Malaysia’s Malindo Air rapidly grows turboprop operation with new Penang base and Subang expansion

Malindo's planned expansion of its KLIA operation and network will be analysed in the second part in this series of reports on Malindo. This part looks specifically at Malindo's rapid turboprop expansion.

Malindo launched services in Mar-2013 as a joint venture between Indonesia's Lion Air Group and Malaysian aerospace company NADI. The carrier initially operated 737-900ERs on domestic trunk routes from Kuala Lumpur International Airport (KLIA).

A turboprop operation was added in Jun-2013 with two ATR 72s based at Subang Airport, which is closer to central Kuala Lumpur and served as the Malaysian capital's main airport before KLIA was opened in 1998. Subang, which is also known as Kuala Lumpur Sultan Abdul Aziz Shah Airport (SZB), has since only handled cargo and turboprop passenger flights.

Subang Airport achieves rapid traffic growth

Subang traffic has grown steadily since 2008, driven primarily by growth at Firefly, which carved out a successful niche at Subang Airport after the airline was established in 2007. Back in 2008 the airport only handled about 300,000 passengers.

Subang traffic increased by 29% in 2013 to 1.86 million passengers, including 1.52 million domestic and 338,000 international passengers, according to Malaysia Airports data. Subang is still a designated international airport but only handles short-haul international flights from Malaysia's three neighbouring countries - Indonesia, Singapore and Thailand - as the airport's passenger terminal is only open to turboprop operators.

Subang Airport annual passenger traffic: 2008 to 2013

Source: CAPA - Centre for Aviation and company reports

The launch of services at Malindo drove some of the growth at Subang in 2013 but most of Malindo's turboprop expansion has occurred in 2014. Malindo ended 2013 with only three ATR 72-600s in its fleet along with six 737-900ERs, which are all based at KLIA.

Malindo Air shifts the focus of its expansion

Malindo has not taken delivery of any additional 737s so far this year and is planning finally to resume jet and KLIA expansion in 4Q2014, when it takes two additional 737-900ERs, for a total of eight aircraft.

Malindo's initial turboprop operation was relatively modest, consisting, from 1-Aug-2013, of three aircraft and six domestic routes from Subang. There was no expansion in the turboprop operation over the last four months of 2013 as Malindo focused on KLIA and the launch of international services.

See related reports:

• Malindo Air launch drives 20% surge in Malaysia domestic traffic as MAS and AirAsia also expand
• Malindo emerges as Lion Group's main international carrier with nine new routes from Kuala Lumpur

But the focus so far in 2014 has shifted back to turboprops and expanding the Subang operation. As Malindo expanded its ATR 72-600 fleet from three to eight aircraft in 2H2014 it focused mainly on increasing frequencies on its initial six routes from Subang.

Malindo establishes high frequency operation on its core Subang routes

After the first phase of its Subang expansion was completed in early Aug-2013, Malindo had 14 daily flights at the airport consisting of four frequencies to Kota Bahru; three each to Johor Bahru and Penang; two to Terengganu; and one each to Alor Setar and Langkawi.

By Jun-2014 Malindo had expanded its Subang operation to 30 daily flights consisting of nine flights to Penang, eight to Kota Bahru, four to Langkawi and Johor Bahru; three to Alor Setar and two to Terrengganu (according to OAG data). The expansion came after Malindo decided there was sufficient demand to support more frequent service on its main Subang routes.

The increased frequency schedule allowed Malindo to compete more effectively against Firefly, which offers an average of 13 daily flights from Subang to Penang, 10 to Kota Bahru, five each to Johor, Terengganu and Alor Setar and two to Langkawi. (These figures are rounded as, unlike Malindo, Firefly's schedule varies depending on the day of the week. Firefly also operates one small domestic route from Subang which Malindo does not serve, Kerteh, with 10 weekly frequencies.)

Malindo now accounts for about 40% of domestic capacity at Subang

Overall Firefly had 285 domestic weekly frequencies from Subang in Jun-2014 compared to 210 for Malindo. Current figures (Jul-2014) are down for both carriers but this represents a short-term reduction for Ramadan as demand for domestic services during the month-long fasting period reduces significantly. Malindo currently has three of its aircraft out for heavy maintenance, which it elects to pursue during the quiet Ramadan period.

