30-Mar-2019 5:00 PM

Malaysia aviation: growth slows, profits under pressure

Analysis

Malaysia has become a challenging market for airlines, set back by intense competition and volatile demand. Six of Malaysia’s seven carriers were unprofitable in 2018 and the seventh, AirAsia, generated its smallest operating profit in four years. An uncertain future for Malaysia Airlines is a destabilising feature

Passenger growth at Malaysia’s flagship airport, Kuala Lumpur International, slowed from 11.2% in 2017 to 2.4% in 2018. The growth in the overall Malaysian market slowed from 10% in 2017 to 3% in 2018.

Growth is likely to remain in the low to middle digits in 2019. Profits continue to be under pressure and overcapacity is once again a concern.

Highlights

Passenger traffic in Malaysia grew by only 3% in 2018, representing a significant slowdown compared to the 10% growth achieved in 2017.
AirAsia/AirAsia X passenger traffic grew by approximately 10%, whereas Malindo and the Malaysia Airlines Group shrank.
Malindo and Malaysia Airlines cut domestic capacity, leading to market share gains for AirAsia.
Competition in the international market has been intensifying, pressuring yields.
Five of the six airlines based in Malaysia were unprofitable in 2018 and the outlook for 2019 is not any rosier.

Malaysia passenger traffic growth slows significantly

Passenger traffic in Malaysia grew by a modest 3% in 2018, to 77.4 million. Malaysia’s domestic market grew by only 1%, to 25.1 million passengers, and the international market grew by 5%, to 52.3 million.

The rate of growth slowed significantly compared to 2017, when total passenger traffic in Malaysia jumped by 10%. Domestic growth slowed from 4% to 1%, and international growth slowed from 15% to 5%.

Passenger traffic in Malaysia has increased by more than 50% over the past six years. However, the rate of growth has not been linear. In 2015 the market grew by just 1%, whereas in 2013 growth peaked at 19%.

AirAsia’s market share again on the upswing in the past four years

The growth in 2013 was exceptional because this was a landmark year for the Malaysian market, with Malindo Air launching operations and Malaysia Airlines also pursuing rapid expansion. This resulted in a rare market share loss for AirAsia, which had enjoyed several years of steady market share gains since the LCC started operations at the end of 2001.

AirAsia’s market share was flat in 2014 and has since been once again on the upswing. In 2015, 2016 and 2017, AirAsia’s market share in Malaysia increased, along with Malindo’s market share, as both benefitted from restructuring at the Malaysia Airlines Group.

In 2018 AirAsia’s market share increased at an even faster rate as passenger traffic at both Malaysia Airlines and Malindo declined, driven primarily by capacity cuts in the domestic market. AirAsia gained 3ppts of market share in 2018, reaching the 50% milestone for the first time.

Malaysia market share for Malaysia Airlines Group, AirAsia/AirAsia X and Malindo: 2012 to 2018

Airline/Airlines	2012	2013	2014	2015	2016	2017	2018
AirAsia/AirAsia X	44%	42%	42%	44%	46%	47%	50%
Malaysia Airlines/Firefly/MASwings	33%	35%	33%	29%	25%	22%	21%
Malindo	0%	2%	4%	6%	8%	10%	9%

AirAsia’s market share figures in the above table include Malaysia AirAsia and Malaysia AirAsia X but exclude passengers to/from Malaysia by overseas affiliates. When the overseas affiliates are included, the AirAsia brand (AirAsia Group and AirAsia X Group) captured approximately a 54% market share in 2018.

AirAsia accounts for half of total seat capacity in Malaysia

AirAsia/AirAsia X currently has approximately a 50% share of total capacity in Malaysia including overseas affiliates (based on OAG data for the week commencing 25-Mar-2019). However, its actual market share is slightly higher because AirAsia/AirAsia X’s average load factor is higher than Malindo's and that of the Malaysia Airlines Group.

