29-Oct-2014 10:00 AM

Malaysia’s Malindo Air further expands domestic and Indonesia networks, pressuring Firefly & AirAsia

Analysis

Malaysian hybrid carrier Malindo Air is doubling its Indonesian network during 4Q2014 with three new routes that leverage its relationship with 49% shareholder Lion Group. Malindo recently launched services to Medan - its fourth destination in Indonesia after Jakarta, Bali and Batam - and will add Pekanbaru in Nov-2014 followed by Bandung in Dec-2014.

Malindo is also expanding its domestic network and will soon serve more airports in peninsular or west Malaysia, 12, than any other carrier. Malindo recently added Ipoh as its 10th destination in peninsular Malaysia and will launch services at Malacca and Kerteh in Nov-2014.

Kerteh will become Malindo's ninth domestic route from its fast growing turboprop base at Kuala Lumpur Subang. In comparison Malaysia Airlines (MAS) regional subsidiary Firefly currently operates seven domestic routes from Subang although it has a bigger international network and is still the leading airline overall at Subang.

Summary

Malindo Air, a Malaysian hybrid carrier, is expanding its Indonesian network with three new routes leveraging its relationship with 49% shareholder Lion Group.
The airline is also expanding its domestic network in Malaysia, with plans to serve more airports in peninsular Malaysia than any other carrier.
Malindo Air is launching services to Medan, Pekanbaru, and Bandung in Indonesia, and adding Malacca and Kerteh in Malaysia.
The airline aims to compete against AirAsia in the Kuala Lumpur-Bandung market, which is currently served by 31 weekly flights from AirAsia.
Malindo Air's expansion in Indonesia will nearly double its weekly seat capacity to the country, but it will still only account for about 5% of seat capacity between Indonesia and Malaysia.
The Lion Group, which owns 49% of Malindo Air, is expected to narrow the gap with AirAsia in the Malaysia-Indonesia market by opening new smaller secondary routes that AirAsia is unable to serve.

This is the second in a series of analysis reports on Malindo's ambitious plans for further fleet and network expansion in 4Q2014. The first report examined the upcoming launch of services from Kuala Lumpur International Airport (KLIA) to Singapore Changi Airport. Singapore will become Malindo's 13th international destination on 3-Nov-2014 and initially be served with three daily 737-800 flights.

Malindo expansion includes KLIA-Singapore and new point to point routes

Singapore will be Malindo's 10th international destination from KLIA and 15th destination overall from KLIA as it also now operates five domestic routes from Kuala Lumpur's main airport. From the city's old airport, Subang, Malindo currently operates eight domestic routes (soon nine) and two international routes. Subang is closer to downtown Kuala Lumpur but is only open to commercial turboprop flights (as well as cargo and general aviation).

Malindo also now operates point to point routes from five secondary cities: Ipoh, Kota Bahru, Johor Bahru, Langkawi and Penang. This includes one international route from Penang (Krabi in Thailand) and one from Ipoh (Medan in Indonesia). Krabi is also served from Subang while Medan is currently only served from Ipoh.

Malacca on 5-Nov-2014 will become the sixth airport in the Malindo network with point to point routes bypassing Kuala Lumpur. Malacca will initially be linked with Pekanbaru and Penang, where Malindo currently has a small base and five destinations (four domestic and one international).

Malindo to double Indonesian network from three to six destinations

The Ipoh-Medan route was launched on 17-Oct-2014 with four weekly ATR 72 frequencies. It became Malindo's 13th international route (including four with turboprops and nine with jets) and fourth to Indonesia.

The other three Malindo routes to Indonesia are KLIA-Bali, KLIA-Jakarta and Subang-Batam. Of its other nine international routes, three are to Thailand (Subang-Krabi, Penang-Krabi and KLIA-Bangkok) and the remaining six are to South Asia (including four to India and two Bangladesh, all from KLIA).

Pekanbaru will become Malindo's fifth Indonesian destination on 5-Nov-2014, when five weekly ATR 72 frequencies are launched from Malacca. Pekanbaru and Medan are both located on the Indonesian island of Sumatra, which is located across the Straits of Malacca from west Malaysia.

Lion is the leading carrier in both Pekanbaru and Medan, accounting for about 55% and 49% of total seat capacity respectively, according to CAPA and OAG data (includes flights operated by regional subsidiary Wings Air). Lion's strong presence in Sumatra significantly reduces the risk of the new Malindo routes as Malindo uses Lion's distribution channels in Indonesia.

