Low cost long haul narrowbody: AirAsia X, NokScoot join the party

Summary

• The AirAsia X Group is negotiating to convert 40 of its A330-900neo orders to A321neos and/or A321neoLRs with deliveries starting in 2Q2019.
• The A321neo/A321neoLR will enable AirAsia X and Thai AirAsia X to add frequency on several existing routes and potentially launch several new routes of up to eight hours.
• NokScoot is planning to add narrowbody aircraft in 4Q2018 as it takes two 737-800s and is looking at acquiring 737 MAX 8s for delivery in 2019.
• There are currently no long haul narrowbody scheduled routes operated by Asia Pacific LCCs but Citilink and Lion are operating some long haul charters from Bali to China.
• Lion, Citilink, AirAsia and Thai AirAsia are among 10 Asian LCCs currently operating new generation narrowbody aircraft but their range is generally not being fully exploited as there are currently no scheduled routes of more than 5hr15mins.
• In comparison, in the Europe-North America market there are now several scheduled LCC narrowbody routes of over seven hours.

The fast growing low cost long haul narrowbody segment will be discussed during the CAPA Low Cost Long Haul Global Summit on 4/5-Oct-2018 in Seville. For more details click here.

Transatlantic market attracts low cost long haul narrowbody operations

Several LCCs have begun deploying narrowbody aircraft on long haul routes over the last two years, driven by the introduction of new generation aircraft and engine technology. So far European LCCs have been at the forefront of using re-engined narrowbody aircraft on long haul routes, particularly across the Atlantic.

Norwegian has been one of the pioneers, using its new fleet of 737 MAX 8s to launch several new transatlantic routes in summer 2017, supplementing existing generally longer transatlantic routes that have been operated with 787s since 2013. Norwegian also has acquired 30 A321neoLRs which will be used to further expand in the transatlantic market from summer 2019. Norwegian's longest current narrowbody route is Bergen to New York Stewart, which has a scheduled time of 7hr40min on the westbound sector and 7hr05mins on the eastbound sector.

Iceland's WOW air is another long haul narrowbody LCC pioneer and became the first European A321neo operator in Jun-2018. WOW's current longest narrowbody route is Reykjavik to St Louis, which has a scheduled time of 7hr20min westbound and 6hr45min eastbound.

WOW launched St Louis with A321neos in late Jun-2018. WOW also now uses the new type for Reykjavik to Tel Aviv route, which has a scheduled time of 7hr10min eastbound and 7hr15min westbound. However, WOW is suspending services to Tel Aviv on Oct-2018, enabling it to expand its transatlantic narrowbody operation.

The only other LCC currently operating narrowbody aircraft across the Atlantic is WestJet, although several LCCs are expected to follow over the next few years. WestJet's longest narrowbody route is Halifax-Paris, which has a scheduled time of 7hr15min westbound and 6hr05mins eastbound.

WestJet serves Halifax-Paris with 737 MAX 8s, which it also uses to operate the slightly shorter Halifax-London Gatwick route. WestJet took its first 737 MAX 8 in late 2017 and launched Halifax to London and Paris in late Apr-2018 and late May-2018 respectively.

Only low cost long haul narrowbody routes in Asia are Indonesia-China charters

In Asia Pacific there are not yet any regularly scheduled narrowbody LCC routes above six hours. However, Indonesia's Lion Air currently operates 737 MAX 8s on several charter routes to China of around seven hours.

Bali-Tianjin is Lion's longest narrowbody route with a scheduled time of 7hr30mins in both directions. Bali-Jinan is its second longest route with a scheduled time of 7hrs0mins in both directions (based on OAG schedule data for the week commencing 3-Sep-2018). Other long haul narrowbody charter routes for Lion include Bali to Xian and Zhengzhou (scheduled time of 6hr50 mins), Bali to Chengdu (6hr40min) and Bali to Shanghai (6hr30mins).

