01-Mar-2013 8:00 AM

Singapore Changi to benefit from continued rapid growth of Indonesia market

Analysis

This is the second part of a report looking at the Indonesia-Singapore market and the impact of the recently expanded bilateral between the two countries. The first part looked at the Jakarta-Singapore route, which accounts for 55% of Indonesia-Singapore capacity and has not seen growth in recent years due to bilateral restrictions.

The other 13 routes currently connecting Singapore and Indonesia have not generally been constrained by the bilateral. But there are huge opportunities to expand capacity on these smaller routes, driven by Indonesia's rapidly growing economy and Changi's position as the leading international hub for secondary cities in nearby Indonesia.

Leading LCC groups - including AirAsia, Lion and Tiger - as well as full-service carriers, led by Singapore Airlines regional subsidiary SilkAir, are likely to launch new routes connecting Indonesia with Singapore as well as add capacity in existing markets.

Summary

The recently expanded bilateral between Indonesia and Singapore has opened up huge opportunities for capacity expansion on smaller routes connecting the two countries.
Leading LCC groups, such as AirAsia, Lion, and Tiger, as well as full-service carriers like SilkAir, are likely to launch new routes and add capacity in existing markets.
Singapore Changi Airport is the main international hub for most of Indonesia, offering a wider range of destinations than Jakarta Soekarno-Hatta.
Changi is well-positioned to serve as the main hub for Indonesia's secondary cities, which are experiencing rapid growth driven by the country's strong economy and rising middle class.
Singapore Changi is the largest destination country for Indonesia, capturing over 30% of all international seats from Indonesia.
The Tiger Group, including Mandala, is expected to increase its market share significantly in the Singapore-Indonesia market in 2013, while Lion is less likely to launch new routes.

Changi is connected with 14 Indonesian airports including several secondary cities

There are about 30 cities in Indonesia with populations exceeding 400,000. Just under half of these cities are currently served from Singapore Changi Airport. The Indonesia-Singapore bilateral only limits capacity on the four largest routes - Jakarta, Bali, Surabaya and Medan. Available capacity for all four routes has increased by 50% as a result of the recently-signed expanded bilateral while there are no constraints on services to secondary cities.

The opportunities in the secondary cities are huge as many of these cities are now seeing rapid growth. In many cases Indonesia's secondary cities are growing more rapidly than Jakarta, driven by Indonesia's strong economy and rising middle class.

There is strong local demand for travel between Singapore and Indonesia's secondary cities. But more crucially Changi is well positioned to serve as the main hub for these growing markets because with the exception of Denpasar on the resort island of Bali these cities have limited international services.

Singapore has emerged as the main hub airport for most of Indonesia

Singapore Changi in many ways is the main international hub for Indonesia. Changi benefits from its close proximity to Indonesia. Changi is able to offer connecting passengers from Indonesia a much wider offering of destinations than Indonesia's largest airport, Jakarta Soekarno-Hatta.

For example, Changi is connected to 13 destinations in Europe while Soekarno-Hatta currently does not have any non-stop flights to Europe. (Garuda Indonesia now serves Amsterdam via Abu Dhabi, Turkish Airlines serves Istanbul via Singapore and KLM serves Amsterdam via Kuala Lumpur. But Garuda is planning to begin flights to London Gatwick, which will be its first non-stop destination in Europe, in late 2013.)

Within Asia-Pacific, Singapore has more than four times as many international destinations as Jakarta (102 compared to 23). As an award winning airport, Changi also offers a far superior and less hassling transit experience compared to the congested and outdated Soekarno-Hatta.

Further expansion in the Indonesian market is strategically important to Changi, which in 2012 recorded 10% traffic growth to 51 million passengers, as it looks to continue its rapid growth trajectory. As Indonesia, which is now the world's fourth most populous country with about 240 million people, continues its rapid economic growth Changi will benefit as long as there are no restrictions on capacity increases. Indonesia now accounts for 13% of total capacity at Changi, making it the airport's largest destination country.

