14-May-2013 11:45 AM

Jetstar Group concentrates on its Singapore hub as Jetstar Asia increases focus on Southeast Asia

Analysis

This is the third report in a three-part series on Jetstar's Singapore-based operations, which includes Jetstar Asia, Jetstar Airways and Valuair. The first two reports analysed Jetstar's position in two key markets, Singapore-Indonesia and Singapore-China. This report looks at other markets and Jetstar's overall outlook in Singapore.

Over the last year Jetstar has slowed down fleet and ASK expansion from Singapore after a period of rapid capacity growth for all of the country's major LCCs, intensifying competition and impacting profitability. Seat capacity, however, has continued to grow rapidly as Jetstar Asia has increased its focus on short-haul Southeast Asian markets, particularly Malaysia, while decreasing its focus on medium-haul flights to North Asia, particularly mainland China.

In the coming months Jetstar Asia/Valuair will take two more A320s for a total of 20 aircraft, with the additional capacity once again being allocated to short-haul markets, primarily neighbouring Malaysia and Indonesia.

Jetstar Asia expands in Southeast Asia while focus on North Asia reduces

Jetstar Asia currently offers about 51,000 weekly seats within Southeast Asia and about 22,000 seats to North Asia, according to CAPA and Innovata data. The Singapore-based carrier, which is 49% owned by Qantas subsidiary Jetstar, is planning to grow its Southeast Asia capacity by 19% over the next two months to more than 60,000 weekly seats in Jul-2013. This follows 47% growth in the Southeast Asia market over the last 10 months from about 35,000 weekly seats in Jul-2012. As a result, Jetstar Asia's capacity in the Southeast Asia market in Jul-2013 will be up 75% year-over-year.

Meanwhile Jetstar Asia's North Asia capacity has shrunk by about 10% last year. As discussed in the second part of this series of reports, mainland China has accounted for the entire decrease.

Over the next two months, North Asia capacity will drop a further 8% to just over 20,000 seats. This is being partly driven by Jetstar Asia cutting three of its 14 weekly flights on the Singapore-Taipei-Osaka route. Jetstar Asia also serves Osaka via Manila with four weekly flights while Jetstar Airways operates three A330 Singapore-Osaka non-stop flights. Jetstar Airways also serves Singapore-Beijing with three weekly A330 frequencies while Jetstar Asia's other North Asian A320 routes consist of Singapore to Guangzhou, Haikou, Hangzhou and Shantou in mainland China and Hong Kong.

North Asia will account for only about 24% of Jetstar Asia's total seat capacity in Jul-2013, compared to 29% currently and 38% in May-2012. Southeast Asia's share will reach 71% in Jul-2013 compared to 67% currently and less than 60% in May-2012.

Jetstar Asia capacity (weekly seats) by region: May-2013 and Jul-2013 versus May-2012

Region	Jul-2013	May-2013	May-2012
Southeast Asia	60,480	50,760	38,520
North Asia	20,160	21,960	24,480
Australia	4,680	2,520	2,160
TOTAL	85,320	75,240	65,160

Jetstar Asia capacity share (% of seats) by region: 8-Jul-2013 to 14-Jul-2013

Jetstar Asia has also been growing capacity to Australia from a very low base. The carrier in Jul-2013 will operate 13 weekly flights between Singapore and Perth, its only route outside Asia, compared to seven currently and six in May-2012. This increase is coordinated with parent Qantas, which recently dropped one of two A330 flights between Singapore and Perth.

As a group Jetstar will offer 76,320 seats in the Singapore-Southeast Asia market in Jul-2013, including the 60,480 seats from Jetstar Asia as well as 13,320 seats from Singapore-based sister carrier Valuair and 2,520 seats from Australia-based Jetstar Airways. This represents growth of 58% compared to the 48,240 seats in the Singapore-Southeast Asia market provided by the three carriers in Jul-2012.

Valuair and Jetstar Airways operates all Jetstar Group flights between Singapore and Indonesia while Jetstar Asia is the operator in all the other Singapore-Southeast Asia markets - Cambodia, Malaysia, Myanmar, Philippines, Thailand and Vietnam. Brunei and Laos are the only two Southeast Asian countries not served by Jetstar. (Jetstar Asia and Valuair have identical ownership structures, with 49% shares held by Qantas and 51% by a Singaporean investor, and have the same management teams, led by CEO Barathan Pasupathi.)

Jetstar Group capacity (weekly seats) in Singapore-Southeast Asia market: Jul-2013 vs Jul-2012

Carrier	Jul-2013	Jul-2012	YoY % change
Jetstar Asia	60,480	34,560	75%
Valuair	13,320	11,520	16%
Jetstar Airways	2,520	2,160	17%
TOTAL	76,320	48,240	58%

Jetstar's share of Singapore-Southeast Asia market to reach almost 13% in July

The Jetstar Group currently has about an 11% share of total capacity in the Singapore-Southeast Asia market compared to just under 10% in May-2012. Jetstar's share of the market will reach almost 13% in Jul-2013, according to CAPA and Innovata data.

