06-Oct-2016 4:09 PM

MEGA Maldives Airlines Part 2: MEGA attempts to diversify beyond the China-Maldives market

Analysis

MEGA Maldives Airlines is attempting to reduce its reliance on the China-Maldives market with new routes to India, Malaysia and Saudi Arabia. By the end of 2016 MEGA plans to resume services from Male to Kuala Lumpur and Jeddah - markets it briefly served in early 2015 - and commence operations to India, with an initial service from Male to New Delhi.

The new services, along with other new routes which are under evaluation, are part of a revisited diversification strategy. MEGA currently only serves China, but since commencing operations in 2011 has experimented several times with other markets. MEGA, which operates the same number of aircraft and routes as three years ago, needs to diversify successfully to resume growth.

This is the second half of an analysis report on MEGA Maldives. The first half examined the recent contraction in the China-Maldives market and intensifying competition. This half will focus on MEGA's plans for entering other markets, and its previous attempts at diversification.

Summary

MEGA Maldives Airlines is attempting to reduce its reliance on the China-Maldives market with new routes to India, Malaysia, and Saudi Arabia.
MEGA has previously tried to diversify with routes to Korea and Japan, but faced challenges and suspended services.
The airline plans to resume services to Kuala Lumpur and Jeddah in 4Q2016, targeting sixth freedom traffic between the two destinations.
MEGA is also planning to launch services to New Delhi, India, which is a fast-growing source market for the Maldives tourism sector.
The airline has faced delays in fleet expansion and has not been able to pursue its long-term network plan, which included routes to Australia and Europe.
MEGA has not been successful in establishing partnerships with other airlines in order to expand its network.

See related report: MEGA Maldives Airlines Part 1: China-Maldives market contracts and competition intensifies

MEGA's first tried to diversify with service to Korea

MEGA has recognised since it launched services in 2011 that it cannot rely entirely on the China market. However, several attempts to diversify have been set back and the airline currently only operates services to China.

MEGA's first non-Chinese route, Male to Seoul, was launched back in late 2012. However MEGA suspended services to Seoul in 2013.

The Maldives-Korea market is relatively small, and MEGA was impacted by the 2013 launch of services to Male by Korean Air. Korean serves Male with three weekly flights via Colombo.

A nonstop Male-Seoul product is hard to maintain, given that Korean residents only account for a 2% share of total visitor traffic to the Maldives. Furthermore, Korean visitor numbers have been on the decline, with a 15% drop in the first seven months of 2016 to only approximately 15,000.

MEGA served Japan for only three months earlier this year

Most recently, MEGA tested out the Japanese market with a service from Male to Tokyo Narita via Beijing. The route was launched in Feb-2016 but the thrice weekly service was short-lived, and was suspended after only three months.

The Maldives has an unusually favourable air services agreement with China, allowing its airlines to serve China with fifth freedom rights both beyond China and via intermediate points. MEGA has always been keen to use fifth freedom rights in the China-Japan market and was initially aiming to launch services to Japan via China in 2012.

However China-Japan is now a competitive market, making it difficult to sustain a service as an airline from a third country with an unknown brand. At one point MEGA was keen to serve several points beyond China, but now seems more focused on other areas for diversification.

Japan still has potential, and could potentially be explored in future as a nonstop route from Male. Japanese visitor traffic to the Maldives was up 8% in the first eight months of 2016 to approximately 21,000, giving Japan a 3% share of total visitor numbers.

But the Maldives-Japan market is well served with one-stop products via Hong Kong, Kuala Lumpur and Singapore. Cathay Pacific, Singapore Airlines and AirAsia/AirAsia X also have a competitive advantage over MEGA or a Japanese airline because they are able to offer connections from Male to multiple destinations in Japan.

MEGA to resume services to Malaysia and Saudi Arabia

In another attempt at diversification, MEGA launched services from Male to Kuala Lumpur and Jeddah in early 2015. However, both routes lasted only three months.

MEGA recently announced that it is planning to resume services to Jeddah and Kuala Lumpur in 4Q2016 as part of its new push for diversification. A launch date has not been set, but MEGA has said it will use its existing 767 fleet.

With Malaysia and Saudi Arabia MEGA is primarily targeting sixth freedom traffic between the two destinations, rather than local traffic. When MEGA first served Kuala Lumpur and Jeddah it mainly pursued religious traffic. At the same time MEGA was also considering the launch of services to Jakarta, with the objective of offering connections to Saudi Arabia.

Saudi Arabia is a small but fast-growing source market

Maldives-Saudi Arabia also has some potential as a local market, both in the inbound and outbound sectors.

