22-Jul-2014 1:00 PM

Malindo Air to resume international expansion in 4Q2014 with more capacity to India and Thailand

Analysis

Lion Air Group Malaysian affiliate Malindo Air is planning to add capacity to India and Thailand in 4Q2014 as part of the next phase of its international expansion. Services to North Asia including mainland China are expected to be launched in 2015 as part of a subsequent phase.

Malindo has been focusing on Bangladesh, India and Indonesia since it launched international services just under a year ago. Malindo also now serves Bangkok in Thailand.

Malindo so far this year has concentrated on domestic turboprop expansion but will resume growing its international operation in 4Q2014 as it adds two 737-900ERs. The two aircraft will be Malindo's first additional jets in over a year and will likely be followed by faster expansion of the 737 fleet in 2015. This is the second of a two part report on Lion Group's Malindo.

Summary

Malindo Air, the Malaysian affiliate of Lion Air Group, plans to add capacity to India and Thailand in 4Q2014 as part of its next phase of international expansion.
The airline has been focusing on Bangladesh, India, and Indonesia since launching international services just under a year ago.
Malindo will add two 737-900ERs to its fleet in 4Q2014, marking the first additional jets in over a year.
The airline has suspended six routes, including five domestic and one international, due to intense competition in the Malaysian domestic market.
Malindo's international focus is on routes that are relatively underserved, such as Bali, Bangkok, Jakarta, and Kochi.
The airline plans to expand its capacity to India, starting with a second daily flight to Kochi, and is also considering adding Kolkata and Coimbatore to its network.

Malindo operates 14 domestic and 10 international routes

Malindo launched domestic services in late Mar-2013 and began international services in late Aug-2013. It currently operates a fleet of six 737-900ERs and nine ATR 72-600 turboprops.

As of the end of Jul-2014 Malindo will operate 11 turboprop routes, including eight from Kuala Lumpur Subang Airport, and 13 jet routes, all of which are from Kuala Lumpur International Airport (KLIA). All but one of its turboprop routes are domestic while nine of its 13 737 routes are international.

Malindo's last two 737s were added in Sep-2013. Malindo so far this year has added six ATR 72s and will take four more turboprops over the next few months. Malindo's rapid expansion of its turboprop operation was analysed in the first instalment in this series of reports.

This second part looks at Malindo's plans for expanding its 737 operation and its overall position in the Malaysian market.

Malindo suspends six routes as domestic jet operation shrinks

While Malindo has not added any jets in nearly a year it has made several adjustments to its 737 network. Six 737s routes have been suspended. This includes five domestic routes - KLIA to Johor Bahru, Miri, Sibu and Tawau and Johor Bahru to Kota Kinabalu. One international route, KLIA to Ahmedabad, has also been cut.

Malindo also has reduced capacity on KLIA to Kota Kinabalu and Kuching, which were its first routes and are the two largest domestic routes in Malaysia. Malindo initially operated three daily flights on both routes and had four daily flights to Kota Kinabalu for several months in late 2013 and early 2014. The carrier currently only offers two daily flights on both routes (with a temporary reduction to one daily flight in Jul-2014 for Ramadan, a period that generally sees a significant reduction in demand for domestic services).

The adjustments reflect the intense competition in the Malaysian domestic market, which is also served by Malaysia Airlines (MAS) and AirAsia. Domestic trunk routes have particularly become highly competitive as both MAS and AirAsia pursued significant expansion following Malindo's launch.

Malindo has shifted focus domestically to turboprop routes, where MAS regional subsidiary Firefly is generally its only competitor. MAS and AirAsia compete on over 20 domestic routes but Malindo now only operates the four largest of these - KLIA to Kuching, Kota Kinabalu, Langkawi and Penang. In addition to its two daily flights to Kuching and Kota Kinabalu, Malindo has one daily flight on KLIA to Langkawi and Penang, which are operated mainly for the purpose of offering connections to its international network.

In all four of its domestic routes from KLIA, Malindo now has a less than 10% share of capacity. There are about 160 weekly flights from KLIA to Kota Kinabalu and Kuching, about 140 on KLIA-Penang and about 130 on KLIA-Langkawi, according to OAG data. AirAsia is the market leader on all these routes with 50% to 60% of capacity compared to roughly 35% to 45% for MAS.

In the overall KLIA domestic market, Malindo has about a 4% share of capacity compared to 54% for AirAsia and 42% for MAS. (Based on schedules for the week commencing 3-Aug-2014 as current schedules have significant temporary adjustments for Ramadan.)

