17-Apr-2015 8:25 PM

Scoot plans Kaohsiung-Osaka & Bangkok-Sapporo as long-haul LCCs focus on fifth freedom opportunities

Analysis

Singapore Airlines long-haul low-cost subsidiary Scoot is planning to launch two fifth freedom routes as it expands capacity for the fist time in over 18 months. The new Singapore-Kaohsiung-Osaka and Singapore-Bangkok-Sapporo routes complement existing services from Taipei to Tokyo and Seoul and will lift Scoot's share of capacity allocated to fifth freedom sectors to over 20%.

More fifth freedom flights for Scoot are likely, particularly from Bangkok due to the new restrictions blocking expansion to Japan and South Korea placed on its Thailand-based sister carrier NokScoot. Asia's leading long-haul LCC, AirAsia X, is also planning to launch its first fifth freedom sector, Osaka-Honolulu, and is looking at other similar opportunities including from India to Europe.

Fifth freedom sectors are attractive as they often provide less competitive and higher yielding options than pursuing new routes from home markets. Allocating capacity to other markets is a good option for Scoot and AirAsia X as the Singapore and Malaysia markets have become relatively saturated.

Summary

Singapore Airlines' long-haul low-cost subsidiary, Scoot, is planning to launch two fifth freedom routes as it expands capacity for the first time in over 18 months.
Scoot's new Singapore-Kaohsiung-Osaka and Singapore-Bangkok-Sapporo routes will complement existing services from Taipei to Tokyo and Seoul and will lift Scoot’s share of capacity allocated to fifth freedom sectors to over 20%.
Scoot is likely to launch more fifth freedom flights, particularly from Bangkok, due to new restrictions blocking expansion to Japan and South Korea placed on its Thailand-based sister carrier, NokScoot.
Fifth freedom sectors are attractive as they often provide less competitive and higher yielding options than pursuing new routes from home markets.
Scoot's expansion into fifth freedom routes reduces the growth rate in its home market of Singapore, but it still has the flexibility to pursue opportunities in other markets.
Scoot's order book, which includes 10 787s by early 2016 and a total of 20 aircraft by early 2019, gives it the flexibility to respond quickly to opportunities in Singapore as well as in other markets.

Fifth freedoms get new life in Southeast Asia as LCCs reach a new phase

Fifth freedom routes have in the past been relatively commonplace for Southeast Asian flag carriers. As a result the main countries in Southeast Asia negotiated beyond access in their air services agreements, particularly with their North Asian counterparts, but also with each other.

Over the last several years the flag carriers have stopped using a large chunk of these rights as many fifth freedom sectors became unprofitable. Intensifying competition played a role as well as increased reliance on alliances and partnerships, which often provides a more viable option for maintaining a presence in markets that are not served non-stop. Among the many fifth freedom sectors dropped by Southeast Asian flag carriers include Taiwan-US and Thailand-Japan by Singapore Airlines (SIA) and Japan-US and South Africa-Argentina by Malaysia Airlines (MAS).

Southeast Asia's LCC groups, most of which were established early last decade, were initially focused on their local markets - as would be expected in their initial phase of development. But the sector has evolved in recent years, with some LCCs becoming more like network carriers and launching long-haul operations.

The air service agreements were drafted long before the establishment of LCCs. But ironically some of the old agreements provide unpredictable opportunities for Southeast Asian LCCs who are now able to use the fifth freedom rights that were dropped by full-service carriers or had never been utilised.

For full-service airlines, more focussed on connectivity and through services, the rights did not have the same value as they do for a point to point airline. Added to that, the airline diversity created by new entry and cross-border joint ventures meant that more tailored use could be made of these potentially valuable routes.

In some cases, such as in the Taiwan-South Korea market, the bilateral agreements provide a potential opportunity to a foreign LCC that is still not available to local LCCs.

Jetstar Asia has been a pioneer with using fifth freedoms

Jetstar Asia was the first Southeast Asian LCC to seize on this opportunity in Jul-2010, when it extended its Singapore-Taipei route from Taipei to Osaka, using fifth freedom rights available to Singaporean carriers. The route was highly successful as Jetstar was the first LCC to compete in the Taiwan-Japan market.

As a result Jetstar in Mar-2012 added a second daily flight on Taipei-Osaka and launched a four times weekly Singapore-Manila-Osaka service. Jetstar Asia added its third fifth freedom route in Jun-2014, when it extended one of its daily Singapore-Bangkok flights to Fukuoka in southern Japan.

