Southeast Asia-US market Part 3: new nonstops need to overcome stiff one-stop FSC & LCC competition


Southeast Asian airlines are seeking to capture a larger share of the Southeast Asia-US market over the next few years as they launch new flights to the US. Three of the region’s flag carriers and at least one long haul LCC are planning to launch flights to the US, intensifying competition in an already fiercely competitive market.

Southeast Asian airlines currently account for less than a 20% share of the total Southeast Asia-US market. Philippine Airlines and Singapore Airlines are the only significant players in this market and are aiming to increase their share as they add new nonstop routes. Garuda Indonesia, Thai Airways and Vietnam Airlines are also keen to become significant players as they launch flights to the US, replacing their now limited offline products.

However, market share gains will likely come at the expense of yields and profitability as competition with North Asian airlines – and to some extent US and Gulf carriers – intensifies. North Asian airlines now account for more than 50% of bookings in the Southeast Asia-US market and have increased their reliance on Southeast Asian connections as they have added US capacity, resulting in very competitive fares.

This is Part 3 in a series of analysis reports on ultra-long-range flights between Southeast Asia and the continental US. The first report focused on the Vietnam-US market, and Vietnam Airlines’ plans for launching flights to the US in 2020 using a newly available high gross weight variant of the A350-900. In the second part CAPA examined other planned and potential new nonstop flights from Southeast Asia to the US, similarly taking advantage of new generation ultra-long-range aircraft.

See related reports:

In this report CAPA will analyse the overall Southeast Asia-US market, including the current major one-stop competitors, and the likely impact from the anticipated new entrants.

SIA and PAL to boost their US presence

There are only two Southeast Asian airlines operating services to the continental US: Philippine Airlines (PAL) and Singapore Airlines (SIA).

PAL operates four routes to the continental US, including three nonstop routes (Manila to Los Angeles and San Francisco and Cebu to Los Angeles) and one one-stop route (Manila to New York via Vancouver). PAL plans to upgrade New York to nonstop in 2018 after taking delivery of 278-tonne higher gross weight A350-900s.

PAL is also considering deployment of the A350 to launch new destinations in the continental US. In addition to Los Angeles, San Francisco and New York, PAL’s current US network includes Guam and Honolulu, which are significantly closer to Southeast Asia than the continental US.

See related report: Philippine Airlines to expand long haul operation after completing A350-900 acquisition

SIA currently operates five one-stop routes to four US destinations – Houston, Los Angeles, New York and San Francisco. However, it plans to launch nonstop flights to San Francisco in Oct-2016 and resume nonstop flights to Los Angeles and New York in 2018.

See related report: Singapore Airlines begins attempt to regain US market share with Singapore-San Francisco nonstops

PAL aims to grow its already leading share of Southeast Asia-US market further

PAL is already the largest airline in the Southeast Asia-US market, accounting for approximately 12% of bookings in the year ending 30-Jun-2016 (based on OAG Traffic Analyser data). PAL is confident it can increase its share of this market by adding new nonstop flights to the eastern half of the US which are not feasible with its current widebody fleet.

While the largest Filipino American communities are on the west coast, there are significantly sized communities in several other US metropolitan areas including in Chicago, New York, Houston and Washington DC. Most of this traffic now flies on North Asian airlines as they are able to offer a competitive one-stop product from all of the popular US gateways to Manila with convenient connections.

PAL has also been evaluating more US west coast destinations – Las Vegas, San Diego and Seattle are all possibilities as they all have sizeable Filipino populations. PAL does not have a strong US domestic partner, making it difficult to access seats beyond Los Angeles and San Francisco and offer competitive fares to offline markets.

PAL’s New York product is competitive on price, but North Asian airlines offer a faster overall transit time compared with the Vancouver stop, and also offer relatively cheap fares. The new Manila-New York nonstop will give PAL a competitive advantage – one that it now enjoys in the Los Angeles and San Francisco markets.

Philippines-US is by far the largest Southeast Asia-US market

The Philippines is by far the largest Southeast Asian destination from the US. In the year ending Jun-2016 the Philippines accounted for approximately 35% of all Southeast Asia-US bookings. There are over 3 million one-way annual passengers in the Southeast Asia-US market with the Philippines accounting for over 1 million.