In 2013 Malindo also captured 4% of the domestic traffic at KLIA, carrying 600,000 of the 14.5 million domestic passengers handled by the airport.

Kuala Lumpur International Airport domestic capacity share (% of seats) by carrier: 3-Aug-2014 to 10-Aug-2014

Malindo CEO Chandran Rama Muthy told CAPA that the carrier plans to reintroduce a third daily flight to Kota Kinabalu from late Oct-2014 and is also considering resuming service from KLIA to Miri and Sibu on a seasonal basis. But as Malindo continues to expand its 737 fleet the primary focus will be on growing internationally.

Domestically the Malindo strategy is to focus primarily on turboprops, with the exception of the handful of trunk routes where Malindo will likely keep a relatively small presence and does not seem keen to get into a market share battle with AirAsia and MAS.

Malindo focuses on international routes which are relatively underserved

The international focus is sensible as Malindo is a network carrier with a product that is geared for longer flights. Malindo has outfitted its 737-900ERs with only 180 seats compared to 215 for sister carrier Lion Air. Malindo has a 12-seat business class cabin and offers in-flight entertainment (IFE) systems with seatback monitors in both cabins along with meals and drinks.

With its international network Malindo has chosen several routes which are only served by one Malaysian carrier. Bali, Bangkok, Jakarta and Kochi are Malindo's only international markets with competition from both AirAsia and MAS.

Bali, Bangkok and Jakarta are large and critical markets where Malindo is able to leverage support from its sister carriers, Thai Lion Air and Lion Air. Bangkok and Jakarta are the second and third largest international markets from Kuala Lumpur after Singapore while Bali is the fifth largest, based on current seat capacity. Kochi meanwhile is also a big market from Malaysia as a large portion of Malaysia's Indian population is from that region of India.

Of Malindo's six other international routes, one is served by only AirAsia (Tiruchirappalli), three by only MAS (Dhaka, Delhi and Mumbai) and one by only Firefly (Subang-Batam) while one is not served by any other Malaysian or foreign carrier (KLIA-Chittagong). Of Malindo's 24 routes overall, AirAsia only serves 10 while the MAS Group (including Firefly) serves 20.

The higher overlap with MAS is probably intentional as AirAsia generally is a stronger competitor. Malindo should be able to benefit from any upcoming restructuring at MAS as the flag carrier's main shareholder, the Malaysian government, starts to review its options following a pair of disasters which has exacerbated an already challenging situation.

Malindo has already added capacity to Dhaka and Tiruchirappalli

In Aug-2014 Malindo will operate 11 weekly flights to Dhaka, 10 to Tiruchirappalli, seven to Bangkok, Bali, Delhi, Kochi and Jakarta, six to Mumbai, three to Batam and two to Chittagong. (Due to Ramadan in the current week most of these routes have a reduced schedule and Bangkok is temporarily suspended.)

Malindo Air international routes ranked by seat capacity: 4-Aug-2014 to 10-Aug-2014

Dhaka was Malindo's first international route, launched in late Aug-2013. Bali and Jakarta were launched in Sep-2013 and Delhi at the end of Dec-2013. Tiruchirappalli and Chittagong were launched in Jan-2014 followed by Mumbai in Feb-2014. Bangkok and Kochi were added in Apr-2014 and Batam in May-2014.

See related reports:

Dhaka and Tiruchirappalli have so far been the only routes to see additional capacity. Dhaka was initially increased in Jun-2014 from seven to 11 weekly flights. Tiruchirappalli was increased from seven to nine weekly flights in May-2014 and will have 10 weekly flights from late Jul-2014, according to OAG data. Malindo was able to add these flights without expanding its 737 fleet as they are operated during overnight hours, resulting in higher utilisation of the six existing aircraft (and lower unit costs).

Malindo will add capacity to India starting with a second daily flight to Kochi

Further capacity expansion to India is planned for 4Q2014 as Malindo adds two more 737-900ERs. The carrier is slated to take one additional 737-900ER in Oct-2014 and one in Dec-2014, giving it a fleet of eight 737-900ERs (along with 13 ATR 72-600s) at the end of 2014.

Mr Muthy says Malindo plans to double capacity to Kochi from Nov-2014 with a second daily flight. The additional capacity will make Kochi its largest international route and give Malindo a leading 46% share of total seat capacity in the Kuala Lumpur-Kochi market, according to CAPA and OAG data. Currently MAS has one daily 737-800 flight on the route while AirAsia operates 10 weekly frequencies with A320s, according to OAG data.