Scoot observed Jetstar's success in the Taiwan-Japan market and decided in 2012 to make Singapore-Taipei-Tokyo Narita one of its five initial routes. The daily flight has been one of Scoot's most successful routes, with Scoot picking up mostly a fresh load of passengers in Taipei.

Fifth freedom sectors already account for 17% of Scoot's capacity

In May-2013 Scoot launched a second fifth freedom route through Taiwan, this time to Seoul in South Korea. Scoot recognised opportunities to stimulate demand in Taiwan, which until late 2014 was the only major Asian market without a local LCC. Taipei-Seoul is a fast-growing but underserved market that Korean LCCs have been unable to enter due to bilateral restrictions.

Taipei-Seoul has also been a successful sector for Scoot, which would be operating more than three weekly flights on the route if there was space for more capacity in the Singapore-South Korea bilateral.

Scoot currently operates daily flights on Singapore-Taipei-Tokyo Narita and three weekly flights on Singapore-Taipei-Seoul using 402-seat 777-200s. They are slated to be the last of Scoot's routes to transition to the smaller 787, an indication of the success Scoot has had on its two fifth freedom sectors.

Currently the two sectors account for 8,040 weekly seats, which represents about 17% of Scoot's total seat capacity. Singapore-Taipei-Tokyo and Singapore-Taipei-Seoul are also among only a few Scoot routes that have not seen a capacity reduction at some point since being launched, another indication of their relative success.

Scoot's routes and frequency

Route	Launch date	Initial Frequency	mid Apr-2015 frequency	mid Jul-2015 frequency
Singapore-Sydney	4-Jun-2012	Daily	5x weekly	Daily
Singapore-Gold Coast	12-Jun-2012	5x weekly	3x weekly	5x weekly
Singapore-Sydney-Gold Coast			2x weekly	N/A
Singapore-Bangkok	05-Jul-2012	Daily	Daily	Daily
Singapore-Tianjin	23-Aug-2012	3x weekly	3x weekly	3x weekly
Singapore-Taipei-Tokyo Narita	18-Sep-2012	Daily	Daily	Daily
Singapore-Qingdao-Shenyang	11-Jan-2013	4x weekly	2x weekly	2x weekly
Singapore-Qingdao			2x weekly	2x weekly
Singapore-Taipei-Seoul	29-May-2013	3x weekly	3x weekly	3x weekly
Singapore-Nanjing	3-Jun-2013	4x weekly	4x weekly	4x weekly
Singapore-Hong Kong	15-Nov-2013	Daily	6x weekly	Daily
Singapore-Perth	12-Dec-2013	5x weekly	5x weekly	Daily
Singapore-Bangkok-Sapporo*	8-Jul-2015	3x weekly	N/A	3x weekly
Singapore-Kaohsiung-Osaka*	9-Jul-2015	3x weekly	N/A	3x weekly

Scoot cements its leading LCC position in Taiwan with a third fifth freedom route

On 16-Apr-2015 Scoot confirmed plans and began selling tickets for another Taiwan route, connecting Singapore with Kaohsiung. The new service will be operated three times per week with 375-seat 787-9s from 9-Jul-2015.

Scoot is planning to extend the new Kaohsiung flight to Osaka and has scheduled the flight accordingly with nine hours between the Singapore-Kaohsiung and Kaohsiung-Singapore legs. But Scoot has not yet formally announced or begun sales for Kaohsiung-Osaka as it is still waiting for final approvals from Japanese authorities.

Singapore-Kaohsiung-Osaka is a logical new route for Scoot as it allows it to cement its position in the Taiwanese market, where it is currently the leading LCC based on total seat capacity even with the 2H2014 launch of Taiwanese LCCs Tigerair Taiwan and V Air.

Taiwan LCC capacity by carrier: 13-Apr-2015 to 19-Apr-2015

Rank	Airline		Total Seats
1	TZ	Scoot*	16,080
2	IT	Tigerair Taiwan	13,860
3	D7	AirAsia X*	10,556
4	MM	Peach*	10,080
5	JW	Vanilla Air*	10,080
6	3K	Jetstar Asia*	8,640
7	BX	Air Busan*	5,322
8	ZV	V Air	5,096
9	UO	HK Express*	4,956
10	9C	Spring Airlines*	3,960
11	TR	Tigerair*	3,600
12	5J	Cebu Pacific Air*	3,580
13	XT	Indonesia AirAsia X*	3,016
14	7C	Jeju Air*	2,632
15	AK	AirAsia*	2,520
16	VJ	VietJet Air*	1,800
17	TW	T'way Air*	1,504
18	ZE	EastarJet*	1,104
19	8L	Lucky Air*	656

The new Singapore-Kaohsiung-Osaka route will give Scoot over 20,000 weekly seats in the Taiwanese market, which represents a 2% share of total international seat capacity in Taiwan and about a 20% share of LCC capacity.

