11-Mar-2014 11:00 AM

Southeast Asia low-cost airline fleet to expand by almost 20% in 2014. Are more deferrals needed?

Analysis

Southeast Asia's low-cost carrier fleet is still projected to increase by nearly 20% in 2014 despite a recent spate of delivery deferrals and suspensions of expansion. The region's LCC fleet also grew by about 20% in 2013, creating overcapacity in several Southeast Asian markets and leading to the current pressure on yields and load factors.

The AirAsia Group has made the right move in slowing down expansion by deferring deliveries and selling aircraft. Tigerair Mandala and Jetstar Asia also have decided to take at least a one-year hiatus from expanding their fleets. More Southeast Asian LCCs, including potentially the Lion Air Group, need to make similar adjustments for market conditions to improve.

Southeast Asia is still a market with huge opportunities for further LCC growth. But LCC capacity expansion has started to outstrip supply, perhaps necessitating a pause for breathing space.

Summary

Southeast Asia's low-cost carrier (LCC) fleet is projected to increase by nearly 20% in 2014, despite recent delivery deferrals and suspensions of expansion.
Overcapacity in several Southeast Asian markets has led to pressure on yields and load factors.
The AirAsia Group has slowed down expansion by deferring deliveries and selling aircraft, and other Southeast Asian LCCs need to make similar adjustments.
Southeast Asia's short-haul sector is experiencing irrational competition on many city pairs, with LCCs accounting for nearly 60% of capacity within Southeast Asia.
Lion Air Group is accelerating fleet expansion in 2014, taking 48 aircraft, while AirAsia/AirAsia X plans to add 16 aircraft.
Lion Air Group is projected to become the largest LCC group in Southeast Asia by fleet size, potentially surpassing AirAsia in 2015.

Southeast Asia's LCC sector to grow to 27 carriers and about 570 aircraft by end 2014

There are currently 23 LCCs operating in Southeast Asia. Another four LCCs are expected to launch in 2014 including three in Thailand - Thai AirAsia X, Thai VietJet Air and NokScoot - and Indonesia AirAsia X.

The start-up activity is not too concerning as three of the new carriers are widebody operators. The medium/long-haul segment of the market is not nearly as crowded, with just four of the 23 existing Southeast Asian LCCs operating widebody aircraft. While some medium-haul markets are also now seeing overcapacity, particularly Southeast Asia-Australia, for the most part this sector of the market remains relatively underpenetrated.

It is Southeast Asia's short-haul sector that is now seeing irrational competition on dozens of city pairs. LCCs now account for nearly 60% of capacity within Southeast Asia. The short-haul sector (both international and where relevant domestic) have become competitive in all five of the leading aviation markets of Southeast Asia - Indonesia, Malaysia, the Philippines, Singapore and Thailand.

LCC share of capacity (% of seats) within Southeast Asia: 2001 to 1Q2014

From a demand perspective the market remains the ideal battleground for LCCs. There is still rapid economic growth in most of Southeast Asia and the region's middle class continue to expand, bringing a rise in discretionary income levels. But LCC capacity has been added at a torrid pace. With full-service carriers also pursuing rapid expansion of regional capacity - including Bangkok Airways, Garuda Indonesia, Malaysia Airlines, Thai Smile and Singapore Airlines subsidiary SilkAir - the competition has become extremely intense as airlines of all types fight over a pie that is growing but not fast enough to keep up with supply.

Southeast Asia's LCC fleet grew by about 19% in 2013 to 485 aircraft. This is a net figure factoring in new aircraft deliveries and retirements. Several Southeast Asian LCCs phased out ageing and generally smaller aircraft in 2013, including Lion Air (MD80s and some 737 Classics), Wings Air (MD80s and Dash 8s), Citilink (737 Classics), Nok Air (737 Classics) and Zest Air (MA60s).