Garuda LCC subsidiary Citilink also currently operates four charter routes to China that are between six and seven hours. Citilink's longest route is Bali-Qingdao, which has a scheduled time of 7hr0min in both directions. Bali-Wuxi, which has a scheduled time of 6hr40mins in both directions, is Citilink's second longest route. Citilink operates both of these routes with A320neos.

Asian LCCs currently operate 117 new generation narrowbody aircraft

Lion and Citilink are among 10 LCCs in Asia Pacific now operating A320neo or 737 MAX family aircraft, which offer improved range compared with the A320ceo and 737NG families. These 10 airlines currently operate 117 re-engined narrowbody aircraft, according to the CAPA Fleet Database.

Asia Pacific re-engined narrowbody fleet by airline and aircraft type: as of 3-Sep-2018

Rank	Airline	Country	# of aircraft	Aircraft type
1.	IndiGo	India	42	A320neo
2.	AirAsia	Malaysia	21	A320neo
3.	Go Air	India	16	A320neo
4.	Lion Air	Indonesia	10	737 MAX 8
5.	Thai AirAsia	Thailand	9	A320neo
6.	Citilink	Indonesia	8	A320neo
7.	HK Express	Hong Kong	5	A320neo
8.	VietJet Air	Vietnam	3	A321neo
9.	Thai Lion Air	Thailand	2	737 MAX 9
10.	West Air	China	1	A320neo

Source: CAPA Fleet Database.

Asia Pacific currently accounts for 41% of the 283 re-engined narrowbody aircraft in service at LCCs globally. The total global re-engined narrowobdy fleet (including full service airlines) is 619 aircraft with Asia Pacific accounting for 278 or 45%.

The A320neo currently accounts for an overwhelming majority, or 349 of the 619 aircraft (56%) of the world's in-service re-engined narrowbody fleet. This is hardly a surprise given the A320neo entered service in Jan-2016, or 16 months earlier than the May-2017 first delivery of the 737 MAX 8.

The A321neo entered service in Apr-2017 and the 737 MAX 9 in Mar-2018. The 737 MAX 8 and 737 MAX 9 have slightly more range than the A320neo or A321neo but less range than the A321neoLR, which is slated to enter service in late 2018.

Among Asia Pacific LCCs, the A320neo currently accounts for 102 of the total 117 aircraft. The A320ceo is the most popular aircraft among Asia LCCs. However, the A320neo's market share will decline from the current 87% as more A321neos and 737 MAX aircraft are delivered. Of the approximately 1,700 re-engined narrowbody aircraft on order by Asia Pacific LCCs around 60% are for A320neos.

Asian LCCs are not yet using their re-engined narrowbody fleets on scheduled long haul routes

Of the 10 re-engined narrowbody LCC operators in Asia, Citilink and Lion are the only airlines currently operating any narrowbody routes over five and a half hours. As previously mentioned these are all charter routes to China - although Citilink and Lion could start operating longer scheduled routes in future.

Therefore, there are not currently any scheduled long haul re-engined narrowbody LCC routes in Asia Pacific (based on most definitions of long haul).

The AirAsia Group and IndiGo, the two largest A320neo operators globally, do not have any routes longer than five hours. Indigo's longest current route is Bangalore to Singapore which has a scheduled time of 4hr40mins westbound and 4hr30mins eastbound.

The AirAsia Group's longest narrowbody route is Kuala Lumpur-Changsha, which is 4hr55mins northbound and 4hr35mins southbound. This route is operated by the group's Malaysian subsidiary.

The longest current route operated by Thai AirAsia is Bangkok to Bali, which has a scheduled time of 4hr35mins southbound and 4hr25ms northbound. Malaysia AirAsia and Thai AirAsia are the only airlines in the AirAsia Group currently operating A320neos although the A320neos are not required on any route as their longest routes are easily within the range of A320ceos. (Indonesia AirAsia and Philippines AirAsia also have a small number of routes that are slightly over four hours but only currently operate A320ceos).