Malacca will be an entirely new destination for Malindo and will also be served from Penang with five weekly ATR 72 frequencies. Ipoh was only added to the Malindo network in early Oct-2014 and is also served from Kuala Lumpur Subang and Johor Bahru.

Bandung will become Malindo's sixth Indonesian destination on 19-Dec-2014, when one daily 737-800 flight is launched from KLIA. Bandung also is a large destination for Lion Air and Wings Air.

Malindo currently operates six 737-900ERs and 11 ATR 72-600s. It recently took delivery of its first 737-800, which will also be used on the Singapore and Bangkok routes, and plans to take a second 737-800 by the end of Nov-2014.

Malindo to compete against AirAsia in Kuala Lumpur-Bandung market

Malindo would not be able to use the 737-900ER on Bandung, located on Indonesia's main island of Java, due to runway restrictions. Lion Air currently uses the 737-800 on all six of its domestic routes from Bandung.

Lion Air also previously linked Bandung with Kuala Lumpur using 737-800s. (Lion is currently not operating the route according to Lion's booking engine but Lion's website is selling the new Malindo-operated Bandung-Kuala Lumpur service from 19-Dec-2014.)

Bandung-Kuala Lumpur is a relatively large market and is currently served with 31 weekly flights from AirAsia, piquing the interest of Malindo and the Lion Group. This includes 24 frequencies from Indonesia AirAsia and seven from Malaysia AirAsia, according to OAG data.

Bandung is one of only a few airports in Indonesia where Lion is not the market leader. The Lion and AirAsia groups each currently account for about a 44% share of total seat capacity at Bandung. The launch of services by Malindo from Kuala Lumpur could result in the Lion Group becoming the market leader in Bandung.

Bandung system-wide capacity share (% of seats) by carrier: 27-Oct-2014 to 2-Nov-2014

Lion to close the gap with AirAsia in Malaysia-Indonesia market

Malindo's business plan has always envisioned several routes to Indonesia, where it is able to leverage Lion's strong brand and network. Malindo and Lion already offer connecting itineraries in several markets through an interline agreement.

Prior to the 17-Oct-2014 launch of Ipoh-Medan, Malindo had about 5,600 weekly seats to Indonesia. This will nearly double to about 10,400 weekly seats after the three new Indonesian routes are launched.

Indonesia currently accounts for about 28% of Malindo's international seat capacity, up from 24% prior to the Ipoh-Medan launch. India currently accounts for a leading 41% share, according to CAPA and OAG data.

Malindo Air international capacity share (% of seats) by country: 27-Oct-2014 to 2-Nov-2014

There is still room for further growth by Malindo in the Malaysia-Indonesia market, using both its turboprop and jet fleets. Even with the three new routes Malindo will only account for about a 5% share of seat capacity between Indonesia and Malaysia. When including Lion Air, the Lion Group's share of capacity between Indonesia and Malaysia will reach about 14%.

AirAsia in comparison currently has about a 60% share of seat capacity between Indonesia and Malaysia. Malaysia AirAsia has about a 31% share while Indonesia AirAsia still has about a 29% share despite cutting back capacity in recent months as part of a broader restructuring of its network.

Malaysia Airlines (MAS) is the largest full service carrier in the Malaysia-Indonesia market with about a 17% share of seat capacity. The MAS Group overall has a 18% share when including its regional subsidiary Firefly while Garuda Indonesia has only a 3% share, according to CAPA and OAG data.

Malaysia to Indonesia capacity by carrier (one-way seats per week): 19-Sep-2011 to 12-Apr-2015

Cuts by the AirAsia Group, which has reduced capacity by about 20% over the past year in the Malaysia-Indonesia market, could provide an opening for further Lion Group expansion on several trunk routes. Kuala Lumpur-Bandung will be only the third Malaysia-Indonesia route after Jakarta-Kuala Lumpur and Medan-Penang which will see competition between AirAsia and Lion. There are several AirAsia routes in this market that are not yet served by any Lion Group carrier.

The Lion Group should also be able to narrow the gap with AirAsia by opening new smaller secondary routes that AirAsia is unable to serve as its fleet consists entirely of A320s. Some Malaysian airports such as Malacca and Subang are only open to turboprops. There are also several routes such as Ipoh-Medan which are ideal for turboprops as they are very short and relatively thin routes.

Malindo's turboprop product is also more suited for short routes because its 737s are in two class configuration with seatback in-flight entertainment (IFE) while its ATR fleet is in single class configuration and does not have an IFE system. The Malaysia-Indonesia market, particularly routes to Sumatra, is typically price sensitive as it consists primarily of migrant workers and visiting friends and relatives.

