Low cost long haul narrowbody aircraft: Asian gamechanger?

Summary

• There are now almost 200 re-engined narrowbody aircraft (A320neo and 737 MAX families) operating in the Asian LCC sector, across 18 operators.
• Only two of the 18 operators currently operate scheduled routes of more than five hours.
• The low cost long haul narrowbody segment is much bigger in other markets, particularly the trans Atlantic, but inevitably will grow in Asia.
• Jetstar, Jetstar Japan and Peach have committed to A321neoLRs and AirAsia X could place an order soon.
• An AirAsia X long haul narrowbody operation could be a game changer and spur other LCCs in Asia to acquire A321neoLRs also.

The emerging long haul narrowbody segment will be discussed at the CAPA Global LCC Summit in Singapore on 25/26-Feb-2019.
The Summit includes panels on how new generation aircraft are enabling new growth opportunities and how Nextgen long haul is remaking traditional network planning.
For more details on the Summit please click here.

Asian LCCs are not yet fully utilising the range of new narrowbody types

There are currently 18 LCCs in the Asia Pacific region operating nearly 200 re-engined narrowbody aircraft, according to the CAPA Fleet Database. This includes 167 A320neo family aircraft at 13 operators and 29 737 MAX family aircraft at six operators (China's Lucky Air operates both types).

Asia LCCs operating re-engined narrowbody aircraft: as of 25-Jan-2019

Rank	Airline	Country	Number of aircraft	Aircraft type
1.	IndiGo	India	69	A320neo (68), A321neo (1)
2.	GoAir	India	29	A320neo
3.	AirAsia	Malaysia	24	A320neo
4.	Thai AirAsia	Thailand	11	A320neo
5.	Lion Air	Indonesia	10	737 MAX 8
6.	SpiceJet	India	10	737 MAX 8
7.	Citilink	Indonesia	8	A320neo
8.	Lucky Air	China	6	A320neo (3), 737 MAX 8 (3)
9.	VietJet	Vietnam	6	A321neo
10.	HK Express	Hong Kong	5	A320neo
11.	Beijing Capital Airlines	China	5	A320neo
12.	Thai Lion Air	Thailand	3	737 MAX 9
13.	West Air	China	3	A320neo
14.	Scoot	Singapore	2	A320neo
15.	Eastar Jet	South Korea	2	737 MAX 8
16.	9 Air	China	1	737 MAX 8
17.	Cebu Pacific	Philippines	1	A321neo
18.	Spring Airlines	China	1	A320neo

Note: includes in-service aircraft only; grounded aircraft are excluded.
Source: CAPA Fleet Database.

Although the 196 aircraft included in the table above are capable of operating routes of up to seven hours, they are currently only operating six scheduled routes of at least five hours.

Only two of the 18 operators, IndiGo and VietJet, have scheduled flights of more than five hours; a few of the operators have some charter flights of more than five hours, including Citilink, Eastar Jet and Lion.

Scheduled routes of more than five hours operated by Asian LCCs using re-engined narrowbody aircraft: week commencing 21-Jan-2019

Route	Airline	Aircraft type	Launch date
Bangalore-Hong Kong	IndiGo	A320neo	Dec-2018
Trivandrum-Doha	IndiGo	A320neo	Oct-2018
Hanoi-Osaka	VietJet	A321neo	Nov-2018
Hanoi-Tokyo	VietJet	A321neo	Jan-2019
Ho Chi Minh-Osaka	VietJet	A321neo	Dec-2018
Ho Chi Minh-Seoul	VietJet	A321neo	Nov-2015*

Note: *VietJet initially launched Ho Chi Minh-Seoul with A320ceos and now operates the route with A321neos. Jeju Air also serves the route using 737-800s.
Source: CAPA - Centre for Aviation.

LCCs in other regions are more commonly using their re-engined narrowbody aircraft on routes of more than five hours. Low cost long haul narrowbody has particularly become common across the Atlantic, led by Norwegian. Flydubai is also using 737 MAX 8s on several routes of more than five hours from its Dubai hub to Africa, Central Asia and Europe.

A321neoLR type could assume large role in Asia Pacific

Later this year Norwegian and another UAE-based LCC, Air Arabia, will become the first LCCs operating A321neoLRs. The new aircraft type, which is capable of operating routes of up to eight hours, entered service in late 2018 with Israel's Arkia.

While there are ample opportunities for Asian LCCs to use the 737 MAX 8/737 MAX 9 and non-LR variant of the A320neo/A321neo to operate more long haul routes, the A321neoLR could emerge as a bigger game changer in the Asia Pacific market from a network perspective. (From a cost perspective, the 737 MAX and A320neo families are already game changers, given their superior efficiency and economics compared to the 737NG and A320ceo families.)

So far, two Asian LCCs have announced commitments to A321neoLRs - Jetstar Japan and Peach. Jetstar Airways from Australia has also committed to acquiring A321neoLRs.