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In 2014 the region's LCC fleet is projected to increase by another 18% to 573 aircraft. Again this is a net figure, but there will be fewer retirements in 2014. One notable exception is AirAsia, which is planning to sell six of its oldest A320s.

Southeast Asia low-cost carriers ranked by fleet size: projection for end 2014 versus start of 2014 and 2013

Rank	Carrier		Country	LCC Group	Projected fleet as of 31-Dec-2014	Fleet as of 1-Jan-2014	Fleet as of 1-Jan-2013
1	JT	Lion Air	Indonesia	Lion	105	94	91
2	AK	AirAsia	Malaysia	AirAsia	76	72	64
3	5J	Cebu Pacific Air	Philippines	(independent)	48	48	41
4	FD	Thai AirAsia	Thailand	AirAsia	43	35	27
5	IW	Wings Air	Indonesia	Lion	34	27	27
8	TR	Tigerair	Singapore	Tigerair	33	25	21
6	QG	Citilink	Indonesia	(Garuda)	32	24	21
7	QZ	Indonesia AirAsia	Indonesia	AirAsia	30	30	22
9	DD	Nok Air*	Thailand	Nok	26	22	20
10	OD	Malindo Air	Malaysia	Lion	23	11	0
11	D7	AirAsia X	Malaysia	AirAsia X	21	18	11
13	3K	Jetstar Asia	Vietnam	Jetstar	19	19	16
13	VJ	VietJet Air	Vietnam	VietJet	18	10	5
14	Z2	Zest AirAsia	Philippines	AirAsia	12	15	15
15	SL	Thai Lion Air	Thailand	Lion	10	2	0
16	RI	Tigerair Mandala	Indonesia	Tigerair	9	9	5
17	TZ	Scoot	Singapore	(Singapore Airlines)	6	6	4
18	BL	Jetstar Pacific	Vietnam	Jetstar	6	5	5
19	DG	Tigerair Philippines	Philippines	Tigerair	4	5	5
20	Y5	Golden Myanmar Airlines	Myanmar	(independent)	4	2	0
21	OX	Orient Thai Airlines*	Thailand	(independent)	4	4	4
22	PQ	Philippines AirAsia	Philippines	AirAsia	2	2	2
23	VF	Valuair*	Singapore	Jetstar	0	0	2
24		Thai AirAsia X	Thailand	AirAsia	2	0	0
25		Thai VietJet Air	Thailand	VietJet	2	0	0
26		NokScoot	Thailand	Scoot and Nok	2	0	0
27		Indonesia AirAsia X	Indonesia	AirAsia	2	0	0
		TOTAL			573	485	408

AirAsia takes the lead in adjusting fleet expansion plans

The decision by AirAsia to sell six A320s and defer seven A320 deliveries which were originally slated for 2014 reduces the 2014 expansion rate of Southeast Asia's LCC fleet by about 3 percentage points. Indonesia's Tigerair Mandala also has dropped plans to add three A320s in 2014, cancelling a deal it had forged with the leasing company SMBC.

The Jetstar Group also recently announced plans to suspend expansion at Singapore-based Jetstar Asia, which will keep its fleet in 2014 at the current 19-aircraft level (includes subsidiary Valuair). But Jetstar Asia had already slowed down expansion, adding only one aircraft in 2013, and the group is starting to pursue expansion elsewhere in Southeast Asia, at its Vietnamese affiliate Jetstar Pacific, which has not grown in several years.

While the recent announcements by AirAsia, Tigerair Mandala and Jetstar Asia are welcome, it is not sufficient to resolve the current overcapacity challenge facing most of the region's markets. Most notably, Lion has not yet joined rival AirAsia in slowing down fleet expansion.

Will Lion consider deferrals?

As CAPA previously reported, the Lion Air Group is significantly accelerating fleet expansion in 2014 by taking 48 aircraft - including 30 737-800/900ERs, six A320s and 12 ATR 72s. In 2013 the group took delivery of 36 aircraft, 24 737s and 12 ATR 72s. It also retired a large number of MD-80s, 737 Classics and Dash 8s in 2013 while this year the group does not plan to retire any aircraft.