Singapore to Southeast Asia capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Jetstar is the third largest LCC brand in the Singapore-Southeast Asia market, behind AirAsia and Tiger. The AirAsia Group currently accounts for about a 17% share of seat capacity between Singapore and Southeast Asia while the Tiger Group has about a 13% share. This includes capacity from AirAsia's subsidiaries or affiliates in Indonesia, Philippines, Malaysia and Thailand and from Tiger's subsidiaries or affiliates in Indonesia, the Philippines and Singapore.

Jetstar's increased focus on the Singapore-Southeast Asia market comes partly as a response to a rapid rise in capacity over the last couple of years from its LCC rivals, in particular AirAsia and Tiger.

Singapore's LCC sector has become intensely competitive, resulting in what is often described as over-capacity and irrational competition in some markets. This has also impacted the profitability of Tiger Singapore and Jetstar Asia.

Jetstar Asia and Tiger Singapore report improving financials after a tough FY2012

For example, Jetstar Asia reported an 81% drop in profits for the year ending 30-Jun-2012 (FY2012) from SGD22.5 million (USD18.1 million) to only SGD4.4 million (USD3.5 million). Tiger Singapore also struggled during this period, reporting losses for the quarters ending 30-Sep-2011, 31-Dec-2011 and 31-Mar-2012, although it turned a small profit in the quarter ending 30-Jun-2012.

(While AirAsia is also publicly traded, its profitability in Singapore is impossible to measure as the carrier serves the market with a combination of subsidiaries and affiliates from four countries. One feature of AirAsia's overall regional strategy is to utilise aircraft according to the fluctuating cost advantages in each of its country markets, an area where its main LCC competitors have not yet gained critical mass to allow them to follow suit.)

The situation may be improving. Jetstar Asia's financial figures for the six months ending 31-Dec-2012 are not available, but parent Qantas stated that Jetstar Asia's profits in 1HFY2013, "improved substantially compared to the prior corresponding period". Tiger Singapore also saw an improvement in profitability during the last six months of 2012 and has been in the black every quarter since Apr-2012.

While the Singapore-Southeast Asia market is challenging and arguably suffers over-capacity, Jetstar will need to continue adding seats to stay competitive. This may help explain the airline's reduction in Singapore-North Asia capacity, as it sought to free up capacity for the more competitive Singapore-Southeast Asia market in the absence of significant fleet growth over the last year.

Jetstar had pursued significant expansion of its Singapore-based A320 fleet in 2011, supporting capacity growth that had previously focused on North Asia and particularly mainland China.

But in 2012 and the first quarter of 2013 the Jetstar Asia/Valuair fleet only grew marginally. In 4Q2012 and 1Q2013 Jetstar Asia/Valuair instead focused on fleet renewal, replacing several A320s that were coming off leases with new aircraft, thus reducing the average age of the fleet to about three years. Jetstar Asia and Valuair currently operate a combined fleet of 18 A320s and are slated to end 2013 with a fleet of 20 aircraft.

Jetstar Asia continues seat capacity growth but ASKs fall due to increased focus on short-haul and constant adjustment in route priorities

As the various players jockey for position in the regional markets and as those markets evolve, route adjustments are being made that affect ASKs and, in turn, average yields. Jetstar Asia has continued to grow passenger traffic over the last year but the growth has been driven by a reduction in average stage length rather than fleet growth. RPKs and ASKs have been on the decline due to the reduction in medium-haul flights to North Asia.

In the six months ending 31-Dec-2012 (1HFY2013) Jetstar Asia/Valuair recorded a 3.5% drop in RPKs to 3.065 billion but a 13.9% increase in passenger numbers to 1.772 million. ASKs were also down by 3.7% as Jetstar Asia's load factor stayed relatively flat at about 78%.

The trend continued in the first three months of 2013 with RPKs again down year-over-year in Jan-2013, Feb-2013 and Mar-2013. Monthly RPKs at Jetstar Asia/Valuair have been down on a year-over-year basis for seven consecutive months (since Sep-2012).

Jetstar Asia monthly RPKs: Jan-2011 to Mar-2013

Jetstar Asia monthly passenger traffic: Jan-2011 to Mar-2013

Jetstar Asia monthly load factor: Jan-2011 to Mar-2013

In the fiscal years ending 30-Jun-2012 and 30-Jun-2011 significant RPK growth was recorded as Jetstar Asia/Valuair used additional aircraft to expand significantly in North Asia. RPKs were up 43% in FY2012 while passenger numbers grew by 23%. ASKs were up 38%, resulting in a 2.8ppts improvement in load factor to 79.5%.