Longest route for Asia's re-engined narrowbody LCC operators based on scheduled time: w/c 3-Sep-2018

Rank	Airline	Country	Route	Block time
1.	Lion Air	Indonesia	Denpasar Bali-Tianjin	7:30
2.	Citilink	Indonesia	Denpasar Bali-Qingdao	7:00
3.	VietJet Air	Vietnam	Seoul- Ho Chi Minh	5:15
4.	HK Express	Hong Kong	Hong Kong-Saipan	5:05
5.	West Air	China	Chongqing-Singapore	5:00
6.	AirAsia	Malaysia	Kuala Lumpur-Changsha	4:55
7.	Thai Lion Air	Thailand	Phuket-Zhengzhou	4:50
8.	IndiGo	India	Bangalore-Singapore	4:40
9.	Thai AirAsia	Thailand	Bangkok-Denpasar Bali	4:35
10.	Go Air	India	N/A*	<3:00

Notes: based on schedules for the week commencing 3-Sep-2018
*Go Air only operates domestically and does not have any routes over 3 hours.
Source: CAPA - Centre for Aviation & OAG.

AirAsia's long haul narrowbody ability limited by the four-hour rule

The AirAsia Group's ability to operate long haul routes is limited by its licensing agreement with sister airline group AirAsia X. Under the agreement, which was forged before AirAsia X commenced operations in 2007, AirAsia X has the right to operate all routes from Southeast Asia that are over four hours. Differentiation is considered necessary as the airlines have varying ownership structures and licensing agreements.

AirAsia is still able to operate longer routes but only if specifically permitted by AirAsia X. Malaysia AirAsia has around 25 routes that have scheduled block times of more than four hours but nearly all of these are less than 4hr30min (and are therefore generally shorter than 4hrs based on actual flight time).

Malaysia AirAsia weekly departing frequencies based on length of flight: 3-Sep-2018 to 9-Sep-2018

Source: CAPA - Centre for Aviation & OAG.

Thai AirAsia also has a few routes longer than four hours but these are also only slightly above four hours. Almost all of Thai AirAsia's capacity is on short haul routes less than four hours although the LCC is now operating A320neos, which have the range to operate much longer routes.

Thai AirAsia weekly departing frequencies based on length of flight: 3-Sep-2018 to 9-Sep-2018

Source: CAPA - Centre for Aviation & OAG.

The four-hour rule separating AirAsia and AirAsia X is hardly ideal as it has essentially resulted in widebody aircraft being deployed on several four to six hour routes that could be more efficiently served by new narrowbody aircraft. The introduction of re-engined narrowbody aircraft has made the four hour rule even more concerning, putting AirAsia as a brand at competitive disadvantage compared to other LCC brands which are freely able to deploy narrowbody aircraft on longer routes (and widebody aircraft on short routes) based on demand.

AirAsia X to acquire A321neos

There has been some talk about AirAsia X potentially acquiring A321neos since 2016, when the AirAsia Group placed orders for 100 A321neos.

The AirAsia Group's A321neos, which are slated to be delivered from 2019 to 2028, are intended to upgauge existing short haul flights, particularly at slot constraints airports. There was an obvious potential requirement for longer routes which would necessitate AirAsia X also acquiring A321neos given the four-hour rule.

See related report: AirAsia up-gauges with a 100 A321neo order; outlook improves and China in its sights

However, AirAsia X until now had decided against adding narrowbody aircraft. As recently as Jul-2018 the group decided to instead expand its order for A330-900neo re-engined widebody aircraft from 66 to 100. The decision to go with such a large widebody fleet (the AirAsia X Group currently operates only 31 aircraft) was somewhat surprising given that re-engined narrowbody aircraft would be a better solution for several of AirAsia X's existing and potential future routes.