As MAS only launched the route in Sep-2013, the Kuala Lumpur-Kochi market will see a quadrupling of total capacity in only 15 months - from 1,260 in Aug-2014 to about 5,500 in Nov-2014.

Kuala Lumpur to Kochi total capacity (one-way seats per week): 19-Sep-2011 to 18-Jan-2015

Malindo also plans to add one more frequency to Delhi in Dec-2014, giving it eight flights on the Kuala Lumpur-Delhi route. Mr Muthy says that Malindo also hopes to add another two frequencies to Delhi by the end of Mar-2015, enabling the carrier to fully utilise the 10 frequencies it has been awarded to Delhi under the Malaysia-India bilateral.

MAS currently has about a 71% share of capacity in the Kuala Lumpur-Delhi market as it has two daily flights including one with 777s and one with 737-800s. No Indian carrier currently serves the route.

Malindo was able to secure Malaysian carrier traffic rights for Delhi and Mumbai as AirAsia X dropped both routes in 2012. Malindo is unable to increase Mumbai service - although it would like to have at least seven weekly frequencies - it has no unused traffic rights for the route as MAS is currently using all the other available rights for Malaysian carriers. Malindo is hoping India will agree to expand the current air services agreement with Malaysia, but this is not likely at least in the short term.

Malindo may launch Kolkata and Coimbatore

The Malaysia-India bilateral has a limit on capacity to six primary Indian cities - Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata. Malindo has not been able to launch services to the other four destinations but Mr Muthy says the carrier is seeking rights for Kolkata as another Malaysian carrier is not currently fully using its entitlements. According to OAG data, AirAsia is currently the only carrier serving Kuala Lumpur-Kolkata while only MAS serves Hyderabad and both carriers serve Chennai and Bangalore. Air India Express also serves Chennai, providing the only Indian carrier service between India and Malaysia.

Malindo is free to add capacity to Kochi and Tiruchirappalli as these are two of 18 secondary destinations which are not capped under India's bilateral with Malaysia and other Southeast Asian countries. None of the other 16 cities on this list are currently served from Kuala Lumpur and are likely to support services.

Mr Muthy says Malindo is studying Coimbatore as a potential new destination. Malindo is keen to serve Coimbatore as it is a growing market with ties to Malaysia yet does not have any non-stop service. But as Coimbatore is not on the current list of 18 cities that Southeast Asian carriers can access without any restrictions Malindo cannot launch the service without a change in the bilateral agreement. Coimbatore currently has only one link to Southeast Asia, Singapore, from Singapore Airlines regional subsidiary SilkAir.

Malindo is keen to expand its share of the Malaysia-India market beyond the current 19%

Malindo is generally keen to expand in India and has been encouraged by its initial performance on the Delhi, Mumbai, Kochi and Tiruchirappalli routes with average load factors of roughly 70%. Only Ahmedabad, which it briefly served in 1H2014 with three weekly frequencies, proved to be unsuccessful. (Ahmedabad is one of the 18 secondary Indian destinations that is open to Southeast Asian carriers without any capacity restrictions.)

With its four current Indian routes Malindo has already captured about a 19% share of capacity in the Malaysia-India market. The additional Kochi and Delhi frequencies will increase Malindo's share in Dec-2014 to about 21% compared to 41% for MAS and 33% for AirAsia.

Following the recent launch of AirAsia India, the AirAsia Group will likely be interested in pursuing further expansion in the India-Malaysia market (using India's traffic rights). But Malindo should be able to maintain its share as AirAsia faces bilateral constraints on the Malaysian side and at least for now a rule on the Indian side preventing the operation of international services for five years.

Malaysia to India capacity by carrier (one-way seats per week): 19-Sep-2011 to 18-Jan-2015

Malindo has benefitted from robust local demand for India-Malaysia services as well as demand to Indonesia and Thailand. India-Indonesia is a relatively large market not currently served non-stop by any carrier.

Malindo is able to offer one-stop connections from India to Jakarta and Bali and two-stop connections to secondary Indonesian destinations using its sister carriers Lion Air and Wings Air. Mr Muthy says Malindo has also seen strong traffic numbers from Kochi and Tiruchirappalli to Bangkok, a market without any non-stop services.

Malindo to add second daily flight to Bangkok

Malindo launched daily Kuala Lumpur-Bangkok Don Mueang service in Apr-2014, taking over a route which was previously operated by sister carrier Thai Lion. While Thai Lion struggled on the route Mr Muthy says Bangkok has performed well for Malindo and will be increased to two daily flights in Dec-2014.