Scoot's 4,500 weekly seats in the Kaohsiung market will also make it the largest LCC in Kaohsiung. Scoot will be larger than all foreign full-service carriers except Vietnam Airlines, which has about 5,000 weekly seats in the Kaohsiung market.

Kaohsiung LCC capacity (seats) by carrier: 13-Apr-2015 to 19-Apr-2015

Singapore will be the first LCC destination in Southeast Asia for Kaohsiung. But Bangkok and Kuala Lumpur are expected to soon follow as AirAsia has indicated it is also intending to launch services to Kaohsiung from its two largest hubs. (Malaysia AirAsia and Thai AirAsia have not yet formally announced these new routes or begun to sell Kaohsiung.)

Kaohsiung has seen huge influx of capacity to Japan

Currently the southern Taiwanese city has five LCC routes, all of which are to destinations in North Asia - Macau (daily service from Tigerair Taiwan), Osaka Kansai (daily from Peach) Tokyo Narita (twice daily from Vanilla Air), Seoul Incheon (five times weekly from Air Busan) and Shanghai (thrice weekly from Spring Airlines).

In addition to Peach the Kaohsiung-Osaka route is currently served by China Airlines (CAL) and EVA Air. CAL has 12 weekly flights, mainly with 737-800s but uses A330s for some flights during peak periods, while EVA has one daily flight using A321s.

The Kaohsiung-Japan market has seen huge growth over the last two years, driven by the launch of new services from LCCs as well as several new routes from CAL and EVA. There are currently about 13,000 weekly one-way seats between Kaohsiung and Japan, representing an increase of about 100% compared to Apr-2014 and nearly 400% compared to Apr-2013, according to CAPA and OAG data.

Kaohsiung to Japan total capacity (one-way seats per week): 19-Sep-2011 to 27-Sep-2015

Peach became the first LCC to serve the Kaohsiung-Japan market in early 2014 while Vanilla launched services to Kaohsiung in early 2015. EVA only began serving Japan from Kaohsiung at the end of 2013 while CAL subsidiary Mandarin Airlines also entered the market at the end of 2013.

CAL now has three Japanese destinations from Kaohsiung (Osaka Kansai, Tokyo Narita and Sapporo) while Mandarin serves a fourth (Okinawa). EVA also now serves three Japanese destinations from Kaohsiung (Fukuoka, Osaka Kansai and Tokyo Narita).

Scoot has obviously noticed the huge growth in the Kaohsiung-Japan and overall Taiwan-Japan market as it has now been operating in the Taiwan-Japan market for over 30 months. Taiwan including southern Taiwan has emerged as a popular tourist destination for Japanese citizens while Japan is an even faster growing outbound market from Taiwan. Japan recorded a 28% increase in Taiwanese visitor numbers in 2014 to 2.8 million while Taiwan recorded a 15% increase in Japanese visitor numbers in 2014 to 1.6 million.

The Singapore-Taiwan market also has been growing

Kaohsiung will be a new destination for the entire SIA Group. Currently the Singapore-Kaohsiung market is only served with two weekly flights from CAL with 737-800s. Scoot should be able to stimulate demand and grow the market, particularly given Taiwan's growing popularity as a tourist destination from Singapore.

Singaporean visitor numbers to Taiwan have nearly doubled since 2009. Taiwan recorded 376,000 visitors from Singapore in 2014, an impressive figure given Singapore only has a population of about 5 million. Singapore meanwhile recorded 259,000 visitors from Taiwan in 2014, representing a 3% reduction compared to 2013.

Taiwan annual tourist arrivals from Singapore: 2008 to 2014

The Scoot expansion is a good example of how the airline group concept works

The new flight from Scoot will generate a 350% increase in non-stop seat capacity in the Singapore-Kaohsiung market. But this should be manageable when factoring in some of Scoot's passengers will be staying on the aircraft and flying to Osaka. Scoot will also likely cater to passengers that were previously flying to Taipei but visiting southern Taiwan.

Scoot will be able offer Singaporeans an option of flying into Kaohsiung and out of Taipei or vice versa, reducing total travel time.

Scoot is the ideal brand for Kaohsiung as the market is primarily leisure and price sensitive and the market would likely not be able to sustain service from either of the SIA Group's two full-service brands - Singapore Airlines or SilkAir.