See related report: Asia LCC widebody fleet: AirAsia X will triple in size in 10 years

AirAsia X has, sensibly, made a very quick U-turn with its fleet strategy and is now planning to add narrowbody aircraft and acquire fewer A330-900neos. AirAsia X disclosed during its 2Q2018 results briefing on 30-Aug-2018 that the group is now negotiating with Airbus to convert 40 of its A330-900neo orders to A321neos or A321neoLRs.

This is a logical move as it will enable AirAsia X to more efficiently serve several of its existing routes. With smaller aircraft, AirAsia X can add frequencies in several existing markets, therefore improving connectivity, and launch services on new thin routes that cannot support widebody aircraft.

Assuming a 236-seat configuration, AirAsia X's A321neo will have 37% fewer seats than its 377-seat A330-300ceo and 40% fewer seats than its future fleet of 396-seat A330-900neos. However, A321neos are extremely efficient and could generate lower unit costs than A330s on four to six hour routes.

Narrowbody aircraft are feasible for almost all of AirAsia X's existing routes

AirAsia X expects to opt for an all economy configuration on at least some of the 40 A321neos/A321neoLRs.

An all economy configuration is ideal for most of AirAsia X's four to six hour routes, which are generally to leisure sensitive markets in South Asia and China. AirAsia X is considering a dual class configuration for some A321neos/A321neoLRs for use on longer routes (of around seven hours) and on those four to six hour routes where there is premium demand.

Having a premium cabin would result in a lower density configuration overall, which would enable AirAsia X to use narrowbody aircraft on nearly all of its existing routes.

Almost all of AirAsia X's flights are now less than eight hours. Its longest current route is Osaka-Honolulu, which has a scheduled time of 9hr25mins westbound and 8hr5mins eastbound.

Malaysia AirAsia X weekly departing frequencies based on length of flight: 3-Sep-2018 to 9-Sep-2018

Source: CAPA - Centre for Aviation & OAG.

The chart above includes one weekly flight of 10 hours but this is an irregular charter service to Beirut. AirAsia X also has a regular seasonal service from Kuala Lumpur to Jeddah, which when it operates is its longest scheduled route - at 9h30mins westbound and 8hr55mins eastbound (the route is not currently operating).

AirAsia X's second longest year-round route is Kuala Lumpur-Sydney, which has a scheduled time of 8h10mins southbound and 8hr50mins northbound. Kuala Lumpur-Sydney would be within the range of low density A321neoLRs but AirAsia X will almost certainly stick with A330s given the large size of the Sydney market and slot constraints at Sydney. The shorter Kuala Lumpur-Gold Coast and Kuala Lumpur-Perth routes would potentially be more suitable for A321neos/A321neoLRs along with new or relaunched destinations in Australia such as Adelaide, Canberra and Townsville.

AirAsia X stated in the group's 2Q2018 results presentation that the A321neo/A321neoLR could potentially operate 64% of the Malaysia AirAsia X network. The group stated that a "dual fleet enables AirAsia X to grow markets with a smaller aircraft and defend markets with a bigger aircraft".

AirAsia-AirAsia X merger becomes more pressing

However, the introduction of A321neos at AirAsia X does have a downside in that operating two types of aircraft adds cost and complexity.

Having AirAsia operate long haul narrowbody routes would be more efficient as AirAsia has an all-A320 fleet. However, this is not possible under the current arrangement between AirAsia and AirAsia X, which have separate ownership groups and stock exchange listings.

Over the years there has been off and on talk about the AirAsia Group merging with or taking over the AirAsia X Group. While some continue to advocate a merger, Tony Fernandes (who leads and has large stakes in both groups) is still steadfast against the idea.

The four-hour rule has never made sense as it compromises efficiency and flexibility. Pressure for a AirAsia-AirAsia X merger will likely build as AirAsia X adds A321neos.

AirAsia X to operate A321neos from Bangkok and Kuala Lumpur

The AirAsia Group and AirAsia X Group are both now planning to take delivery of A321neos in 2019. The AirAsia X deliveries are expected to begin in 2Q2019 while the AirAsia Group deliveries will likely begin slightly later.