Malaysia Airlines reported a load factor of 78% for 2018. Malaysia AirAsia reported a seat load factor of 85% for 2018 and its sister long haul airline Malaysia AirAsia X reported a seat load factor of 81%. Malindo, Firefly and MASwings do not report load factor data but are generally well below AirAsia's levels.

The Malaysia Airlines Group currently has a 23% share of seat capacity in Malaysia, including the regional subsidiaries Firefly and MASwings. Malindo currently has a 9% share of seat capacity. Malindo’s parent, the Indonesia-based Lion Group, has a 10% share of seat capacity in Malaysia when Indonesia-Malaysia flights operated by Lion Air are also included.

AirAsia now dominates Malaysia’s domestic market

In the domestic market, AirAsia currently has a 60% share of seat capacity compared to 29% for Malaysia Airlines Group (including Firefly and MASwings) and 11% for Malindo.

As CAPA has previously highlighted, AirAsia has gained significant domestic market share over the past two years as it resumed domestic expansion, whereas Malaysia Airlines and Malindo have cut capacity. (Firefly and MASwings, which mainly operate in the domestic market, also been shrinking over the past three years.)

Two years ago, in Mar-2017, AirAsia had only 46% share of domestic capacity. Its share had increased to 54% in Mar-2018 and over the past year has increased by another 6ppts.

AirAsia is also the leader in the international market by a wide margin

AirAsia has also been gaining international market share, but the gains have not been nearly as steep.

AirAsia/AirAsia X currently accounts for approximately a 44% share of international seat capacity in Malaysia (including overseas affiliates).

Malaysia Airlines accounts for an 18% share, followed by Malindo with an 8% share (or 9% for the overall Lion Group). The remaining 29% of international seat capacity is generated by other foreign airlines (excluding AirAsia affiliates and Lion).

There are currently 61 foreign airlines serving Malaysia (includes Lion Air, Indonesia AirAsia, Thai AirAsia and Philippines AirAsia). In 2018 foreign airlines carried approximately 16 million passengers to/from Malaysia and accounted for 31% of total international passenger traffic.

Malaysia annual passenger traffic (in millions) by airline: 2012 to 2018

Airline	2012 pax	2013 pax	2014 pax	2015 pax	2016 pax	2017 pax	2018 pax
AirAsia	19.7m	21.9m	22.1m	24.3m	26.4m	29.2m	32.3m
Malaysia Airlines	13.4m	17.2m	17.0m	15.0m	13.9m	14.0m	13.5m
Malindo Air	N/A	0.9m	2.5m	3.7m	5.3m	7.2m	6.6m
AirAsia X	2.6m	3.2m	4.2m	3.6m	4.5m	5.7m	6.1m
Firefly	1.7m	2.0m	2.2m	2.2m	1.8m	1.6m	1.4m
MASwings	1.6m	1.5m	1.6m	1.4m	1.3m	1.2m	1.2m
Foreign airlines	11.2m*	12.9m*	12.9m*	13.2m*	14.7m*	15.9m*	16.3m*
Market TOTAL	50.2m	59.6m	62.5m	63.4m	67.9m	74.8m	77.4m

Notes: Foreign airline figures are estimated for all years by subtracting the figures of the six Malaysian carriers from the market total; these figures in some of the prior years are slightly inflated due to limited traffic carried by other Malaysian carriers that are no longer operating.
Malaysia total calculated by combining figures for Malaysia Airports Berhad and Senai Airport, the only airport in Malaysia outside the Malaysia Airports portfolio.
AirAsia X and Malindo figures exclude their fifth freedom traffic.
Malindo figure for 2018 is estimated.
AirAsia and AirAsia X numbers exclude passengers carried to/from Malaysia by its overseas affiliates.
Malindo began operations in 2013.
Source: CAPA - Centre for Aviation.

Malaysian carriers enjoy strong share of the international market

Malaysian carriers collectively enjoy a very strong share of their international market (approximately 70%).

Malaysian carriers have benefitted from inbound growth as well as growth in sixth freedom traffic. The outbound market has been relatively soft over the past year.