Of the 48 additional aircraft, 38 will end up in the LCC sector in Southeast Asia as Lion's only full-service subsidiary, Indonesia-based Batik Air, recently confirmed it will take 10 aircraft (all six of the A320s and four 737-800s). Of the 38 aircraft for the LCC market, 18 are now expected to end up in Indonesia at Lion and Wings, 12 in Malaysia at Malindo and eight in Thailand at Thai Lion. But this breakdown is subject to change as the Lion Group typically only finalises allocation of aircraft a couple of months prior to delivery.

Lion potentially has the flexibility to still defer some of its 2014 deliveries as a majority - 30 of the 48 - are coming in the second half of the year. But the group has shown no signs of even considering such a move. Lion seems eager to continue to make inroads in Malaysia and Thailand, where its affiliates are still relatively small, and resume faster expansion in Indonesia. In 2013 the focus was mainly on Malaysia and Thailand as the Lion Air fleet grew only marginally and the Wings Air fleet was flat, due in part to the phase out of older aircraft.

Lion will soon overtake AirAsia with largest LCC fleet in Southeast Asia

The 38 aircraft Lion plans to add to the Southeast Asian LCC marketplace 2014 is in stark contrast to the 16 aircraft AirAsia/AirAsia X plans to add. Lion will account for about 43% of the total LCC fleet expansion in Southeast Asia while AirAsia and AirAsia X will account for only about 18%. AirAsia will still have a larger fleet at the end of 2014 but Lion will close the gap to less than 20 aircraft. (If you include Batik in the Lion figures the gap will close to less than 10 aircraft.)

AirAsia currently has about 400 additional aircraft on order compared to over 550 for the Lion Air Group. As all Lion affiliates are based in Southeast Asia while AirAsia is planning to launch new affiliates in South Asia and North Asia, it is inevitable Lion will surpass AirAsia as the largest LCC group in Southeast Asia by fleet - most likely in 2015.

AirAsia/AirAsia X Group projected delivery dates for aircraft on order: as of 11-Mar-2014

Lion Air Group projected delivery dates for aircraft on order: as of 11-Mar-2014

The deferrals and aircraft sales at AirAsia will mainly impact its affiliates in Indonesia and the Philippines. Indonesia AirAsia, which originally was slated to add six A320s in 2014, is now not slated to take any. The group says its fleet in the Philippines, which was at 17 A320s at the end of 2013, will drop to 14 aircraft. This includes Philippines AirAsia (PAA) and Zest AirAsia, which phased out MA60 turboprops in early 2013 before its merger with PAA while adding A320s sourced from the AirAsia Group towards the end of the year.

AirAsia still plans more rapid growth for Malaysian market in 2014

Malaysia AirAsia (MAA) will still expand its fleet in 2014 but by only four aircraft to 76 A320s. This marks a major reduction compared to 2013, when eight A320s were added at MAA. But as a majority of these aircraft were delivered in 2H2013, MAA will still see rapid capacity expansion on a year-over-year basis. Average fares were down 18% at MAA in 4Q2013, an indication of the tough market conditions.

MAA is slated to take delivery of 14 new A320s, but six of these will replace older aircraft which are being sold and four will replace four older A320s which are being moved to AirAsia India. AirAsia India aims to launch services in 2Q2014 with an initial fleet of two new A320s as the four A320s from MAA will be moved over later in the year.

Malaysia-based AirAsia X is also slowing down expansion after adding seven A330s in 2013. The AirAsia X Group plans to again add seven A330s in 2015, but two are expected to be allocated to Thai AirAsia X as well as two to Indonesia AirAsia X. This will leave three additional aircraft for the original Malaysian operation. AirAsia X is still planning ambitious ASK growth of about 50% in 2014, with most of the growth coming in the first half and being primarily driven by the aircraft added in 2H2013.