More Asian LCCs are likely to announce commitments in 2019. (Some Asian LCCs may have already acquired A321neoLRs without disclosing so: Airbus does not distinguish in its order book between the A321neo and A321neoLR.)

Jetstar to operate A321neoLRs on Australia-Indonesia routes

As highlighted in prior CAPA analysis reports, in Feb-2018 Jetstar Airways announced the conversion of 18 of its A321neo orders to A321neoLRs. The 18 aircraft are slated to be delivered from mid 2020 to 2022 and will be used, in part, to replace 787s on long haul routes between Australia and Bali (freeing up the 787s for routes deeper into Asia).

Jetstar is also evaluating potential new long haul narrowbody routes from Perth to New Zealand and from eastern Australia to South Pacific. However, Jetstar will mainly use the new A321neoLR fleet on existing domestic routes that are being operated with A320ceos/A321ceos (therefore not taking full advantage of the improved range).

See related reports:

• Airbus A321neoLR orders: Jetstar the ninth airline, third LCC, to order the new long haul narrowbody
• Jetstar Airways' new routes for A321neoLR fleet: Perth-New Zealand could be at the top of the list

Peach and Jetstar Japan target Japan-Southeast Asia market

In Jul-2018 Peach announced the conversion of two of its A320neo orders to A321neoLRs. Peach plans to take delivery of both aircraft in 2020.

In late Nov-2018 Jetstar Japan announced the acquisition of three A321neoLRs for delivery starting in 2020. Jetstar Japan is acquiring these aircraft on its own; they are not part of the 18 A321neoLR orders placed by its sister airline Jetstar Airways.

Jetstar Airways has a total of 99 A320neo orders (consisting of 45 A320neos, 36 A321neos and the 18 A321neoLRs) which, in theory, can be accessed by its overseas affiliates, but its affiliates also have the flexibility to obtain aircraft independently.

Jetstar Japan plans to use its A321neoLR fleet to open new long haul narrowbody routes - most likely to Southeast Asia. Jetstar Japan has not yet decided on a configuration; it is considering offering a business class product and therefore may end up with a slightly different spec compared to its sister airline. Jetstar Airways has selected a 232-seat all economy configuration.

Jetstar Japan is now mainly a domestic operator and will continue to focus on the domestic market but is keen to explore niche opportunities in the Japan-Southeast Asia market. Rival LCC Peach is also keen to develop its Southeast Asian market using A321neoLRs.

Both Peach and Jetstar Japan will likely acquire more A321neoLRs, although initially they are taking a conservative approach (typical for Japanese carriers) to long haul narrowbody expansion.

Jetstar Japan to use A321neoLRs to beef up international presence

Jetstar Japan is a larger airline than Peach but Peach has a much larger international operation. Peach will also overtake Jetstar Japan as the largest of Japan's new generation LCCs once it completes a merger with Vanilla Air. Peach currently operates 23 A320ceos, Jetstar Japan operates 24 A320ceos, and Vanilla operates 15 A320ceos.

Jetstar Japan is much larger than Peach or Vanilla domestically. However, Peach has five times more capacity than Jetstar Japan in the international market and Vanilla has more than twice as much.

Jetstar Japan has a less than 2% share of international LCC capacity in Japan while Peach and Vanilla combined have 11%. Jetstar Japan has a leading 47% share of domestic LCC in Japan, compared to 30% for Peach and 15% for Vanilla (based on OAG schedules for the week commencing 21-Jan-2019).

Jetstar Japan's international operation accounts for less than 7% of its total seat capacity. Peach and Vanilla have a focus that is more international, making up 41% and 37% of their total seat capacity respectively. Peach has seven international destinations, Jetstar Japan has four, and Vanilla three.

Japan's two other (much smaller) local LCCs, AirAsia Japan and Spring Airlines Japan, also do not have a significant international presence. Spring Airlines Japan has four international destinations (all in China) and AirAsia Japan is launching its first international service on 1-Feb-2019.

Japanese LCC capacity share (% of total seats) by airline: week commencing 21-Jan-2019

Rank	Airline	IATA code	Domestic capacity share	International capacity share
1	Jetstar Japan	GK	4.1%	0.4%
2	Peach	MM	2.7%	2.1%
3	Vanilla Air	JW	1.3%	1.0%
4	Spring Airlines Japan	IJ	0.5%	0.3%
5	AirAsia Japan	DJ	0.3%	N/A

Note: capacity share is based on total seats in the domestic and international market, including seats from FSCs and foreign airlines.
Source: CAPA - Centre for Aviation & OAG.

Japan's LCCs have so far focused on short haul routes

All except one of the international destinations currently served by Japanese LCCs are within North Asia. The exception is Bangkok, which is served by Peach.

However, Peach only serves Bangkok from Okinawa in southern Japan, which is a four-hour flight (approximately). Japan's LCCs do not currently have any flights above five hours.