Total visitor numbers to Malaysia were flat in 2018 and have declined slightly since 2014. But when Singapore, the largest source market which mainly consists of visitors entering via land crossings, is excluded, visitor numbers have increased significantly.

Visitor numbers to Malaysia excluding Singapore were up 13% in 2018, to 15.2 million. China was the main driver as Chinese/Hong Kong visitor numbers surged by 29%, to 2.9 million.

Malaysia annual visitor numbers and year-over-year growth excluding Singapore: 2008 to 2018

AirAsia, AirAsia X, Malaysia Airlines and Malindo have all pursued rapid expansion in China over the past few years. Chinese airlines have also added capacity to Malaysia, making it an extremely competitive market such that some routes have experienced capacity increases outstripping the increase in demand.

Competition in all the major markets is fierce

China is Malaysia’s third largest international market based on seat capacity. Indonesia and Singapore are the two largest markets based on seat capacity (and are also the largest based on visitor numbers).

AirAsia/AirAsia X, Malaysia Airlines and Malindo now serve all of Malaysia’s top 10 international markets. Malaysia has become an extremely competitive market.

Malaysia top 10 international markets based on weekly seat capacity: week commencing 25-Mar-2019

Low fares are the norm, a result of the intense competition and the fact that most of the passengers are price sensitive leisure travellers. Yields have been on the decline in recent years – and slipped further in 2018 – impacting profitability as fuel costs increased.

Most of Malaysia’s carriers struggle to achieve profitability

Of the six Malaysia-based airlines, only one was profitable in 2018: Malaysia AirAsia, which reported a 54% drop in pretax profit.

The outlook for 2019 is again relatively gloomy. Malindo is resuming expansion, which could impact AirAsia and Malaysia Airlines as yields on some routes are again pressured.

See related report: Malindo resumes growth after two year pause

Malaysia AirAsia is slowing seat capacity growth in 2019. The airline grew seat capacity by 16% in 2018 but growth will likely be in the high single digits in 2019. Malaysia AirAsia initially planned to add six aircraft in 2019 but is now only planning to add three aircraft.

Malaysia AirAsia X is expected to maintain a similar rate of expansion as in 2018, when its seat capacity increased by 7%. While it does not have any deliveries this year, the long haul LCC is aiming to increase utilisation rates; capacity for 2019 is also increasing due to aircraft added in late 2018.

Malaysia Airlines' capacity is expected to be relatively flat. However the flag carrier continues to price aggressively and could become even more aggressive as it reassesses its commercial and overall strategy.

Uncertain future of Malaysia Airlines disturbs the market outlook

Malaysia Airlines is working on - yet another - turnaround plan after missing the targets set in the five-year turnaround plan that ends later this year. The government is also considering selling Malaysia Airlines and has even stated that shutting it down entirely is an option under consideration.

The uncertainty surrounding the future of Malaysia Airlines is not healthy.

Shutting it down is not likely a feasible option politically, although the Malaysian market does not necessarily need three airline groups. It is also hard to imagine a sale (of a significant stake or the entire airline group), given the current state of the Malaysia Airlines Group and the overall Malaysian market. Another phase of restructuring (which ideally would go deeper without any interference) is the most likely scenario. Given the recent revolving door of CEOs delegated to restructure the airline, this would be little more than kicking the can down the road, often the default political option in these circumstances.

Given the unlikelihood of consolidation, competing in the Malaysian aviation market is not about to get any easier. Competition between the three players is fierce, and there is also intensifying competition regionally – for local, and particularly sixth freedom traffic – as Kuala Lumpur is a major hub airport.

Malaysia Airlines operates 23% of the seats at KLIA, so its winding down or withdrawal would cause a jolt to the airport, as well as the market - but one which AirAsia and Malindo would undoubtedly quickly exploit.

Controlling over half the market and benefitting from its very low cost structure, AirAsia is clearly in a position of strength. Malindo and Malaysia Airlines will continue trying to carve out sustainable niches, but profitability is likely to remain elusive.