Southeast Asia-US market share based on Southeast Asian country of origin: year ending Jun-2016

PAL relies almost entirely on local traffic, particularly ethnic traffic and the visiting friends and relatives (VFR) segment. PAL is keen to increase its sixth freedom traffic from the US to other Southeast Asian countries as it adds capacity to the US. However, the main objective is to increase its share of local traffic as approximately two thirds of this traffic is now travelling on one-stop options via North Asian hubs.

In addition to new nonstop routes planned from 2018, PAL is adding capacity to Los Angeles and San Francisco over the next few months as it expands its 777-300ER fleet from six to eight aircraft. The additional flights to the US west coast will enable PAL to increase its Philippines-US market share ahead of the arrival of the longer-range A350-900s.

Manila-Los Angeles and Manila-San Francisco are now by far the two largest city pairs in the Southeast Asia-US market. Combined they accounted for approximately 11% of all Southeast Asia-US traffic. Manila-New York is also among the six largest Southeast Asia-US city pairs, making it an attractive nonstop route for PAL.

PAL is the only nonstop competitor on Manila to Los Angeles and San Francisco and currently offers daily flights on both routes. PAL also launched three weekly flights from its secondary hub at Cebu to Los Angeles in Mar-2016. Cebu-Los Angeles is only the 30th largest Southeast Asia-US city pair but PAL is offering domestic connections beyond Cebu, enabling passengers travelling from secondary Philippine cities to the US to bypass congested Manila.

Singapore-US is much smaller, but strategically important

Singapore is a much smaller market from the US than the Philippines. Singapore currently accounts for approximately 12% of total Southeast Asia-US bookings, making it the fourth largest Southeast Asian market from the US after the Philippines, Vietnam and Thailand.

But Singapore is an important market for corporate travel, with a relatively large premium component. SIA strategically needs a nonstop product to regain its share of corporate and premium Singapore-US traffic, which has slipped since it suspended nonstop services in 2014.

As the chart below indicates, Singapore to New York, San Francisco and Los Angeles are all similarly sized markets and are among the top 10 Southeast Asia-US city pairs. While there are seven larger Southeast Asia-US city pairs the three Singapore routes have a smaller proportion of price-sensitive leisure or ethnic passengers.

Southeast Asia-US top 20 city pairs based on % of total Southeast Asia-US bookings: year ending 30-Jun-2016

Southeast Asian point of origin US destination % of total bookings
Manila Ninoy Aquino International  Los Angeles International         6.9%
Manila Ninoy Aquino International  San Francisco        4.6%
Ho Chi Minh City Los Angeles International Apt        3.8%
Bangkok Suvarnabhumi International  Los Angeles International         3.1%
Manila Ninoy Aquino International  New York J F Kennedy International         2.9%
Ho Chi Minh City San Francisco         2.3%
Bangkok Suvarnabhumi International  New York J F Kennedy International          2.0%
Singapore Changi  New York J F Kennedy International          1.6%
Singapore Changi  San Francisco          1.6%
Singapore Changi  Los Angeles International           1.5%
Bangkok Suvarnabhumi International  San Francisco          1.4%
Ho Chi Minh City Houston George Bush          1.3%
Manila Ninoy Aquino International  Honolulu          1.3%
Manila Ninoy Aquino International  Chicago O'Hare International           1.2%
Manila Ninoy Aquino International  Seattle-Tacoma International           1.1%
Jakarta Soekarno-Hatta  Los Angeles International           1.0%
Manila Ninoy Aquino International  Houston George Bush           1.0%
Ho Chi Minh City New York J F Kennedy International           1.0%
Manila Ninoy Aquino International  Las Vegas McCarran International           0.9%
Ho Chi Minh City Washington Dulles International          0.8%

All major Southeast Asia-US city pairs could have nonstop options by 2021

Not surprisingly, all top 10 of the Southeast Asia-US city pairs are now targeted by various Southeast Asia airlines. As mentioned earlier in this report, PAL already serves the two largest city pairs with nonstop flights and plans to serve the fifth largest with nonstop flights from 2018.

The fourth largest Southeast Asia-US city pair, Bangkok-Los Angeles, is a likely future nonstop route for Thai Airways. Thai served Los Angeles nonstop with A340-500s until 2012 and subsequently offered a one-stop product until 2015.

As outlined in the last instalment in this series, Thai recently stated its intention to launch nonstop flights from Bangkok to San Francisco or Seattle in 2017 – routes which are within range of its A350-900 and 787-9 fleets. However, CAPA pointed out that Bangkok-Los Angeles is a bigger and more prudent nonstop route and could potentially be served by Thai with the 280-tonne maximum takeoff weight variant of the A350-900.