With the A321neoLR Peach (and Jetstar Japan) will be able to serve Thailand from Osaka and Tokyo as well as reach other destinations in Southeast Asia.

While none of the Japanese LCCs have long haul flights, six foreign LCCs operate long haul flights to Japan using widebody aircraft: AirAsia X, Jetstar Airways, NokScoot, Scoot, Thai AirAsia X and Thai Lion Air. Jetstar operates from Australia and the others operate from Southeast Asia (Malaysia, Singapore or Thailand).

Southeast Asia-Japan is a natural market for low cost long haul narrowbody

VietJet also recently began operating flights to Japan using its new A321neo fleet. As highlighted in the chart earlier in this report, VietJet launched long haul narrowbody services to Tokyo Narita from Hanoi on 11-Jan-2019 and began serving Osaka Kansai from both Hanoi and Ho Chi Minh in late 2018.

Jetstar Japan and Peach will likely start competing with Southeast Asian LCCs (and each other) on several Japan-Southeast Asia routes as they build up their A321neoLR fleets.

The A321neoLR will inevitably also be acquired by LCCs in Southeast Asia. From Southeast Asia, Japan is a natural market for the A321neoLR. There are also opportunities for Southeast Asian LCCs to use A321neoLRs to serve other markets in North Asia and parts of Australia.

AirAsia X continues to evaluate the A321neoLR

A potential A321neoLR order from AirAsia X would have significant strategic implications, leading to much faster growth within Asia Pacific in the low cost long haul narrowbody segment. AirAsia X may use A321neoLRs to replace A330-300s on its thinner routes to North Asia, including Japan, as well as opening new routes to North Asia, South Asia and Australia that would not be viable with widebody aircraft.

Sister airline group AirAsia operates A320neos and has A321neos on order (for delivery starting later this year) but is not able to make full use of the range of these aircraft and expand into the long haul narrowbody segment due to self-imposed restrictions separating AirAsia and AirAsia X.

However, there is nothing preventing AirAsia X from supplementing its existing widebody fleet with narrowbody aircraft on long haul routes (which it has the right to operate as part of its franchise agreement with AirAsia). AirAsia and AirAsia X are separate companies with different ownership groups and stock listings, but they share a website, brand and distribution network.

In a Sep-2018 analysis report CAPA revealed that AirAsia X was considering the conversion of 40 A330-900neo orders to A321neos or A321neoLRs. AirAsia and AirAsia X have since publicly talked about the possibility of AirAsia X acquiring A321neoLRs, but the group has not yet made a final decision.

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

AirAsia X has also not yet confirmed an order for 34 additional A330-900neos which was announced at the Farnborough Airshow in Jul-2018. The delay in confirming this order, which would increase AirAsia X's A330neo commitment to 100 aircraft, is likely related to an ongoing negotiation for A321neoLRs, which would reduce AirAsia X's requirement for A330neo widebodies.

AirAsia X would acquire at least 20 A321neo/A321neoLRs

AirAsia X CEO Benyamin Ismail told CAPA TV in Nov-2018 that the group's network team was still assessing the A321neo/A321neoLR and potential markets for the new type. He pointed out that its existing fleet of 377-seat A330ceos were ideal for mature routes but for some new markets they were too big, and there are some airports in India that AirAsia X would like to serve but those airports cannot accommodate widebody aircraft.

Mr Ismail explained that A321neoLRs would be used "to grow the pie and go into secondary and tertiary markets where widebodies don't go in and where it's a bit of a stretch for the A320". But he added that AirAsia X would need to acquire at least 20 or 30 A321neos or A321neoLRs to justify going with a new aircraft type, and the group first needs to be sure that there are enough routes to support a fleet of that size.

AirAsia X would still require new widebody aircraft if it decided to expand into the long haul narrowbody segment, but an A321neoLR commitment could result in further delays to A330-900neos deliveries. AirAsia X has been concerned with the Trent 7000, the only engine powering the A330-900neo, and could be better off focusing on narrowbody expansion over the next few years.

Mr Ismail said that Malaysia AirAsia X was still "targeted" to start A330-900neo deliveries at the end of 2019 from the group's order book and that Thai AirAsia X was planning to begin operating A330-900neos in mid 2019 using two aircraft acquired independently from leasing companies. However, he added that AirAsia X was still "waiting for updates from Rolls-Royce about the engine's viability on the new Trent 7000".

"We are waiting to see if it's up to par. As you know the Trent 1000 in all the markets with the 787s are having a bit of issues. A lot of the technology is translated to our A330neos. I want to make sure that is managed quite well. We will get to know some more colour in the next few months and will see how it goes."

Over the past few years there have been a lot of twists and turns in the AirAsia X fleet strategy. AirAsia X should finally settle on a new fleet plan soon; it should come as no surprise if the new fleet plan focuses heavily on the A321neoLR, given the attractive economics of the new type and the growing global appeal of low cost long haul narrowbody operations.