Singapore Changi leading country destinations by capacity share (% of arrival seats): 25-Feb-2013 to 03-Mar-2013

Source: CAPA - Centre for Aviation & Innovata

Over 30% of all international seats from Indonesia are now captured by Singapore. This is a huge number considering Indonesia is one of the largest countries in the world and has one of the world's fastest growing economies. For tiny Singapore, a country of only five million people, to draw so much traffic from a country that is about 50 times bigger, is a huge accomplishment and shows the power and potential of the Changi hub.

SIA Group accounts for one-third of Singapore-Indonesia market

There are currently about 96,000 weekly one-way seats from Singapore to Indonesia. The SIA Group, including regional subsidiary SilkAir, has a leading 33% share of the market, and by far the largest Singapore-Indonesia network with 11 destinations (includes two destinations operated by SIA mainline and nine operated by SilkAir).

Indonesia AirAsia is the second largest player in the Singapore-Indonesia market with an 18% share of capacity and five routes. Lion and Garuda are tied for third largest with 11% capacity shares.

Lion currently operates just two Singapore-Indonesia routes - Jakarta and Surabaya (although it has Ho Chi Minh in Vietnam as a third destination from Singapore). Garuda also only serves three destinations from Singapore but codeshares with SilkAir on several other Singapore-Indonesia routes.

Indonesia to Singapore capacity share (% of seats) by airline group: 25-Feb-2013 to 03-Mar-2013

Carrier	Capacity share
Singapore Airlines	33%
AirAsia	18%
Lion	11%
Garuda	11%
Tiger	9%
Jetstar	8%
Turkish	2%
Qatar	2%
Air France-KLM	2%
China Airlines	2%
Sriwijaya	1%
Philippine Airlines	1%

Indonesia to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 18-Aug-2013

The Tiger Group in recent months has surpassed Jetstar as the fifth largest airline group in the Singapore-Indonesia market with a 9% share of capacity. Mandala, which resumed services in Apr-2012 after emerging from a bankruptcy process which saw Tiger acquire a 33% stake, has quickly built up a 6% share of capacity in the Singapore-Indonesia market despite not being able to serve Jakarta-Singapore due to bilateral restrictions. Singapore-based Tiger Airways has just one route to Indonesia, Jakarta, and a 3% share of Singapore-Indonesia capacity.

See related artcies:

Tiger/Mandala market share to continue increasing rapidly in 2013

Tiger's share of the Singapore-Indonesia market will continue to increase significantly in 2013 as Mandala and Tiger both add capacity on Jakarta-Singapore and as Mandala continues to expand on other Singapore routes. Mandala now serves five destinations from Singapore - Bali, Medan, Padang, Pekanbaru and Surabaya.

Mandala is the only LCC on the Padang-Singapore and Pekanbaru-Singapore routes. SilkAir is the only other carrier on the Pekanbaru route and offers four weekly frequencies while Mandala launched the route on 14-Feb-2013 with five weekly frequencies. Mandala became the only carrier on Padang-Singapore when it launched the route on 01-Dec-2012 with one daily flight, although several years ago the route had been served by Tiger Singapore.

Padang and Pekanbaru are both located in the nearby island of Sumatra and are only a one hour flight from Singapore. They are small cities but their close proximity to Singapore and lack of international services position them as ideal routes for Changi. The only other international destination for both Padang and Pekanbaru is Kuala Lumpur.

Mandala also serves the Singapore to Bali, Surabaya and Medan routes with one daily flight. All these markets could potentially support more capacity from Mandala given they are the second, third and fourth largest routes between Indonesia and Singapore.

Mandala says it is now considering adding a second frequency to Bali and Medan as both these routes have performed well during their initial phase. Medan was Mandala's first Singapore route and was launched on 20-Apr-2012 (just a couple of weeks after the carrier resumed operations as a Tiger affiliate) while Bali was launched on 01-Dec-2012.