Malindo continues to grow turboprop operation

Malindo launched services in Mar-2013 with an initial fleet of two 737-900ERs operating in Malaysia's two biggest domestic routes, Kuala Lumpur to Kuching and Kota Kinabalu. Kuching and Kota Kinabalu are currently the carrier's only two destinations in east Malaysia, which is separated by a large body of water from west Malaysia.

Malindo took four additional 737-900ERs in 2013 which it used to add seven more domestic routes (five of which were subsequently axed) and launch international services to South Asia and Indonesia (some of the South Asia flights were added in early 2014). Bangkok was added later, in Apr-2014.

As CAPA previously analysed, Malindo's expansion so far this year has focused on its turboprop operation at Kuala Lumpur Subang. Malindo has taken eight additional ATR 72-600s since the beginning of 2014 and is expecting to receive two more turboprops by the end of 2014.

Malindo currently operates 11 ATR 72-600s on 11 domestic and three international routes. This includes eight domestic and two international routes (Batam and Krabi) from Subang. Three of these destinations (Langkawi, Penang and Kota Bahru) are also served from KLIA with 737-900ERs.

But Malindo operates only one daily flight to Langkawi, Penang and Kota Bahru from KLIA, focusing mainly on international connections, while several daily frequencies are offered from Subang. In comparison AirAsia and Malaysia Airlines operates several daily flights to Langkawi, Penang and Kota Bahru from KLIA.

A new mini-hub in Penang includes two domestic turboprop routes (Penang to Kota Bahru and Langkawi) and one international route (Penang to Krabi). A third point to point domestic route, Penang to Malacca, will be launched on 5-Nov-2014 with five weekly flights. Malindo also launched one daily ATR 72 flight from Penang to Johor Bahru in Jul-2014 but this route was quickly dropped.

Malindo to launch Malacca and Kerteh services

Malacca, which is located only 150km south of Kuala Lumpur, is not currently served by any carrier. Previously the airport was served by Firefly as well as small Indonesian carriers.

Malacca will be the 11th airport in west Malaysia served by Malindo and the 13th domestic destination overall (when also including Kuching and Kota Kinabalu in east Malaysia). Kerteh will become the 12th airport in west Malaysia served by Malindo on 16-Nov-2014, when Malindo launches 10 weekly ATR 72 flights on the Subang-Kerteh route. (There will be two flights per day Sunday through Thursday but no flights on Friday and Saturday.)

Kerteh is currently only served by Firefly, which also currently operates 10 weekly ATR 72 flights from Subang. Kerteh is the only domestic route Firefly currently operates from Subang that is not served by Malindo. As a result Malindo's launch of Kerteh is significant as it means there will now be competition on all seven of Firefly's domestic routes from Subang. Slightly over a year ago (before Malindo launched its turboprop operation) almost all these routes were monopolies.

Malindo already has the largest east Malaysia network

Firefly currently serves 10 domestic destinations and five international destinations with a fleet of 16 ATR 72s (based on network data from OAG and fleet data from the CAPA Fleet Database). Seven of the domestic destinations are served from Subang. The other two, Ipoh and Kuantan, are both served from Singapore. Firefly also serves Ipoh from Johor Bahru and Kuantan from Penang but neither are served from Subang.

Of Malindo's 12 domestic destinations in west Malaysia (including Kerteh), nine will be served from Subang. This includes the same seven that are served from Subang by Firefly as well as Ipoh and Kuantan. The other two west Malaysia airports in the Malindo network are KLIA and Malacca.

Firefly parent Malaysia Airlines (MAS) also serves nine domestic destinations in east Malaysia while AirAsia serves eight destinations, according to OAG data.

Airports in west Malaysia with scheduled services: Nov-2014

	AirAsia	Firefly	MAS	Malindo
Alor Setar	Yes	Yes	Yes	Yes
Ipoh	No	Yes	No	Yes
Johor Bahru	Yes	Yes	Yes	Yes
Kerteh	No	Yes	No	Yes*
Kota Bahru	Yes	Yes	Yes	Yes
KLIA	Yes	No	Yes	Yes
KL Subang	No	Yes	No	Yes
Kuantan	No	Yes	Yes	Yes
Langkawi	Yes	Yes	Yes	Yes
Malacca	No	No	No	Yes*
Penang	Yes	Yes	Yes	Yes
Terengannu	Yes	Yes	Yes	Yes
TOTAL by carrier	8	10	9	12*

AirAsia and MAS however have much larger networks than Malindo in east Malaysia. AirAsia currently has seven destinations in east Malaysia while MAS has 21 destinations, including destinations served with turboprops operated by MASWings.