The AirAsia X Group plans to allocate the first batch of A321neos to Thai AirAsia X. However, Malaysia AirAsia X will also likely operate the new type by the end of 2019.

All Thai AirAsia X existing routes are within range of the A321neo or A321neoLR. However, Thai AirAsia X will most likely operate A321neos on routes of roughly five hours to China rather than longer routes to South Korea or Japan.

Thai AirAsia X's current longest route is Bangkok-Sapporo, which has a scheduled flight time of 6hr45mins northbound and 7hr15mins southbound. Most of its flights are in the five to six hour range.

Thai AirAsia X weekly departing frequencies based on length of flight: 3-Sep-2018 to 9-Sep-2018

Source: CAPA - Centre for Aviation & OAG.

While Thai AirAsia X could potentially use A321neos on all its existing routes it still needs widebodies for thicker routes to North Asia and to launch long haul services to Europe. The AirAsia X Group plans to serve Europe from both Thailand and Malaysia using its new fleet of A330-900neos. The group also plans to use the new A330-900neo fleet to launch new flights from Japan to the continental US.

In addition to the operations in Malaysia and Thailand, the AirAsia X Group has an affiliate in Indonesia. However, Indonesia AirAsia X currently only operates two aircraft, has been struggling and is planning to suspend scheduled operations (for the second time). The group is planning to move one of the Indonesia-based A330s to Thailand by the end of 2018 and has been looking at potentially shutting down Indonesia AirAsia X entirely.

NokScoot to also add narrowbody aircraft

Malaysia AirAsia X, Thai AirAsia X and Indonesia AirAsia X are three of only four all-widebody LCCs in Asia Pacific. The fourth, Thailand-based NokScoot, is planning to add narrowbody aircraft in Oct-2018.

NokScoot currently operates five two class 415 seat 777-200 and is leasing two second hand 189-seat all economy 737-800s from 4Q2018. The two 737-800s will be used to replace 777-200s on existing flights to Taiwan and China, freeing up 777-200s to expand in Japan and potentially South Korea.

NokScoot has discovered the 777-200 is too large for several of its existing routes, particularly during off peak periods. All of the airline's routes are within range of narrowbody aircraft although for some routes using high density widebodies is still a better solution.

NokScoot's current longest route is Bangkok-Tokyo, which has a scheduled time of 6hr5mins northeastbound and 6hr30min southwestbound. All its other routes are between three and six hours.

NokScoot weekly departing frequencies based on length of flight: 3-Sep-2018 to 9-Sep-2018

Source: CAPA - Centre for Aviation & OAG.

NokScoot's initial 737-800 routes are Bangkok-Taipei and Bangkok-Xian. Both routes are slightly less than four hours, putting them very comfortably within the range of the 737-800.

NokScoot is also intending to use 737-800s to launch flights from Bangkok to Fukuoka, which is a longer route at slightly over five hours but also within range of high density 737-800s.

NokScoot may add 737 MAX 8s in 2019

Taipei, Xian or Fukuoka would not qualify as long haul under most definitions. However, NokScoot is looking at launching longer narrowbody routes in 2019 using 737 MAX 8s.

NokScoot has another four additional 737s in its business plan for 2019. While it is also considering additional 737-800s, it is currently leaning towards acquiring longer range 737 MAX 8s.

NokScoot is looking at potentially sourcing 737 MAX 8s from either of its JV partners, the Singapore Airlines (SIA) Group and Thailand-based Nok Air. Both have 737 MAX 8s on order and have equal 49% stakes in NokScoot. (The SIA stake is through its 100% owned LCC subsidiary, Scoot.)

NokScoot is sourcing its initial two 737-800s from Nok and sourced its five 777-200s from SIA. However NokScoot is not tied to sourcing all its aircraft from its shareholders and is also considering sourcing 737s (737-800s or 737 MAX 8s) from leasing companies.