Mandala is also evaluating new potential Singapore-Indonesia routes. As discussed in the first part of this report, Mandala is also planning to launch four daily flights from Jakarta to Singapore using newly available traffic rights.

Tiger/Mandala better positioned than other LCCs for Indonesia-Singapore expansion

Since becoming a Tiger affiliate Mandala has looked to combine domestic sectors from its Jakarta base to other Indonesian cities with sectors from the other cities to Singapore. Mandala currently only serves six destinations in Indonesia and all of these except Jakarta are now served from Singapore, with Jakarta-Singapore to be launched within the next few months.

Singapore is already Mandala's largest destination after Jakarta. Singapore will continue to be Mandala's second largest destination as its capacity at Singapore is expected to more than double over the next six months.

Mandala top 10 hubs/bases/stations by capacity (weekly seats): 25-Feb-2013 to 03-Mar-2013

As Mandala continues to build out its domestic network more opportunities for new Singapore-Indonesia routes will open up. Mandala, which will soon be rebranded Mandala Tiger, will continue to look to serve several of its new domestic points from Singapore, leveraging the strength of Tiger's hub at Changi.

The Tiger Group will likely end up with the largest Singapore-Indonesia network after the SIA Group. Tiger has an advantage over the other LCC groups in that it has subsidiaries or affiliates in both Singapore and Indonesia. This helps with sales from both ends and also makes it easier to secure slots at congested Changi. Tiger also has the largest network among LCCs serving Singapore, allowing Mandala passengers to connect in Singapore to a wider range of destinations throughout Asia.

AirAsia to compete with Mandala on Singapore to Medan and Surabaya

Mandala's rapid expansion over the last year in the Singapore-Indonesia market has put pressure on Indonesia AirAsia, which for now remains the largest LCC in the market. AirAsia currently serves five routes between Indonesia and Singapore, or one less than the Tiger Group's six routes, but has double the capacity given the high number of frequencies it operates on Bali-Singapore and Jakarta-Singapore.

Indonesia AirAsia currently operates six daily flights from Singapore to Jakarta (compared to two for Tiger although Tiger/Mandala will soon significantly increase this) and four flights to Bali (compared to one for Mandala, which will likely increase to two). Singapore to Jakarta and Bali are Indonesia AirAsia's two largest international routes.

Indonesia AirAsia also operates two daily flights from Singapore to Bandung, one daily flight to Yogyakarta and four weekly flights to Semarang. Bandung, Yogyakarta and Semarang are not yet part of Mandala's domestic network, making it impossible for Mandala to serve these destinations from Singapore for now. SilkAir also serves the Singapore-Bandung route with three weekly flights while AirAsia is currently the only carrier in the Singapore-Yogyakarta and Singapore-Semarang routes. (Previously Singapore-Yogyakarta was served by Garuda while Singapore-Semarang was served by Batavia prior to its Jan-2013 bankruptcy.)

The new Indonesia-Singapore bilateral will finally enable Indonesia AirAsia to enter the larger Medan-Singapore and Surabaya-Singapore markets, giving AirAsia seven routes between the two countries. Indonesia AirAsia initially lodged applications in 2012 to serve Medan and Surabaya from Singapore. While it received the required traffic rights for these routes from Indonesian authorities, Singaporean authorities sat on its applications for several months in an ultimately successful tactic to put pressure on Indonesia to negotiate an extended bilateral. At about the same time Singapore authorities approved Mandala to launch Singapore-Medan and later Singapore-Surabaya, which frustrated AirAsia as both carriers received from Indonesian authorities the traffic rights but Singapore only sat on the AirAsia applications.