Schedules will return to normal in late Jul-2014. For most of Aug-2014 Firefly will have 291 domestic weekly frequencies from Subang while Malindo will operate 208, according to OAG data.

Based on schedules for mid-Aug-2014, Firefly will account for 57% of domestic seat capacity at Subang compared to 41% for Malindo. Small regional carrier Berjaya Air accounts for the remaining 2%.

Subang domestic capacity (seats) by carrier: 11-Aug-2014 to 17-Aug-2014

Source: CAPA - Centre for Aviation & OAG

Berjaya currently serves two small niche island destinations, Redang and Tioman, where its parent company owns resorts, from Subang and Singapore. Neither Firefly nor Malindo serve these routes.

Berjaya, which operates two ATR 72-500s and three Dash 7s (the latter are needed to access Tioman), also previously competed on Subang to Penang and Langkawi routes. But Berjaya offered fewer frequencies and dropped both routes in early 2014.

Clearly Berjaya lacks the scale (and cost structure) to compete with much larger Firefly and Malindo. Berjaya may have been able to survive in these markets with just one competitor (Berjaya had served Langkawi since late 2011 and Penang since late 2012), but the entry and rapid expansion from Malindo made it extremely challenging.

Domestic capacity at Subang has more than doubled since 2012

Malindo and continued expansion at Firefly has driven a 120% increase in total domestic capacity at Subang over the past two years. Firefly has expanded its domestic operation at Subang by nearly 40% over the past two years including by nearly 20% since Malindo entered the market. Berjaya has decreased capacity but this has not had a significant impact on the totals as it was from a small base and was easily offset by the expansion at the other two carriers.

In Jun-2014 there were about 73,000 weekly domestic seats at Subang (41,000 for Firefly, 30,000 for Malindo and 1,000 for Berjaya) compared to only 33,000 seats in Jun-2012 (30,000 for Firefly and 3,000 for Berjaya). In 2013 there were 44,000 weekly seats prior to Malindo's entry (35,000 for Firefly and 9,000 for Berjaya) and 63,000 seats once Malindo completed its first phase of expansion in August with three ATR 72s (40,000 for Firefly, 14,000 for Malindo and 9,000 for Berjaya.)

Subang Airport total domestic capacity (one-way seats per week): 19-Sep-2011 to 4-Jan-2015

Source: CAPA - Centre for Aviation & OAG

Subang routes offer high yields and less competition

Yields on domestic routes within peninsular Malaysia are typically higher at Subang compared to KLIA as Subang is a more convenient airport, particularly for business passengers. Competition is also less intense at Subang as Firefly historically has been the only operator on most routes. (The Berjaya competition was for a limited period on a limited number of routes.)

Malindo recognised there was a bigger opportunity to stimulate domestic demand at Subang compared to KLIA, where Malindo has had to compete with both AirAsia and MAS. AirAsia is Malaysia's largest domestic carrier and accelerated domestic expansion in 2014 as Malindo entered trunk routes from KLIA. MAS has also been a very aggressive competitor, adding domestic capacity and lowering fares. MAS increased domestic ASKs by 20% in 2013 and by another 16% in 1Q2014.

Firefly has contributed to the MAS domestic expansion (Firefly's figures are consolidated under MAS) and is targeting 15% to 20% passenger growth in 2014 as it also continues to expand its turboprop fleet. Firefly currently operates a fleet of 12 ATR 72-500s and three ATR 72-600s, according to the CAPA Fleet Database.

But competing against an expanding Firefly is an easier proposition than competing against both MAS and AirAsia. While Malindo has rapidly expanded its turboprop and Subang operation it has dropped three of its domestic routes from KLIA (Miri, Sibu and Tawau) and reduced capacity on Malaysia's two largest domestic routes - KLIA to Kota Kinabalu and Kuching.

Malindo plans to add back some capacity to Kota Kinabalu and Kuching as well as potentially resume services to Miri and Sibu in 4Q2014, when it adds two 737-900ERs. But its domestic strategy has evolved to focus primarily on short routes and turboprops. (In addition to Kuching and Kota Kinabalu, Malindo currently serves Penang and Langkawi from KLIA. But these routes are only operated once per day and cater primarily to international passengers connecting from Malindo flights from Indonesia and South Asia.)