The Maldives is a tiny country, with a population of less than 400,000, but is predominantly Muslim. There are currently no nonstop services between the Maldives and Saudi Arabia - Saudia currently serves Male with two weekly flights via Colombo.

Saudi Arabia is also one of the fastest-growing source markets for the Maldives although it remains relatively small, accounting for less than 2% of total visitor numbers. The Maldives reported a 33% increase in Saudi Arabian visitor numbers in the first eight months of 2016, to approximately 12,000.

Malaysia and Indonesia are even smaller source markets, accounting for 1.1% and 0.3% of total visitor numbers respectively. With the Male-Kuala Lumpur route already served by AirAsia, MEGA is unlikely to attract significant local traffic and will rely almost entirely on connections to Jeddah. Malaysia-Saudi Arabia is a large market but is also very competitive, with several nonstop and one-stop options.

MEGA to launch services to India

India is also now being targeted as MEGA diversifies. MEGA is planning to launch services to India in 4Q2016, although - as is the case with Malaysia and Saudi Arabia - it has not yet set a launch date or begun sales.

India is a fast-growing source market for the Maldives tourism sector, and much larger than Saudi Arabia. Indian visitor numbers were up 22% in the first eight months of 2016 to 35,000. India now accounts for almost 5% of total visitor traffic to the Maldives.

MEGA is preparing to serve the Indian capital New Delhi initially. There are currently no nonstop services from Male to New Delhi, although SriLankan and the two Indian airlines serving the Maldives market - Air India and SpiceJet - offer competitive one-stop products.

SpiceJet now serves Male from Kochi, while Air India serves Male from Bangalore and Trivandrum. The other international airline based in the Maldives - the government-owned Maldivian - also serves Trivandrum along with Chennai. Maldivian currently accounts for approximately 37% of Maldives-India seat capacity, compared with 48% for Air India and 15% for SpiceJet (based on schedules for the week commencing 3-Oct-2016).

Maldives to India capacity by airline: Oct-2013 to Mar-2017

Maldives-India connections have historically been with South India

Southern Indian cities has historically been the main Indian market from the Maldives, driven by outbound traffic. The Maldivians often go to southern India for shopping, universities and medical facilities.

However, India is starting to emerge as a big inbound market. A large share of the inbound traffic is generated from cities in central and northern India.

MEGA announced in Aug-2016 that it had secured approvals to serve India. On 30-Sep-2016 MEGA completed its first charter flights in the Indian market, operating from Mumbai to Dar es Salaam in Tanzania.

MEGA could potentially serve several Indian cities as well as Colombo in Sri Lanka, although the initial priority seems to be New Delhi, with flights likely commencing by the end of 2016.

MEGA wet-leases a 737-800

India flights will initially be operated with a 737-800 that MEGA has wet-leased leasing from the Czech operator Travel Services. MEGA added the wet-leased 737-800 in late Sep-2016, and stated that it plans to use the aircraft for new routes to India and Sri Lanka.

MEGA also plans to use the 737-800 to resume services to Hong Kong. MEGA has been in and out of the Male-Hong Kong market several times over the past three years. As CAPA noted in the first half of this report, MEGA is currently only operating three scheduled routes (Male to Beijing, Chengdu and Shanghai) with a fleet of three 767s.

MEGA previously wet-leased a 737-800 for the Male-Hong Kong route and to cover a charter contract it had for a couple of years for flights from Hong Kong to Palau in Micronesia. MEGA has never included 737s in its own fleet plan. Its business plan has always focused on 757s and 767s, which enjoy commonality, and a potential new widebody aircraft type.

MEGA fleet expansion has been significantly delayed

MEGA added its first 757 in 2012, originally planning to add four of the type in 2014 and have a fleet of seven 757s by the end of 2016. However MEGA never secured any additional 757s, despite coming close on several occasions. Its original 757 was removed from service earlier in 2016, leaving it with an all-767 fleet, according to the CAPA Fleet Database.

MEGA has also repeatedly delayed plans to add 767s. It had originally planned to add two 767s in 2015 and one more in 2016, for a total of six aircraft.

In addition, MEGA has repeatedly delayed plans to introduce a new longer-range widebody aircraft type. Initially it was looking to add a new widebody type in 2015, for use on flights to Australia and Europe. Its original fleet plan envisaged five of the new type by the end of 2016.

MEGA Maldives fleet plan: as of early 2014

Australia unlikely to be pursued in near future

MEGA's long-term network plan has always envisaged several routes to Europe, which would require a new aircraft type. The network plan from 2014 also included up to 10 destinations in China (compared with three currently), two destinations in Australia and four destinations in Africa.