With the new bilateral now forged, Indonesia AirAsia plans to resubmit applications for Singapore-Medan and Singapore-Surabaya and will likely launch the routes by the end of 2013. Indonesia AirAsia currently serves Surabaya from Johor Bahru, a route it launched in Oct-2012 due to frustrations in securing approval to launch the routes from Singapore. Johor Bahru is located in southern Malaysia, just across from Singapore, and its airport is connected by a direct bus link promoted by AirAsia. Indonesia AirAsia has also been preparing to launch service from Johor Bahru to Medan.

But Johor Bahru is a different market, attracting mainly Indonesian migrant workers who live in southern Malaysia rather than Singapore. An AirAsia source says on average only 15 to 20 passengers on the four weekly Johor Bahru-Surabaya flights have connected to the bus from Johor airport Senai to Singapore. As a result, AirAsia should be able to maintain the Johor Bahru-Surabaya route and potentially launch Johor Bahru-Medan while launching Singapore-Medan and Singapore-Surabaya.

Lion less likely to launch new Singapore-Indonesia routes

The second largest LCC currently in the Indonesia-Singapore market, Lion, launched services to Surabaya in Dec-2011 and now serves the route with one daily flight. Surabaya is the only destination in Indonesia other than Jakarta that Lion now serves from Singapore.

Lion is likely to add capacity to Jakarta and Surabaya, using some of the newly available traffic rights from the Indonesia-Singapore bilateral. But it is not as likely as AirAsia and Tiger/Mandala to link secondary cities in Indonesia with Singapore. Lion previously tried other Indonesia-Singapore routes, including Bali-Singapore, but discovered such markets were more challenging.

Unlike AirAsia and Tiger/Mandala, Lion is predominately a domestic brand, making it difficult for the carrier to sell in Singapore. Only 5% of Lion's seat capacity is currently allocated to the international market, compared to 57% for Indonesia AirAsia and 56% for Mandala.

Lion also does not offer connections in Singapore, which puts it at a potential disadvantage in opening more routes from Indonesia to Singapore. But as Indonesia's largest domestic carrier Lion is able to offer connections in Jakarta and Surabaya across its domestic network. This gives Lion an advantage on the two largest Singapore-Indonesia routes as it has domestic hubs at both Jakarta and Surabaya, allowing the carrier to offer connecting services to the dozens of Indonesian destinations which are not among the 14 Indonesian cities linked directly with Singapore.

Jetstar has done little since becoming first LCC to enter Singapore-Indonesia market

The other LCC group serving the Singapore-Indonesia market, Jetstar, currently has an 8% share of capacity between the two countries. Most of the group's Indonesia flights are operated by Valuair, which serves Bali, Medan and Surabaya as well Jakarta. Valuair currently operates six weekly flights to Medan and Surabaya and five weekly flights to Bali. (Australia-based Jetstar Airways also operates four weekly flights between Singapore and Bali as part of a Singapore-Bali-Perth routing.)

Jetstar has not made any significant adjustments in its Singapore-Indonesia capacity since acquiring Valuair in 2005. The Valuair acquisition gave Jetstar first mover advantage in the Singapore-Indonesia market as Valuair at the time was the only budget carrier that was able to access the market. But Jetstar has done little to build on this position and as a result has steadily lost market share between Singapore and Indonesia as other LCCs gradually were able to also gain access.

Valuair initially got around an Indonesian restriction which prevented LCCs from operating any of the four primary Singapore-Indonesia routes by claiming it was not a LCC and instead met Indonesia's definition of a "boutique carrier". Valuair, which launched services in 2004 at about the same time Jetstar Asia and Tiger launched, was more of a hybrid carrier as it offered some frills such as snacks and drinks.

Indonesia continues to apply the "boutique carrier" rule on flights from Singapore to Jakarta, Bali, Medan and Surabaya. But pure LCCs have also been able to meet the rule by offering small free snacks and a glass of water on those routes. Currently these four Indonesia routes are the only routes in the Tiger, AirAsia and Jetstar group networks in which passengers are offered a free snack and water.