Malindo currently only has two destinations in east Malaysia. But it has been looking at expanding its east Malaysian network using 737s and potentially new turboprop bases in Kuching and Kota Kinabalu.

Firefly retains market leading position at Subang - for now

While Malindo now has more domestic routes than Firefly at Subang, Firefly is still the market leader at Kuala Lumpur's second airport as it has more frequencies than Malindo on the domestic trunk routes. Firefly also has five international routes from Subang (Batam, Medan, Pekanbaru and Singapore) compared to only two for Firefly (Batam and Krabi).

Firefly currently accounts for a leading 58% of total seat capacity at Subang including a 55% share of domestic seats, according to CAPA and OAG data.

Kuala Lumpur Subang domestic capacity (seats) by carrier: 28-Oct-2014 to 2-Nov-2014

Malindo could potentially later join Firefly on the Subang to Medan and Pekanbaru routes, particularly as it will soon be serving both of these Indonesian points from other Malaysian airports. Malindo however is unable at least for now to compete against Firefly on Subang-Singapore, which is by far Firefly's largest international route.

Malindo to operate up to six routes from Ipoh

Firefly has traditionally been the only carrier serving smaller west Malaysia airports such as Ipoh and Kerteh. Malindo broke Firefly's monopoly at Ipoh in early Oct-2014.

Firefly currently operates two daily flights to Ipoh from Singapore and four weekly flights to Ipoh from Johor Bahru. But Firefly is upgrading Johor Bahru-Ipoh to daily on 1-Nov-2014, a likely response to the entrance of Malindo. As it tries to fight off intensifying competition from Malindo, Firefly is also currently offering promotional fares starting at MYR29 (USD9) across its domestic network.

The Malindo and Firefly expansion at Ipoh could also be seen as a response to planned Ipoh-based start-up YOU Wings, which has been aiming to commence operations this year. YOU Wings, formerly known as Flying Fox Airways, is partially backed by Indonesian carrier and Lion Group rival Sriwijaya Air.

While Malindo and Firefly now compete on Johor Bahru-Ipoh, Malindo is the only carrier currently serving the Kuala Lumpur-Ipoh market, which is a very short flight as the cities are only 200km apart or about three hours by bus. Malindo is also for now the only carrier in the Ipoh-Medan market. But this is one of the initial routes planned by YOU Wings/Flying Fox and is also a potential route for Firefly.

Malindo has stated it is looking at also serving Ipoh from Langkawi, Krabi and Singapore. Malindo has said Ipoh-Singapore would be operated with its 737 fleet while the other potential Ipoh routes would be operated with ATR 72s.

Malindo blocked from expanding its ATR operation to Singapore

Malindo would be interested in serving Ipoh-Singapore with ATR 72s and in launching ATR 72 service from Subang to Singapore. But Malindo has so far been unable to secure approval from Singaporean authorities to operate turboprops to Changi, which has an unwritten ban on additional turboprop operations.

Firefly and small Malaysian carrier Berjaya Air are the only turboprop operators currently serving Changi. Firefly has been unable to expand at Changi over the past couple of years due to Singapore's restriction on turboprops but is able to maintain its current operation. Firefly currently serves Singapore from Subang, Ipoh and Kuantan while Berjaya Air serves Singapore from Redang (it also previously served Singapore from Tioman). Berjaya also serves Redang (and previously Tioman) from Subang but it no longer competes with Firefly or Malindo on any domestic trunk routes and is now primarily a charter carrier.

Firefly enjoys a huge competitive advantage on the lucrative Subang-Kuala Lumpur route, which is popular with business travellers, as other carriers have been unable to launch the route. Ipoh is open to jets, enabling Malindo to compete with Firefly on Ipoh-Singapore using 737-800s. But this market is relatively small and better suited for turboprops. Singapore should reconsider its turboprop ban as Malindo turboprop flights to Changi would increase competition in important markets and stimulate demand at a time Singapore's traffic has flattened.

An opportunity to operate Subang-Singapore would be icing on the cake. For now Malindo is focused on launching KLIA-Singapore and pursuing further expansion to Indonesia and domestically within Malaysia. Overcoming stiff competition from other Malaysian carriers will be challenging but Malindo has quickly proven to be a nimble carrier and is always on the lookout for niche markets which are un-served or under-served.