Having Malindo rather than Thai Lion operate between the two hubs is logical as Kuala Lumpur-Bangkok is mainly an inbound market from Malaysia. Malindo now has a stronger brand than Lion in Malaysia and is known for providing frills including checked bags. For the sake of connecting markets such as southern India it is also easier from a product standpoint for Malindo to operate the route.

Malindo's other two regional international routes, Bali and Jakarta, will be maintained at once daily flights. Mr Muthy says Malindo will not be focusing on Indonesia in its next phase of international expansion as sister carrier Batik Air is planning to launch services to Malaysia from Jakarta and Surabaya. But he says Malindo's new turboprop service from Kuala Lumpur Subang to Batam will be expanded to five weekly flights.

Batik has the same product as Malindo, offering a business class and a full-service product including seatback IFE monitors in both cabins. This makes it easy for Malindo to offer connections with Batik when Batik enters the Malaysia-Indonesia market. While Malindo also connects with the low cost Lion Air and sold for a while on Thai Lion's Bangkok-Kuala Lumpur service, such connections provide a product mismatch to passengers. This may be manageable by clearly communicating to passengers the differences, but even then is not ideal.

While new Indonesia routes are not on the plans for 2H2014 Malindo has been looking at other potential new regional international destinations in Southeast Asia. Mr Muthy says Malindo is close to deciding on two new international routes which would be launched in 4Q2014. One of the routes Malindo has reportedly been looking at is Kuala Lumpur-Ho Chi Minh.

Malindo eyes China services for 2015

Mr Muthy says Malindo also is preparing an application for Chinese authorities. But he says the process of being authorised by the CAAC will take three to six months. Malindo is aiming to complete the process by early 2015, allowing it to begin serving China as part of its 2015 expansion. For the next six months the focus will be on strengthening its current network in South and Southeast Asia.

Malindo also has been looking at Hong Kong and Taipei for 2015. Malindo's business plan envisions 10 additional aircraft for 2015, which should give it the capacity to launch several more international routes including multiple points in North Asia.

How the 10 aircraft are allocated between turboprops and jets has not yet been decided. But it would be logical for Malindo to focus primarily on 737 expansion in 2015 given the focus in 2014 has been on turboprops. While growing the turboprop operation in 2014 was a sound strategy, that sector of the market may start approaching maturity, limiting further growth opportunities.

Slower growth and waiting until 2015 to serve China could be a blessing for Malindo

The focus so far this year on expanding the turboprop fleet and the decision to delay adding to the 737 fleet until the fourth quarter means Malindo will fall short of its original goal of carrying 3 million passengers in 2014. Mr Muthy says Malindo will likely end the year with 2.5 million to 2.7 million passengers. The carrier transported about 1 million passengers in 2013 - not a bad showing given it only operated for nine months.

The slower growth for 2014 could end up working in Malindo's favour given the current market conditions in Malaysia. If Malindo had pursued faster international expansion and entered the China market in 2014 the results could have been disastrous given the huge drop in inbound demand from China following the MH370 incident in Mar-2014.

By focusing its expansion on its short-haul turboprop operation and a sector of the market where there is less competition, Malindo has had an opportunity to catch its breath and consolidate its position.

From a market share standpoint the slower than expected growth is not such a big deal as overall growth in the Malaysian market has slowed from almost 20% in 2013 to 12% in 1H2014. For the full year in 2014 the Malaysian market is expected to grow by only about 7%.

Malindo, with only 4% market share, has huge opportunities for expansion

Malindo captured less than a 2% share of the total Malaysian market in 2013, when Malaysia handled 59.5 million passengers (38 million international and 21.5 domestic). MAS captured a 29% share while AirAsia (including AirAsia X) captured 43%.

Malindo is now on pace to capture 4% of the total Malaysian market in 2014. Malindo should have plenty of opportunities to make further inroads in 2015 as MAS is now looking to cut capacity and restructure. Malaysia AirAsia also is slowing down expansion, with four aircraft to be added in 2014 compared to eight in 2013. The LCC's fleet is expected to see limited or no growth in 2015.

Malindo has wisely been cautious at picking its fights. Its limited presence on highly competitive domestic trunk routes, which have suffered plummeting yields over the last year, should have enabled the carrier to minimise losses. Malindo meanwhile has quietly established itself domestically by focusing on turboprops and Subang while building up an international network that focuses on the relatively strong Malaysia-South Asia market.

The expansion planned for 4Q2014 as Malindo resumes growing its 737 fleet is relatively modest. A bigger test will likely come in 2015. But by then market conditions and the competitive landscape in Malaysia could be in Malindo's favour.