Other Asian LCCs plan long haul narrowbody routes

NokScoot, Thai AirAsia X and AirAsia X will not be the only LCCs from Asia Pacific adding long haul narrowbody operations.

Cebu Pacific and Scoot are expected to operate longer narrowbody routes as they start taking A320neo family aircraft. Cebu Pacific is slated to begin A321neo deliveries in late 2018 and is taking a mix of A320neos and A321neos in 2019. Scoot plans to take its first A320neo in late 2018.

Scoot already has several relatively long A320ceo routes (five to six hours) to China and India which will likely be transferred to the more efficient A320neo. Scoot also has several 787 routes which could be better served with A320neos and is looking at several potential new five to seven hour routes which are too thin for 787s. Scoot has 39 A320neos on order; it does not have any A321neos or A321neoLRs on order but could potentially convert some of its A320neos.

Cebu Pacific's longest narrowbody routes are Cebu and Manila to Tokyo, which are slightly more than five hours on the southbound sectors. Cebu Pacific is looking at using its new fleet of 236-seat A321neos to launch longer routes of around six hours. Cebu Pacific has 32 A321neos and five A320neos on order, according to the CAPA Fleet Database.

VietJet is also looking at launching new longer routes as its A321neo fleet expand. VietJet's longest current route is Ho Chi Minh-Seoul, which has a scheduled time of slightly more than five hours in both directions. VietJet is launching a few longer routes to Japan over the next few months. Ho Chi Minh-Osaka, which has a scheduled time of 5hr50min northbound and 6hrs southbound, will become VietJet's new longest route in Dec-2018.

VietJet operates three A321neos and has another 70 of the type on order. It also has acquired up to 200 737 MAX family aircraft.

Jetstar and Peach commit to A321neoLR

VietJet, Cebu Pacific and Scoot have not yet committed to the A321neoLR. The only Asia-Pacific LCCs that have announced orders for A321neoLRs are Jetstar and Peach.

Jetstar's parent Qantas Group in Feb-2018 announced the conversion of 18 A321neo orders to the A321neoLR. Jetstar plans to take delivery of the 18 A321neoLRs from 2020 to 2022 and configure the aircraft with 232 all-economy seats.

All Nippon Airways subsidiary Peach announced in Jul-2018 the conversion of two A320neo orders to the A321neoLR. Peach plans to take delivery of both aircraft in 2020 and will likely order more A321neoLRs for a new long haul operation aimed at connecting Japan with Southeast Asia and South Asia.

A321neoLR could be a game changer for AirAsia X

The A321neoLR offers about an extra hour or range compared with the standard A321neo. While the A321neoLR has the range to operate routes of more than eight hours, this is not possible with a high density all economy configuration.

For example, Jetstar plans to use A321neoLRs to replace 787-8s on six hour Australia-Bali routes. Jetstar is looking at potential new routes of similar and slightly longer length but has said that given its high density 232-seat configuration Australia-Bali routes are "getting towards the edge of the range".

See related report: Jetstar Airways' new routes for A321neoLR fleet: Perth-New Zealand could be at the top of the list

Other Asian LCCs will likely have similar limitations if they opt for A321neoLRs. Some Asian LCCs, including AirAsia X, may opt for two class A321neoLRs but even these would be in a relatively high density configuration compared to FSCs.

For example Air Astana, the only FSC in Asia Pacific that has announced commitments for A321neoLRs, has selected a 166-seat two class configuration. A two class AirAsia X A321neoLR would likely seat around 200 passengers, which should enable the airline to operate routes over seven hours but not over eight hours as planned by Air Astana.

Asia Pacific LCCs are not likely to operate the world's longest long haul narrowbody routes. However, several Asian LCC groups will take advantage of the game changing economics to introduce new long haul narrowbody routes. AirAsia X will perhaps provide the best example of what re-engined narrowbody aircraft can do for LCCs in the vast Asia Pacific region.