Thai AirAsia still plans ambitious fleet expansion for 2014

There is still room for AirAsia to potentially make additional capacity adjustments for 2014. The group has indicated it could end up selling more than the six A320s currently on the block. While a slowdown at AirAsia X is probably not necessary, especially if the two new affiliates are able to launch as planned, there could be a need to slow down expansion at short-haul affiliate Thai AirAsia (TAA).

Among all the AirAsia short-haul franchises in Southeast Asia, TAA is the only one that has not adjusted its fleet plan for 2014 as the carrier still plans to take eight A320s, matching the eight aircraft added in 2013. The decision not to slow down growth at TAA is somewhat surprising given the unfavourable market conditions in Thailand, where political protests have significantly dampened demand.

Tigerair Singapore should slow down fleet expansion

At the much smaller Tigerair Group, while struggling Mandala is cutting capacity the main subsidiary in Singapore continues to grow at high-double digit clips. Tigerair Singapore's ASKs were up 24% in calendar 2013 as it added four aircraft, bringing its fleet to 25 A320s. The biggest indications of overcapacity in Singapore's short-haul market emerged in 4Q2013, when the carrier's average fares were down 16% while load factor slipped 11.6pts to 73.4%.

Tigerair Singapore is now planning to add another nine aircraft by the end of Mar-2015, including five aircraft which are coming out of the fleet of Tigerair Philippines following the sale of the carrier to Cebu Pacific. CAPA estimates eight of these aircraft will arrive by the end of 2014.

Tigerair recognises its home market will struggle to absorb the additional capacity and has been looking at possibly selling or subleasing aircraft. But finding suitors for A320s is not an easy feat in the current market.

Deferrals would be ideal as it would buy Tigerair time to get its new affiliate in Taiwan up and running. But as Tigerair has a small order book which runs dry in 2015 it probably lacks the leverage AirAsia enjoys with Airbus. One solution could be a new A320neo order as Tigerair has been evaluating long-term replacements, although even that may not persuade Airbus to swallow the last minute deferrals of current generation A320s.

Independent LCCs are more conservative as Lion and AirAsia race ahead

Emerging LCC group VietJet also plans to add 10 A320s in 2014. Most of the aircraft will be used to pursue further expansion in the Vietnamese market while at least two A320s could be used to launch Thai VietJet, which is now aiming to begin operations in mid-2014.

Garuda LCC subsidiary Citilink is also planning to add eight A320s in 2014 while increasing utilisation of its existing fleet.

Relatively conservative growth is being pursued at most of the region's independent LCCs, including Nok Air, Cebu Pacific and Golden Myanmar. Nok plans to add four 737-800s in 2014 as it grows its fleet to 26 aircraft, including the six Saab 340 turboprops operated by a regional partner it is now in the process of acquiring.

Cebu Pacific plans to add four aircraft in 2014 but it also plans to move over four of its existing aircraft to Tigerair Philippines as that carrier returns its current fleet of five aircraft to Tigerair Singapore. There will still be growth for Cebu Pacific however as three of the aircraft being added are widebodies, A330s, and the carrier also plans to increase utilisation of its A320 family fleet.

Golden Myanmar, meanwhile, plans to take two ATR 72-600s to supplement its current fleet of two A320s. Golden Myanmar along with Malindo and Thai Lion were the only LCCs to launch in Southeast Asia during 2013.

While some of Southeast Asia's independent LCCs remain in a relatively good position as they have first mover advantage in their home markets, competition will increase with the bigger groups. The groups, particularly AirAsia and Lion, account for most of the over 1,000 aircraft ordered by Southeast Asia's LCCs. This is a massive figure that would triple the size of the current fleet even after taking into account some replacements.

While Southeast Asia generally remains a favourable market for LCCs, overcapacity could lead to some consolidation and reductions in the order book. There is undoubtedly unexploited growth in these markets, but for now the recent deferrals by AirAsia could be just the tip of the iceberg.