In FY2011, Jetstar Asia/Valuair similarly recorded 40% growth in RPKs and 18% growth in passengers carried. ASKs were up 46% as the carrier's load factor slipped 3.8ppts to 76.7%.

Jetstar Asia capacity increases the most in Malaysia, despite a (temporary?) retreat

As Jetstar Asia's focus has shifted southwards over the last year, Malaysia has seen the most rapid growth as the carrier more than doubled capacity between Singapore and Kuala Lumpur, now its biggest route. As it is also the shortest route in the Jetstar Asia network, the significant expansion to Kuala Lumpur has been a major contributor to the wide gap between seat and ASK growth.

Jetstar Asia's Singapore-Kuala Lumpur schedule expanded in 4Q2012 from 23 to 51 weekly frequencies. There was an additional increase in early 2013 to 59 weekly flights in Feb-2013.

But over the last couple of months Jetstar Asia has pulled back in the Kuala Lumpur-Singapore market and currently offers 35 weekly frequencies, according to Innovata data. The carrier, however, is planning to add back the frequencies it removed over the next couple of months and is scheduled to operate 56 weekly flights in Jul-2013, according to Innovata data. Over one-third of Jetstar Asia's total Southeast Asia seat capacity will be allocated to the Singapore-Kuala Lumpur route.

In Jul-2013 Jetstar Asia will account for about 19% of seat capacity in the Singapore-Kuala Lumpur market (including both Kuala Lumpur airports), second only to AirAsia, which will have about a 31% share. Tiger is a much smaller player, with only a 10% share.

Jetstar also serves Penang in Malaysia but with only 10 weekly flights, giving it about a 15% share of capacity on the Singapore-Penang route. AirAsia and SilkAir are much larger players in the Singapore-Penang market while Tiger is slightly smaller. Jetstar Asia also previously served Kota Kinabalu in east Malaysia but dropped the route in Feb-2011 as it increased focus on North Asia. Jetstar also does not serve Kuching, another east Malaysia destination that is currently served by AirAsia and Tiger.

Overall Jetstar currently has just over 8,000 weekly one-way seats in the Singapore-Malaysia market, which will increase to about 12,000 in Jul-2013. Its current share of the Singapore-Malaysia market is 17%.

Singapore to Malaysia capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Jetstar's Singapore-Thailand market has also expanded

Jetstar has also expanded in the Singapore-Thailand market over the last year. It currently offers 7,740 weekly one-way seats to Thailand, compared to 5,220 weekly one-way seats in May-2012, giving it a 13% share of the total market.

Tiger, which serves four destinations in Thailand, has a leading 21% share of the Singapore-Thailand market. AirAsia has about a 12% share.

Singapore to Thailand capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Jetstar serves only two destinations in Thailand - Bangkok and Phuket.

But Singapore-Bangkok is the carrier's second largest route after Kuala Lumpur while Singapore-Phuket is the fourth largest.

Jetstar Asia top 10 routes ranked by capacity (seats): 8-Jul-2013 to 14-Jul-2013

Other Southeast Asian markets lag well behind, although Indonesia may expand

Jetstar Asia's other Southeast Asian markets are all much smaller and have not seen significant changes in capacity. The carrier's capacity to Vietnam has decreased slightly while Myanmar increased from a low base after Jetstar Asia upgraded its Singapore-Yangon service to daily in 2012. Capacity levels have remained flat to Cambodia and the Philippines. No significant schedule changes are planned for these markets or Thailand over the next couple of months.

Malaysia will see the biggest change once again over the next couple of months as flights are added back to Kuala Lumpur. Significant changes in the Indonesia market, which is served by Valuair and to a lesser extent Jetstar Airways, is also expected in 3Q2013 but have not yet been filed.

Jetstar's capacity in the Singapore-Indonesia market has been relatively flat over the last four years (with some mainly seasonal adjustments), as discussed in the first report in this series. Jetstar is expected to announce within the next few weeks significant expansion in the Singapore-Indonesia market, which is partly made possible by the signing of an expanded bilateral agreement between the countries in early 2013. Once announced this will drive a further increase in the Jetstar Group's overall Southeast Asia capacity in 3Q2013.

Jetstar's increased focus in Southeast Asia has its challenges but is the right move

Jetstar's increased focus on Southeast Asia is risky as the LCC group faces intense competition from multiple LCCs in every Southeast Asian market it serves. Yet the group has little choice but to compete aggressively in order to maintain the position it has built up since Jetstar Asia launched in 2004. The Jetstar Group currently has an 8% share of capacity at Singapore Changi, slightly below the 9% share for the Tiger Group and the 8% share from the AirAsia Group.

