-2013. The market at this point is likely too small to sustain a second carrier. Dragonair/Cathay is better positioned to serve the market compared to a Burmese carrier as the Yangon flights are timed to maximise connections beyond Hong Kong, including to North Asia and North America. Dragonair is also well positioned to cater to growing demand for Myanmar as a tourism destination as it works closely with Hong Kong agents.

While Golden Myanmar has been able to attract some inbound international traffic with its Bangkok and Singapore routes, it would need to rely significantly more on inbound traffic for any new international route. The carrier has a local brand which is not yet widely recognised outside Myanmar.

A tie-up with an Asian LCC group could help Golden Myanmar penetrate new international markets from a marketing and distribution perspective. Such a tie-up would likely include an equity stake. There is interest in the Myanmar market among Southeast Asia's LCC groups. As Golden Myanmar has already launched and is the country's only LCC, it would be an attractive target. But Asian LCC groups also have the option of establishing a new LCC, possibly using one of the four new AOCs which are currently in process.

Golden Myanmar to focus more on domestic market

As an independent LCC with a local brand, the domestic market is more appealing. The ATR 72 enables Golden Myanmar to more effectively compete in the domestic market. Only a handful of the country's airports can accommodate A320s and it is challenging to fill 180 seats even on the biggest domestic routes.

Golden Myanmar is leasing two new ATR 72-600s from Air Lease for delivery in Jan-2014 and Mar-2014. The carrier intends to initially use the turboprops on domestic routes although international routes - Bangkok and potentially other destinations in Thailand such as Chiang Mai - could be considered in a later phase.

Golden Myanmar plans to base one of its ATR 72s in Yangon and one in Mandalay. The carrier has not yet decided on its initial turboprop destinations but is expected to use the ATR 72s to start competing in the main domestic routes.

Besides Yangon-Mandalay, which Golden Myanmar already serves with an A320, the main domestic routes from Yangon are Nyaung-u (the gateway to the popular tourist town of Bagan), Heho, Thandwe and Dawe. From Mandalay the main domestic routes besides Mandalay are Nyaung-u, Heho, Tachilek and Myitkyina. These domestic routes are currently already served with ATR 72s by Myanmar's other domestic carriers: Air Mandalay, Air Yangon, Air Bagan, Air KBZ, Asian Wings and Myanma Airways.

Additional frequencies between Yangon and Mandalay are also expected. While Yangon-Mandalay is a relatively big market a higher frequency turboprop operation is a logical option. Most of the carriers operating on the route use regional aircraft except Asian Wings, which uses its A321. The load factors are not generally sufficient on Yangon-Mandalay to support a domestic A320 or A321 operation. Asian Wings is eventually expected to re-deploy its A321 to launch international operations.

Golden Myanmar is also planning to use A320s to operate Yangon-Nay Pyi Taw, which is being launched at the end of Oct-2013 with one daily flight. But ATR 72s would be more logical as this market is a short route (one hour on a turboprop) with relatively limited demand, although the market has long-term potential as the new capital expands.

Currently Yangon-Nay Pyi Taw is served with scheduled flights from Air Bagan, Air KBZ and Asian Wings, which combined operate only 11 weekly frequencies using ATR 72s. FMI also offers a regular charter service with ATR 42s and Beechraft 1900Ds. FMI is now in the process of establishing a scheduled carrier, which is expected to launch services by the end of 2013 using an initial fleet of two CRJ200s that could be based at Nay Pyi Taw.

Regional aircraft are at least for now better suited for Myanmar's domestic market, with the ATR 72 being by far the most common aircraft in the country. Golden Myanmar recognised it also needed ATR 72s to compete domestically. But the carrier could face challenges trying to differentiate its operation from the more established operators.

Local limitations prevent pure LCC model

While Golden Myanmar is considered a LCC, it does not typically offer significantly lower fares than its local competitors. This is logical as the carrier follows more of a hybrid model and is unable to have a significantly lower cost base.

Handling and staff costs are identical for all local carriers. All airlines serving regional airports, several of which Golden Myanmar will start to fly to in 2014 with its new ATR 72 fleet, use the same handling company and need to rely on manual systems as there is not a reliable internet connection.

Distribution costs are also similar for all Burmese carriers as they all need to rely heavily on travel agents given Myanmar's low internet penetration rate. Slightly less than 20% of Golden Myanmar's current sales are generated online. But almost all of this comes from the Bangkok and Singapore markets.

Opportunities to increase aircraft utilisation are also limited as most of Myanmar's airports are not equipped for night operations. Golden Myanmar plans to get about 8hrs of utilisation from its ATR fleet. This is still better than most of its competitors (Golden Myanmar will be the country's seventh ATR operator) as average utilisation rates in Myanmar are relatively low. But it is less than ideal, particularly as the carrier is leasing new aircraft. Without international operations or more airports being upgraded for nighttime operations, it will be hard to squeeze more utilisation out of its ATR 72 fleet.

In the international market, Golden Myanmar is able to provide some differentiation compared to the only other Burmese international carrier, MAI, as it operates A320s in all-economy configuration and charges for food, drinks and preferred seating. MAI, which also operates A320s, offers a full-service product and business class. But for the ATR 72s there will be even fewer opportunities for differentiation. All of Myanmar's carriers operate a small number of ATRs (generally between two and five) in the same all-economy configuration, giving them the same costs and efficiencies when it comes to items such as spare parts and maintenance.

Golden Myanmar also has matched competitors by providing free check-in baggage for both domestic and international flights. The local market has simply not reached a point where it can accept a pure LCC model. The five foreign LCCs serving the Myanmar market are able to come in with a different product as they are primarily carrying foreigners. AirAsia remains the largest LCC brand in the Myanmar international market, with nearly a 50% share of international LCC capacity in Dec-2013 compared to about 27% for Golden Myanmar.

Myanmar international LCC capacity share (% of seats) by carrier: 16-Dec-2013 to 22-Dec-2013

There are huge opportunities for further LCC expansion in Myanmar in both the domestic and international markets. LCCs currently account for only 28% of international seat capacity in Myanmar and Golden Myanmar's one domestic flight gives the domestic market a practically non-existing LCC penetration rate. But the domestic penetrate rate will increase significantly as Golden Myanmar adds ATR 72s while the international penetration rate will also increase slightly, driven by expansion at Golden Myanmar, foreign LCCs and potentially the launch of new local LCCs.

There will be challenges given the intense competition and lack of opportunities for Myanmar carriers to follow a pure LCC model. But over time the market will evolve and Golden Myanmar should be able to exploit its first mover advantage in Myanmar's emerging LCC sector.