The "boutique carrier" rule is an annoyance to LCCs in the Singapore-Indonesia market as it drives up cost, makes it harder to sell ancillaries and adds complexity to the otherwise basic LCC model. As a result the rule can limit the profitability of Singapore-Indonesia routes. But LCCs have no choice but to adhere to the ridiculous rule in order to access these important markets.

As the rule only applies to the four main routes, LCCs are able to sell all food and beverages on other Singapore-Indonesia routes. These are the same four routes which are also covered by the Singapore-Indonesia bilateral and are currently the four largest routes between the two countries.

Singapore-Indonesia routes ranked by capacity (weekly seats): 25-Feb-2013 to 3-Mar-2013

More growth likely for Singapore to Bali, Surabaya and Medan routes

Jakarta-Singapore has been the only Indonesia-Singapore route where growth has been significantly restricted by the bilateral. Capacity on the second largest Singapore-Indonesia route, Singapore-Bali, has been operating near full capacity but generally there has been room for new services when requested. For example, Mandala was able to secure traffic rights from Indonesian authorities to launch Singapore-Bali in Dec-2012.

There are currently about 20,000 weekly one-way seats from Singapore to Bali. SIA has a leading 31% share of the market, followed by 25% for Indonesia AirAsia, 12% for KLM, 12% for Qatar Airways, 8% for the Jetstar Group, 6% for Mandala and 6% for Garuda. KLM and Qatar have sixth freedom traffic rights on the route, with KLM's service originating in Amsterdam and Qatar's service originating in Doha.

Bali is a much different market than the other Singapore-Indonesia routes as a majority of traffic consists of foreign tourists. This gives SIA and AirAsia a big advantage on the route as they have powerful international brands.

Singapore to Bali capacity by carrier (one-way seats per week): 19-Sep-2011 to 18-Aug-2013

Most other Singapore-Indonesia routes have a higher mix of local business and Indonesia outbound leisure traffic as well as migrant workers that are from Indonesia but work in Singapore. There are a couple of exceptions such as Manado, which is a popular dive destination and a niche route for SilkAir.

In the second largest route between Singapore and Indonesia, Singapore-Surabaya, there are currently about 8,000 weekly one-way seats. As in the case with Bali, there was still room under the previous bilateral to support modest capacity increases in this market.

SilkAir currently accounts for 24% of capacity in the market, followed by 19% for Lion, 14% for Valuair and 16% for Mandala. Taiwan's China Airlines accounts for the remaining 27% but not all of this capacity is for the local Singapore-Indonesia market as it serves Surabaya on Taipei-Singapore-Surabaya routing.

Singapore to Surabaya capacity by carrier (one-way seats per week): 19-Sep-2011 to 18-Aug-2013

There are currently about 4,500 weekly one-way seats on the fourth largest Singapore-Indonesia route, Singapore to Medan. Again, there traditionally has been room under the bilateral for more capacity to Medan. SilkAir has a leading 47% share of capacity in this market, followed by 28% for Mandala and 24% for Valuair.

The Singapore-Medan market can likely support more capacity as it was also previously served by Batavia. A new airport is expected to open shortly in Medan, replacing the current small downtown airport and opening up space to support expansion.

SIA and SilkAir to continue expanding their Indonesia network

SilkAir generally has an advantage in operating on the smaller Singapore-Indonesia routes as it does not have to rely entirely on local traffic. Garuda has traditionally struggled on these smaller routes as there is generally not sufficient demand to support a full-service carrier without connections in Singapore.

Garuda has tried over the years to make routes such as Yogyakarta work but has been unsuccessful. In addition to Jakarta it now only links Singapore with Bali and Sepingann. Singapore-Bali is only served with one daily flight while Singapore-Sepingann is served with only four weekly flights.