Short-haul LCC subsidiary Tigerair would be an option as Singapore-Kaohsiung is a four-hour flight and Tigerair could also operate Kaohsiung-Osaka, which is only about three hours in duration. But Tigerair has been in restructuring rather than growth mode while Scoot has the capacity to expand as it has ordered 20 787s, only two of which have been already delivered.

Scoot will compete against Jetstar in the one-stop Singapore-Osaka market

Osaka is also a logical destination for Scoot but one which the SIA Group would prefer Scoot to serve one-stop from Singapore to avoid cannibalising its own service. SIA currently serves Osaka with two daily non-stop flights from Singapore.

With the new one-stop flight via Kaohsiung the SIA Group will be able to compete against Jetstar for price sensitive customers seeking a low-cost option. Jetstar currently offers 18 weekly one-stop flights from Singapore to Osaka.

Jetstar Airways briefly operated non-stop flights from Singapore to Osaka in late 2012 and early 2013 using A330s. Had Jetstar maintained this route the SIA Group may have been more inclined to have Scoot serve Osaka non-stop. Scoot also only offers a one-stop product in the Singapore-Tokyo market, a route SIA serves with five daily non-stop flights including three flights to Haneda and two to Narita.

Scoot pounces on Bangkok-Sapporo as Thai AirAsia X is forced to withdraw

In Jul-2015 Scoot also plans to begin offering one-stop flights from Singapore to a third Japanese destination, Sapporo, on the picturesque north island. Sapporo will be a new scheduled year-round destination for the SIA Group although SIA has previously operated seasonal charters to Sapporo.

Scoot plans to serve Sapporo via Bangkok Don Mueang. Scoot already serves the Singapore-Bangkok market with one daily turnaround flight and has begun selling three additional weekly Singapore-Bangkok flights from 8-Jul-2015. As is the case with the Kaohsiung-Osaka sector, Scoot has not yet begun selling Bangkok-Sapporo as it is still waiting for final approvals from Japanese authorities.

The Bangkok-Sapporo market is particularly appealing to Scoot given the new restrictions placed by Japanese authorities on Thai carriers. As CAPA previously highlighted, Japanese authorities at the end of Mar-2015 placed restrictions preventing all Thai carriers from mounting new flights to Japan due to an ICAO finding against the Thai DCA.

NokScoot and its long-haul low-cost rival Thai AirAsia X (TAAX) are therefore unable to pursue expansion in the Japanese market until the Thai DCA passes a new ICAO audit, a process which is expected to take at least several months. TAAX's existing services to Osaka and Tokyo Narita are not impacted but it has stated that it will have to suspend its new Bangkok-Sapporo route, which it is launching on 1-May-2015 with one daily flight, at the end of Jun-2015. TAAX has refunded passengers who purchased tickets on Bangkok-Sapporo for 2H2015, providing an opening for Scoot.

The Bangkok-Sapporo market is currently only served non-stop by Thai Airways, which operates one daily flight on the route mainly using 787-8s. The Bangkok-Sapporo and overall Thailand-Japan market has seen a surge in demand over the last two years after Japan lifted visa restrictions for Thai citizens.

As CAPA stated in a 12-Apr-2015 analysis report, Scoot has been looking at launching several potential fifth freedom routes from Bangkok to Japan, including Tokyo and Osaka. Scoot also has already taken over charter flights from Bangkok to Tokyo which were originally committed to by NokScoot. These flights are being operated with a 777-200 which initially was to be delivered to NokScoot by Apr-2015.

"Thailand-Japan is a strategically important market for NokScoot and the Scoot group. The Scoot group needs to close the gap with the rival AirAsia X Group, which already operates three daily flights to Japan," CAPA wrote.

AirAsia X to also begin operating fifth freedom sectors

Unfortunately for AirAsia X, there are no fifth freedom rights in the Thailand-Japan market available to Malaysian carriers. The group's Malaysian subsidiary therefore does not have an opportunity to take over the Bangkok-Sapporo route from its Thai affiliate. The group will also not be able to pursue further capacity expansion in the Bangkok-Tokyo or Bangkok-Osaka markets or launch any other new route from Thailand to Japan.

AirAsia X however has started seeking out fifth freedom opportunities. The group recently announced plans to begin serving Honolulu from Osaka with four weekly flights starting 1-Nov-2015. The new flight, which will involve extending some of the Malaysian carrier's existing Kuala Lumpur-Osaka flights to the US state of Hawaii, will be the first fifth freedom route for AirAsia X and the entire AirAsia Group.