Subang now accounts for 63% of Malindo's domestic seat capacity and 78% of Malindo's domestic frequencies. In comparison KLIA only accounts for 32% of Malindo's domestic seats and 16% of its frequencies. Overall the domestic market accounts for about two thirds of Malindo's seat capacity; more than 95% of its international capacity is from KLIA.

Malindo Air top 10 domestic hubs/bases/stations ranked by seat capacity: 11-Aug-2014 to 17-Aug-2014

Source: CAPA - Centre for Aviation & OAG

Malindo also enjoys a relatively low cost base with its ATR 72s, which are in single-class configuration with 72 seats and 30in pitch. The carrier's 737-900ERs are in a 180-seat two-class configuration with 32in pitch seats along with seatback in-flight entertainment monitors in economy.

Malindo decided on the relatively spacious configuration on the 737s as it is positioned as a hybrid carrier with frills including checked baggage, seat assignments, IFE, meals and drinks. But in the extremely competitive and price sensitive domestic Malaysian market securing high enough yields to offset the cost of an upmarket product and low seating density would be difficult.

Malindo does not release yield or average fare figures as it is privately held. However, domestic yields have declined significantly at AirAsia and MAS since early 2013, providing a challenging competitive landscape for all players. Malindo's decision to focus its domestic expansion over the last year on turboprop routes that are generally served by Firefly rather than MAS and AirAsia is a sound strategy.

Malindo to focus turboprop expansion outside Subang in 2H2014

Malindo will continue with this strategy as it adds another five ATR 72-600s in 2H2014, including one aircraft which Malindo picked up from Toulouse on 18-Jul-2014. But the focus of the expansion will shift away from the Subang domestic market, which is now relatively saturated.

Malindo will instead allocate most of the additional turboprop capacity to new bases as well as to short-haul international routes from Subang. This is also sensible as adding even more frequencies on Subang trunk routes such as Penang and Kota Bahru could result in overcapacity. Demand has so far been sufficient to absorb the additional capacity on these routes, with Malindo reporting average load factors above 70% for its Subang operation, but both Malindo and Firefly would be wise to hold off at least for now in adding more capacity.

With its ninth ATR 72 Malindo plans to refrain from adding capacity on existing domestic routes and instead plans to open two new routes - Penang to Johor and Subang to Kuantan. Penang-Johor will be served with one daily flight from 23-Jul-2014 and Subang-Kuantan will be served with five weekly flights from 25-Jul-2014.

Kuantan is a new destination for Malindo and is currently not served by any carrier from Subang. Firefly, however, serves Kuantan from Penang and Singapore while MAS serves Kuantan from KLIA, according to OAG data.

The Penang-Johor route is currently only served by AirAsia. It will become Malindo's second route from Johor (after Subang) and its fifth route from Penang (after Subang, KLIA, Kota Bahru and Langkawi with all routes except KLIA operated with turboprops).

Malindo plans to base two to three ATR 72s at Penang

Malindo's mini-hub at Penang is currently operated by rotating aircraft from Subang. Malindo CEO Chandran Rama Muthy tells CAPA that the carrier's ninth ATR 72, which was delivered on 18-Jul-2014 and will be placed into service over the next few days, is also being based at Subang. But he says the carrier plans to base two or three ATR 72s at Penang within the next few months as another four aircraft are delivered.

The new Penang base will be used to operate some of the existing Penang flights (including the new Johor flight) and open new routes. Malindo has already announced and begun sales for a new four times per week ATR 72 service from Penang to Krabi in southern Thailand which will begin on 12-Sep-2014. Malindo is also launching a daily service to Krabi from Subang on 11-Sep-2014.

Krabi will become the second international destination for Malindo's turboprop operation after Batam in Indonesia, which was launched in May-2014 with three weekly flights. Mr Muthy says the Subang-Batam route has performed well and will be expanded to five weekly flights.

Malindo competes with Firefly on the Subang-Batam route. No carrier currently serves the Subang-Krabi route but Firefly also has announced plans to launch Penang-Krabi. Firefly will initially serve Penang-Krabi with three weekly flights starting from 16-Sep-2014 (just a few days after the Malindo launch).