The flight to Sepingann, also known as Balikpapan, continues onto Makassar. There are currently no non-stop flights between Singapore and Makassar but this a potential new route for Garuda, SilkAir or one of Indonesia's LCCs. Makassar is a fast-growing city in central Indonesia and is now a regional hub for Garuda. The carrier has talked about using its new fleet of Bombardier CRJ1000s, some of which are based at Makassar, to open a Singapore-Makassar route and potentially other secondary routes connecting Singapore with secondary cities in Indonesia.

Garuda codeshares with SIA on the Bali route and with SilkAir to Sepingann, which gives Garuda access to more frequencies in both markets. SIA operates three daily flights to Bali and SilkAir operates five weekly flights to Sepingann.

Garuda codeshares on several of the other eight SilkAir routes to Indonesia, none of which Garuda currently operates with its own aircraft. While Garuda and SIA are competitors in several markets, this codeshare is logical as Garuda would struggle to make most of these routes work on its own.

A large portion of the passengers SilkAir carries from Indonesia transfer onto other SilkAir and SIA flights at Changi. These markets are generally too small to support point-to-point service from a full-service carrier.

SilkAir plans to continue to grow its Indonesia network, exploiting the growth in Indonesia's smaller cities and its ability to offer a large portfolio of connecting destinations with SIA. Indonesia along with China and India are SilkAir's three main growth markets as it expands capacity at a rapid annual clip of almost 20%. Several more Indonesia routes will potentially be added over the next few years, particularly if Garuda can help sell to local Indonesia-originating passengers.

Indonesia-Singapore market has huge potential for both local and connection traffic

LCCs have also succeeded in entering several smaller Singapore-Indonesia routes, including routes served by SilkAir, as their fares are low enough to stimulate sufficient point-to-point demand. LCCs will likely continue to add services from Singapore to secondary cities in Indonesia in response to rising demand for traffic between the two countries.

For example there are five SilkAir routes to Indonesia that do not yet have LCC service: Lombok, Manado, Palembang, Sepingann and Solo. There are also some potential markets which are currently not served at all such as Makassar and Pontianak (the latter had been connected to Singapore by Batavia). With low enough fares sufficient demand could be generated to support LCC services, particularly if served by LCCs that also provide some connectivity in Singapore such as Mandala/Tiger and Jetstar.

Mandala/Tiger and Jetstar now offer connections in Singapore across the Tiger and Jetstar Asia networks. But the overwhelming majority of their traffic (roughly 80% to 90%) continues to be point-to-point. Indonesia AirAsia for now is strictly a point-to-point carrier although its sister carrier in Malaysia offers connections while Lion only offers connections on the Indonesia end.

Overall, approximately 30% of passengers travelling between Indonesia and Singapore transit in Changi to other points. The SIA Group carries most of this traffic as the other carriers in the Indonesia-Singapore market focus primarily on point-to-point traffic. There were 5.2 million passengers on an origin and destination basis between the two countries in 2012, according to Indonesian sources. As there were roughly 9.5 million seats in the market during 2012, there were roughly 2.4 million transit passenger passengers and 5.2 million local passengers assuming average load factors of 80%.

While transit traffic and leveraging Changi's status as a leading international hub will continue to be an important driver of growth in the Singapore-Indonesia market, local traffic between the countries is also expected to continue growing rapidly. Singapore-Indonesia is a huge local market as there are strong business ties between the two countries.

Indonesians also take frequent holidays in Singapore, where they are drawn by Singapore's casinos, resorts, medical facilities and shopping malls. Many wealthy Indonesians have properties and bank accounts in Singapore. There is also a large flow of migrant workers from Indonesia to Singapore and a large visiting friends and relatives (VFR) market - segments which the LCCs mop up.

There will likely be a period of over-capacity in the Singapore-Indonesia market as several LCCs race at the same time to exploit the opportunities. But eventually most of the additional capacity should be absorbed given the rapid economic growth in Indonesia, Singapore's position as a leading leisure and business destination for Indonesians, and Changi's position as the preferred hub when Indonesians travel abroad.