While Malaysian carriers do not have Thailand-Japan rights, they enjoy rights beyond Japan to the US which were originally negotiated by Malaysia for MAS. The Malaysian flag carrier dropped services to Los Angeles via Tokyo Narita in 2014.

Malaysian carriers also have fifth freedom rights between Europe and India. Specifically the Malaysia-India bilateral allows Malaysian carriers to operate beyond six Indian metros (Bangalore, Chennai, Delhi, Hyderabad, Mumbai and Kolkata) to four European points - London, Paris, Rome and Zurich.

AirAsia X is now looking at potentially using these rights as the long-haul LCC contemplates a resumption of service to Europe. AirAsia X suspended non-stop flights from Kuala Lumpur to Paris and London in early 2012.

At about the same time AirAsia X also suspended services to Mumbai and Delhi. Resuming services to Mumbai or Delhi would be challenging as there is limited to no space for additional flights in the Malaysia-India bilateral. But AirAsia could potentially transfer some of its Bangalore, Chennai, Hyderabad and/or Kolkata capacity to its long-haul sister carrier, enabling AirAsia X to enter these markets from Kuala Lumpur as well as pursue beyond flights to Europe (most likely London).

AirAsia X's pursuit of fifth freedom sectors comes as the original Malaysian subsidiary attempts to turn around after posting large losses which were driven partially by overambitious expansion in the Malaysian market. AirAsia X is taking a hiatus for most of 2015 from expanding in the Malaysian market and has cut capacity in some existing markets including Australia. Fifth-freedom sectors such as Osaka-Honolulu and potentially India-Europe reduce its exposure to the Malaysian market, where market conditions remain relatively challenging.

Scoot's pursuit of fifth freedom routes means less growth for Singapore

Scoot's pursuit of fifth freedom sectors similarly reduces its exposure to the Singaporean market. Scoot will allocate about 22% of its total seat capacity to fifth freedom sectors in mid-Jul-2015 - assuming it is able to secure final approvals for the Kaohsiung-Osaka and Bangkok-Sapporo sectors.

Scoot is beginning a major expansion phase in mid-2015 using its rapidly expanding 787 fleet. As CAPA previously highlighted, the upcoming expansion marks the first time that Scoot has pursued capacity growth since late 2013, when it took its sixth and final 777-200. Scoot took its first 787 at the end of Jan-2015 but as its first batch of 787-9 is being used as 777 replacements capacity growth is not being pursued until Jul-2015. (Scoot now plans to phase out its last 777 at the end of Aug-2015, at which point it should have seven 787s.)

Scoot's decision to use its first growth aircraft in over 18 months on two fifth freedom routes reduces the growth rate in its home market of Singapore. There will still be some expansion in Singapore, as three weekly flights to Bangkok are added and three weekly flights to Kaohsiung are launched, but Scoot would have been able to grow capacity more significantly in Singapore if had instead launched traditional turnaround routes. This particularly impacts Scoot's planned expansion of its network in mainland China, where it does not have any fifth freedom opportunities.

Scoot has the flexibility to pursue opportunities in other markets

The slower growth in Singapore may be disappointing to Singaporean consumers and Singapore Changi, which is counting on Scoot to unlock new growth during a challenging time of flat traffic for the airport. While Singapore Changi must have been delighted at Scoot's long list of 787s due for delivery, it will be less excited that Scoot is allocating a large chunk of the capacity they generate offshore.

But the focus on fifth-freedom routes is wise, given the opportunities in other markets and the situation at NokScoot.

Scoot will still be able to pursue growth in Singapore in 2H2015 and 1H2016 even if it continues to launch more fifth-freedom routes. Scoot has already committed to launching services to Melbourne in Nov-2015 and is also increasing capacity to Australia in early Jun-2015, when it resumes daily non-stops flights to Sydney, five weekly non-stop flights to Gold Coast and implements a long planned but delayed increase to a daily service to Perth.

More new destinations are also expected during 2H2015 in addition to Melbourne, Kaohsiung and Sapporo, which will be Scoot's first new destinations since Dec-2013 and give the carrier a network of 16 destinations (including Singapore).

Scoot's order book, which includes 10 787s by early 2016 and a total of 20 aircraft (10 375-seat 787-9s and 10 335-seat 787-8s) by early 2019, gives it the flexibility to respond quickly to opportunities in Singapore as well as in other markets.

Increasingly there is also flexibility in the long-haul low-cost model, which is still in its infancy, to pursue shorter sectors and new types of markets. Airline groups experimenting with the long-haul low-cost model need to be innovative and quick in pouncing on opportunities in the dynamic Asian marketplace.