It is unfortunate timing that Jetstar's increased focus on Southeast Asia has had an impact on its Singapore-Northeast Asia operation. The group could possibly have avoided reducing capacity in Northeast Asia while still increasing its focus on Southeast Asia by accelerating fleet expansion of its Singapore-based fleet. The problem is a common one among this new form of "network" airlines, as they juggle capacity among the various bases - although the same issue also offers the advantages of flexibility, as each market fluctuates in terms of demand and supply/competition. For the time being, Jetstar's capacity is needed elsewhere in the group and assets are limited.

Another option may have been for Jetstar to increase average aircraft utilisation. Some of its North Asian routes operate during overnight hours (albeit not popular with passengers) and Jetstar Asia could have maintained or added seats on some of these routes while still having capacity to increase its operation within Southeast Asia. For example Jetstar Asia's Guangzhou service, which was recently reduced from daily to four weekly flights, leaves Singapore at 20:25 and returns to Singapore at 05:15.

From a group perspective, however, China can be better accessed via the group's forthcoming Jetstar Hong Kong subsidiary. Southeast Asia is also beginning to mature whereas North Asia, including China, still has many - potentially massive - growth chapters to be written. In the face of limited assets, it makes sense for Jetstar in the meantime to shift focus from North Asia to Southeast Asia. It can, and inevitably will, return to North Asia in due course.

Jetstar Airways also has cut back its Singapore-based A330 medium and long-haul operations. The carrier currently operates only 14 weekly A330 flights from Singapore, compared to 20 at the beginning of 2013. Its Melbourne service has been cut from daily to five times weekly flights, Beijing from five to three weekly flights and Osaka from four to three weekly flights (although it is slated to return to four in Sep-2013). Auckland has remained at three weekly flights since mid-2012, when it was cut from four weekly flights. One A330 has been returned from Jetstar to Qantas to facilitate competition with Virgin Australia in the domestic Australian market.

Although Jetstar is scheduled to take 787-8 aircraft in mid-2013, these will replace its existing A330s, which are then transferred back to Qantas to replace its ageing 767s. There will be only a few 787s for growth (as opposed to replacement), and Jetstar favours widebody capacity on strong point-to-point routes rather than connecting markets where competition is greater. It remains to be seen where widebody growth will occur in the Jetstar market.

Jetstar was originally planning to add a fourth A330 in Singapore by early 2012 but instead the group recently redeployed some of its Singapore widebody capacity back to Australia to counter a growing Virgin Australia and Tiger Airways Australia combination (and Virgin has recently been granted approval to acquire a controlling share in Tiger Australia, shifting the competitive balance there). The group's current Singapore widebody schedule only requires two aircraft.

Hong Kong looks likely to be Jetstar's main access to North Asia, while Singapore emerges as its main hub for Southeast Asia

It is evident Hong Kong will be Jetstar's main base for China and facilitating North Asia-Southeast Asia connections. Carriers at either end - Jetstar Asia and Jetstar Japan - can facilitate further connections to less common destinations.

As Jetstar continues to build up frequencies in key Singapore-Southeast Asia routes, connections in more markets open up. Jetstar has had success in pursuing transit traffic in Singapore, with at least 15% of Jetstar's Singapore passengers transiting. (The 15% figure is over one year old and Jetstar has not publicly provided an updated figure).

So far most of the group's transit traffic in Singapore has been Jetstar to Jetstar. But Jetstar-Qantas connections is poised to grow as Qantas, after moving its London flights from Singapore to Dubai at the end of Mar-2013, was able to re-time its Australia-Singapore flights to connect with more flights within Asia. Jetstar also has the potential to work with other carriers that serve Singapore - both low-cost and full-service. KLM for example is an active connector with Jetstar in Singapore.

Jetstar-to-Jetstar connections could decline slightly as the group reduces its Singapore-North Asia operation because Jetstar Asia has traditionally had strong transit traffic in markets such as Indonesia-China. But this should be more than offset by gains in transit passengers from other markets, particularly Australia-Southeast Asia.

The group's strengthening Southeast Asia operation is particularly attractive for the fast-growing Australia-Southeast Asia market, while for the Australia-North Asia market connections are significantly shorter via Hong Kong. A different range of connections is possible from Hong Kong compared to Singapore, offering shorter distances and thus lower fuel consumption and fares. Hong Kong may not have the breadth of Singapore connections, but it will be able to cover key markets.

Despite the intense competition in Southeast Asia, Jetstar has a relatively bright outlook in Singapore. Jetstar certainly will not become the largest LCC group in the region. AirAsia, Lion and Tiger will continue to be larger and will likely grow faster than Jetstar. But Jetstar has carved out a successful niche in Southeast Asia using the Singapore base of Jetstar Asia/Valuair.

This should continue to provide the group a platform for growth in Southeast Asia along with modest profitability - something that may serve the wider Qantas Group well as and when it expands its red-tail (Qantas) into Asia. That is a strategy that is still in the making, but Jetstar's pathfinder role may be an important part of it.