MEGA Maldives long-term network plan: as of early 2014

Australia is a small but growing source market. The Maldives reported an 18% growth from Australian visitors in the first seven months of 2016, to approximately 14,000.

However, Australia could struggle to support a nonstop product and does not seem to be a priority for MEGA at this point. Australia accounts for less than 2% of total visitor traffic and is served with competitive one-stop products from AirAsia/AirAsia X, Cathay Pacific, China Southern and Singapore Airlines. As is the case with other potential MEGA markets, competitors have the advantage of offering connections from multiple gateways in Australia, whereas MEGA would have to focus on just one or two Australian destinations.

Europe has potential but is already well served

Europe is a much bigger market from the Maldives, accounting for 45% of total visitor traffic. It also continues to grow, with total European visitor numbers up 6% in the first seven months of 2016 to 327,000. (Eastern, Northern and Southern Europe accounted for all the growth as visitors from Western Europe were flat at 124,000.)

However, the Maldives-Europe market is extremely competitive, with service from several Western European operators (mainly point-to-point leisure airlines) and aggressively priced one-stop products from Emirates, Etihad, Qatar and Turkish.

There are currently four European airlines serving Male (includes Turkish) and five airlines from the Middle East. More European airlines serve Male on a seasonal basis, such as Switzerland's Edelweiss.

European and Middle Eastern airlines serving Male ranked by weekly seat capacity: 3-Oct-2016 to 9-Oct-2016

Rank	Airline		Weekly seats
1	EK	Emirates Airline	20,800
2	QR	Qatar Airways	4,914
3	TK	Turkish Airlines	4,004
4	EY	Etihad Airways	1,904
5	FZ	flydubai	1,872
6	SU	Aeroflot	1,208
7	SV	Saudia	1,140
8	DE	Condor Flugdienst	996
9	NO	Neos	552

MEGA still has aspirations to serve Europe, but for now the priority should be medium haul opportunities in Asia and the Middle East. Acquiring a new widebody type and launching long haul services would be risky, particularly given the challenges MEGA currently confronts.

MEGA's partnership ambitions have also not materialised

MEGA has understandably been set back by the lack of growth in its core market - Maldives-China. Prior attempts to diversify its network have not succeeded, making it impossible to pursue the fleet expansion that was initially envisaged.

In addition to several non-China routes from Male, MEGA was initially aiming to diversify with new operations in other countries - through a combination of new joint ventures and partnerships with existing airlines. For example, in Mar-2014 MEGA announced a partnership with Nepalese start-up BB Airways. However the partnership with BB was never implemented, and after operating briefly in 2013 using wet-leased aircraft, BB never resumed services.

MEGA has pursued several other similar partnership opportunities over the past few years and continues to search for opportunities in a wide range of overseas markets. As CAPA highlighted in its last analysis of MEGA in Apr-2014:

MEGA is generally looking for partnerships in small leisure-focused markets which it sees as underserved. Carriers from such markets generally struggle to compete but [MEGA] sees a brighter future if such airlines band together …. In its first three years MEGA has proven there is still a role for leisure carriers in small but growing markets. MEGA is now ready to embark on much more ambitious expansion that could see the carrier increase the size of its fleet six-fold over the next three years while also pursuing partnerships in other countries.

MEGA has encountered numerous challenges

MEGA has ultimately failed to implement its ambitious three-year growth plan and instead has shrunk in size. The airline operates fewer aircraft to fewer destinations and has fewer staff than three years ago. A low point occurred in 3Q2016, when MEGA cut 65 jobs and froze plans for hiring additional staff.

The setbacks at MEGA highlight the challenges confronting airlines based in small markets with predominantly inbound traffic. Focusing on China can be a sensible strategy, given the huge growth potential of the outbound Chinese market, but can also be dangerous. MEGA is not alone with a backdoor China strategy; for example, several airlines in Cambodia have been launched in recent years with a similar reliance on inbound Chinese visitor traffic.

Unlike some of the other China-focused start-ups MEGA has been innovative with its strategy, and flexible. It is also well managed. However, MEGA has confronted challenges to multiple components of its business plan. A combination of changes in market conditions, intensifying competition, and regulatory constraints have made for a more turbulent ride than expected.

MEGA has learned what countless other airline start-ups have experienced over the years. MEGA will take another stab at diversification and expansion, hoping this time its efforts and hard work will pay dividends, despite the relatively low odds of success in the always tough airline industry.