Bangkok-San Francisco is the 11th largest Southeast Asia-US city pair, while Bangkok-Seattle is the 35th largest city pair. The latter particularly will be a challenging route without a strong partnership with one of the two US airlines that have a hub in Seattle (Delta Air Lines or Alaska Airlines).

As outlined in the first report in this series, Vietnam Airlines recently ordered the 280-tonne A350-900, which it intends to use to launch nonstop flights from Ho Chi Minh to Los Angeles in 2020. Ho Chi Minh-Los Angeles is the third largest Southeast Asia-US city pair, slightly ahead of Bangkok-Los Angeles.

Ho Chi Minh-San Francisco is also in the top 10, while Ho Chi Minh-Houston is in the top 15 and Ho Chi Minh-New York is in the top 20. All of these are potential nonstop routes for Vietnam Airlines although the initial preference is Los Angeles, being the biggest US market from Vietnam.

Indonesia-US routes are relatively small

Garuda is also planning to launch services to Los Angeles, initially via Tokyo with its existing 777-300ER fleet and subsequently with a (not yet ordered) new generation widebody aircraft capable of operating Jakarta-Los Angeles nonstop. As CAPA has previously observed, Indonesia-US is a relatively small market that may not be able to support a nonstop product.

See related report: Garuda Indonesia Part 2: US expansion, starting with Los Angeles, will be challenging and risky

The Indonesia-US market is also split between Bali and Jakarta, making it easier for North Asian airlines as they can offer a competitive one-stop product to both destinations. Jakarta-Los Angeles was the 16th largest Southeast Asia-US city pair in the year ending 30-Jun-2016, while Bali-Los Angeles was the 23rd largest.

Jakarta-New York, which Garuda is also considering, was the 30th largest Southeast Asia-US city pair in the year ending Jun-2016. Jakarta-San Francisco was the 35th largest.

North Asian and US airlines have a competitive advantage

On the US end, the Indonesia-US and the broader Southeast Asia-US market are also relatively fragmented. Los Angeles is by far the most popular US gateway, accounting for 21% of all Southeast Asia-US bookings in the year ending Jun-2016, and not surprisingly is a target for all the Southeast Asian airlines operating, or planning to launch, nonstop flights to the US.

San Francisco and New York are also relatively popular. However after Los Angeles, San Francisco and New York there are no US destinations with more than 150,000 annual one-way passengers.

Southeast Asia-US market share based on US airport destination: year ending Jun-2016

North Asian airlines have a huge competitive advantage over their rivals from Southeast Asia because they serve all eight of the most popular US destinations from Southeast Asia. US airlines also have an advantage as they can offer domestic connections to all eight of these cities, which account for 66% of all Southeast Asia-US bookings. US airlines are also able to offer connections to the remaining (generally) smaller destinations, which account for the remaining 34% of bookings.

US airlines account for less than 20% of Southeast Asia-US bookings

However, US airlines have limited networks in Southeast Asia and rely mainly on offline connections using their North Asian partners. American Airlines does not have any of its own services to Southeast Asia. Delta and United each have two destinations but Delta is planning to drop Bangkok and United is about to drop Ho Chi Minh, leaving both with just one Southeast Asia destination (Singapore).

United launched Singapore-San Francisco nonstop services in Jun-2016 and Delta now serves Singapore via Tokyo, but has been considering Singapore-Seattle nonstop flights. Neither airline uses Singapore to offer connections to other Southeast Asian points.

United accounted for approximately 8% of total Southeast Asia-US bookings in the year ending Jun-2016, while Delta accounted for 7%. American also has almost a 4% share of Southeast Asia-US bookings, most of which are generated by its trans-Pacific joint venture partnership with Japan Airlines.

North Asian airlines account for over 50% of Southeast Asia-US bookings

Three North Asian airlines – EVA Air, Korean Air and Cathay Pacific – have a bigger slice of the Southeast Asia-US market than any US airline and all Southeast Asian airlines except PAL. As discussed earlier in this report, PAL has a 12% share of total Southeast Asia-US bookings and SIA a 5% share. The total share for Southeast Asian airlines is less than 20%, as Garuda, Thai and Vietnam Airlines (and others) currently have a very limited offline presence in the US.