Firefly's move to also launch Penang-Krabi highlights the increasing competition with Malindo. The two carriers will likely face off on other new routes from Penang as Firefly is planning to expand its Penang base from two to four aircraft by the end of 2014. Firefly currently operates eight routes from Penang (four domestic and four international) with Krabi becoming its ninth in Sep-2014.

Malindo is now looking at serving Phuket from Penang, a route already served by Firefly. But this is contingent on securing slots at Phuket, which has become challenging for all carriers.

Malindo could also potentially compete with Firefly from Penang to Banda Aceh on the Indonesian island of Sumatra. Firefly also links Penang with Medan on Sumatra but this route is already served by Malindo sister carrier Lion Air.

Malindo considers services to Malacca but Singapore is unlikely

Malindo is also very keen to operate the Subang-Singapore route, which is currently served by Firefly with 46 weekly frequencies. But Changi Airport is currently not allowing any additional turboprop flights (including more frequencies from Firefly) and also has slot constraints during peak hours. Singapore should reconsider its ban on additional turboprops as growth at Changi has slowed significantly but unfortunately for Malindo a change in this stance is unlikely in the near term.

New domestic turboprop routes at least at for the short term are more plausible. Mr Muthy says Malindo is now looking at launching services from Penang to Kuantan and Terengganu. Penang-Kuantan is now served by Firefly but Penang-Terengganu currently has no non-stop service.

Mr Muthy says Malindo also is looking at potentially launching services to Malacca and has applied for the Malacca to Kota Bahru and Penang routes. Firefly previously linked Malacca with Penang as well destinations in Sumatra.

Malacca, a former Portuguese port city about halfway between Singapore and Kuala Lumpur, currently has no scheduled airline service, according to OAG data. Malindo believes there may be sufficient demand to support point to point domestic services and potentially services across the Strait of Malacca to Sumatra.

Malindo may operate turboprop services within east Malaysia

Malindo is also continuing to study launching turboprop operations within east Malaysia. Mr Muthy says Malindo expects to make a decision by the end of Aug-2014 on whether to base an ATR 72 in Kuching as well as one in Kota Kinabalu.

Aircraft at the new bases would be used to serve secondary cities in the eastern Malaysian states of Sarawak and Sabah, catering to point to point demand as well as offering connections onto Malindo's services from Kuching and Kota Kinabalu to KLIA. Malindo sees such routes as Kota Kinabalu-Tawau, which is now served by AirAsia and MAS, as ideal for ATR 72s and fitting with its strategy as a network carrier.

While AirAsia and MAS operate a few short-haul routes within east Malaysia, the market is mainly served by MAS regional subsidiary MASwings. MASwings currently operates a fleet of 12 ATR 72s and four Viking Twin Otters, according to the CAPA Fleet Database. The Twin Otters are used on subsidised routes to small communities but the ATR 72s are used on routes which are thick enough to potentially support a second competitor.

Malindo's turboprop operation has emerged as more than just a small niche

Malindo sees opportunities across Malaysia for turboprops including routes with limited and no competition. The ATR 72 is ideal for the Malaysian market as all domestic routes except those between peninsular and east Malaysia (which are over two hours in duration as the two parts of Malaysia are separated by sea) can be served with a quick turboprop flight of one hour or less. There are also opportunities to operate short-haul international routes to parts of Indonesia, Thailand and potentially Singapore (if Changi lifts its ban on more turboprop flights).

Demand for international routes between secondary cities such as Penang and Krabi is growing but is not sufficient to support A320s, making ATR 72s an ideal tool. With several trunk routes now suffering from overcapacity as a result of ambitious expansion from A320 and 737 operators, many smaller routes within Southeast Asia are becoming more and more appealing.

Malindo was not initially expecting to operate more ATR 72s than 737-900ERs. The turboprop operation was envisioned as a relatively small niche. But the reality is the small niche is growing and offers higher yields with less competition. In the highly dynamic Southeast Asian marketplace, maintaining the flexibility to adjust quickly and shift focus is a valuable trait.

Malindo's planned expansion of its KLIA operation and network will be analysed in the second part in this series of reports on Malindo