Southeast Asia-US market share (% of bookings) by airline: year ending Jun-2016

Korean, Cathay and EVA are all among the six largest Asian airlines in the US and have been expanding rapidly in the US market in recent years. As they have expanded in the US they have been relying more on Southeast Asian connections.

Japan Airlines, All Nippon Airways (ANA) and Taiwan’s China Airlines are the other top six Asian airlines in the US and also have relatively significant shares of the Southeast Asia-US market – as does Air China. Overall, North Asian airlines currently account for slightly more than 50% of total Southeast Asia-US traffic.

Gulf airlines pose increasing threat

Gulf airlines have also been increasing their share of the Southeast Asia-US market over the past couple of years as they have expanded in the eastern US.

Connections from Southeast Asia to the western US via the Middle East are circuitous, whereas connections to the eastern US via the Middle East offer similar transit times as connections via North Asia. The three big Gulf airlines accounted for approximately 6% of total Southeast Asia-US bookings in the year ending 30-Jun-2016, led by Emirates with a nearly 3% share.

The Gulf airlines have become aggressive competitors, impacting yields in markets such as Singapore-New York. However, Southeast Asia-US fares were already very low (often below USD1000 return, including taxes) as a result of aggressive competition from North Asian airlines.

LCCs pose potential new threat

As Southeast Asian airlines launch new nonstop options competition will further intensify. The new competitors should not assume they can command a yield premium for nonstop, since Southeast Asia-US is generally a highly price-sensitive market. The new competitors also do not have well-known brands in the US and may have to undercut the more established one-stop players to fill seats.

The outlook for Southeast Asian full service airlines in the US market is even bleaker when the prospect of new LCC options is considered. Malaysia’s AirAsia X is planning to launch services to the US within the next year. While AirAsia X has no intention of operating nonstop flights to the US, its one-stop product via Japan will add another highly competitive one-stop option for Southeast Asia-US passengers.

AirAsia X initially planned to serve Honolulu as its first US destination. However, over the last year as AirAsia X has slowly worked its way through the US FAA approval process it has started to consider other US destinations – which would also be served via Japan, where the AirAsia Group is setting up a new local short haul affiliate.

See related report: AirAsia X Part 3: 5 new routes in 2016 - LCC's accelerated expansion risks newfound profitability

Cebu Pacific could eventually compete against PAL on Manila-US west coast routes

Cebu Pacific also has been considering a launch of Honolulu. It has already secured US FAA approval, which enabled it to launch Guam in Mar-2016. Honolulu is approximately 11 hours from Manila, while Guam is less than four hours.

Honolulu is not a large market from Southeast Asia generally, accounting for only 3% of total Southeast Asia-US bookings. However, it is a relatively large market from the Philippines as there is a big Filipino community in Hawaii. If Cebu Pacific or AirAsia X serves Honolulu there are also LCC self-connection options available to the US west coast on US airlines.

Cebu Pacific does not currently have the aircraft to operate nonstop flights to the continental US but has been looking at potential new generation widebody aircraft that would enable it to enter this market. A decision is not likely in the short term, but remains a long-term priority given the huge size of the Manila-Los Angeles and Manila-San Francisco routes.

Manila-Los Angeles/San Francisco is a much more likely nonstop LCC market than Kuala Lumpur, Bangkok or Singapore to Los Angeles/San Francisco, since Manila is approximately two to three hours closer. While Malaysia-based AirAsia X, Thai AirAsia X and the SIA long haul LCC subsidiary Scoot have – or in future may have – aircraft capable of operating nonstop flights to the continental US, the extra two to three hours of flying time (compared with Manila) make it difficult from an economic perspective. Nevertheless, AirAsia X could emerge as a strong one-stop competitor.

Outlook for new Southeast Asia-US nonstop routes is relatively bleak

The reality is that ultra-long-range nonstop flights are extremely challenging for any operator, even with the advent of new generation widebody aircraft. Ultra-long haul routes are costly, are complex, and come with significant risk.

The Southeast Asia-US market is big, with over 3 million annual one-way passengers, and is growing. However it is already very well served, and consists primarily of price-sensitive leisure passengers who are generally not willing to pay extra for a nonstop product.

There are already plenty of competitively priced one-stop options and one-stop competition will only get fiercer as North Asian airlines continue to expand in the US, and as LCCs enter the North Pacific market. Launching new nonstop flights to the continental US represents a strategic and likely unprofitable move for most Southeast Asian flag carriers.

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