28-Mar-2014 10:00 AM

Thai AirAsia X and NokScoot both target Thailand-Japan market, starting with Bangkok-Tokyo Narita

Analysis

Competition in the Thailand-Japan market will greatly intensify by the end of 2014 as new long-haul low-cost carriers Thai AirAsia X and NokScoot both plan to serve Tokyo Narita as their first destination. Thai AirAsia X plans to initially serve Japan with charter flights starting in Apr-2014 while Thai AirAsia X and NokScoot are both expected to start operating scheduled services to Japan in 4Q2014.

Thai AirAsia X will launch with a fleet of two A330-300s sourced from its Malaysian sister carrier while NokScoot is now planning to launch with a fleet of two 777-200s sourced from Singapore Airlines. Thailand will become the first country with two medium/long-haul LCCs, providing an intriguing dynamic.

The Thailand-Japan market is growing rapidly and could benefit from LCC stimulation. But there is a risk of overcapacity, particularly if the Thailand market does not recover rapidly from the recent political protests.

Summary

Competition in the Thailand-Japan market will intensify by the end of 2014 as new long-haul low-cost carriers Thai AirAsia X and NokScoot both plan to serve Tokyo Narita as their first destination.
Thai AirAsia X will launch with a fleet of two A330-300s sourced from its Malaysian sister carrier while NokScoot is now planning to launch with a fleet of two 777-200s sourced from Singapore Airlines.
The Thailand-Japan market is growing rapidly and could benefit from LCC stimulation, but there is a risk of overcapacity, particularly if the Thailand market does not recover rapidly from the recent political protests.
Thai AirAsia X plans to initially serve Japan with charter flights starting in Apr-2014 while Thai AirAsia X and NokScoot are both expected to start operating scheduled services to Japan in 4Q2014.
The Thailand-Japan market has grown rapidly over the last year, driven by continued increases in demand for Japanese holidaying in Thailand as well as a sudden surge in outbound numbers.
Japan is Thailand’s fifth largest market with over 90,000 weekly return seats, and Japan is one of Thailand’s largest and fastest growing markets.

Thai AirAsia X to launch initially with charter services

Thai AirAsia X, also known as TAAX, was established in 2013 and was initially planning to commence operations in 1Q2014 with scheduled services. The new carrier completed proving flights using an A330-300 in Jan-2014 and secured its air operators' certificate soon after. But the formal launch had since been delayed.

TAAX is now planning to launch operations in early Apr-2014 with charter flights on the Bangkok Don Mueang-Tokyo Narita route. TAAX expects to upgrade the service to a scheduled flight later in the year but the timing is unclear and hinges partially on the Thai Government.

With Thailand still in political limbo as anti-government demonstrations continue in the capital, TAAX will essentially have a relatively low profile launch. A public launch will occur in 2H2014 and will mark the start of public scheduled services. This launch could include a ceremony with government participation.

Thai AirAsia X to start with just one aircraft

Thai regulations require airlines operate a minimum fleet of two aircraft from the commencement of operations. While TAAX plans to have two 377-seat A330-300s by the time it begins scheduled operations, it has meanwhile received an exemption that enables the carrier to begin its forthcoming charter operation with just one aircraft.

TAAX is not entirely a start-up, for which that regulation was imposed, and has been able to appease Thai authorities by promising to back up its initial one aircraft using longstanding Malaysia-based AirAsia X. The Malaysian carrier can if necessary operate the Bangkok-Tokyo route if the TAAX aircraft is out of service. AirAsia would also have the option of re-accommodating passengers via Kuala Lumpur. AirAsia X now serves Tokyo Haneda from Kuala Lumpur while its shorthaul sister carriers Malaysia AirAsia and Thai AirAsia (TAA) each operate several daily flights connecting Kuala Lumpur with Bangkok Don Mueang.

As CAPA has previously reported, North Asia will be the initial focus of TAAX. In addition to Narita, other Japanese destinations are being considered along with destinations in South Korea and northeast China. Australia is a possibility but is not expected in the first phase.

Taipei and other parts of China are not under consideration as these regions are already served by TAA. TAAX and TAA have different ownership structures but will use the same AirAsia website and offer joint itineraries.

TAA is owned by Thailand-listed Asia Aviation and Malaysia-listed AirAsia Berhad while TAAX is owned by Malaysia-listed AirAsia X Berhad and local Thai investors, including the TAA/Asian Aviation CEO and largest shareholder, Tassapon Bijleveld.

AirAsia X, with AirAsia, progressively develops its multi-hub network

The AirAsia X Group does not anticipate having its new affiliates in Thailand and Indonesia launching new destinations but leveraging existing destinations already served by the original carrier in Malaysia. AirAsia X currently serves three Japanese destinations from Kuala Lumpur - Nagoya, Osaka, Tokyo - and two in South Korea - Busan and Seoul Incheon.

(AirAsia X now serves Tokyo Haneda and TAAX will also serve Narita; but this is not an issue as AirAsia X is expected also at some point to launch a separate Kuala Lumpur-Narita flight and Narita is also expected to be the base for AirAsia's new short-haul Japanese affiliate. The longer game strategy of "joining the dots" is therefore progressively being engineered into place. As self described on its website, AirAsia X aims "to create, together with other carriers of the AirAsia Group, the first global, multi-hub low-cost carrier network".)

Blending the AirAsia X, TAAX and the various short haul AirAsia affiliate routes requires sophisticated network planning. AirAsia X also links Kuala Lumpur with five destinations in Greater China - Beijing, Chengdu, Hangzhou, Shanghai and Taipei.

But, from Bangkok, Hangzhou and Taipei are now covered by TAA with A320s as these destinations are within four hours from Bangkok but over four hours from Kuala Lumpur. Shanghai is just over four hours from Bangkok and Beijing is slightly over five hours, making them possible destinations for TAAX.

TAA does not currently serve Chengdu, which would be a TAA destination from Bangkok as the flight is only slightly over three hours. AirAsia X affiliates have the first right to operate all routes over four hours while its short-haul sister carriers have the first right on routes under four hours.

NokScoot also plans North Asia focus with Narita as first route

Meanwhile the other Thailand-based low cost long haul operator, NokScoot also plans to stick at least initially to the Thailand-North Asia market. As short-haul LCC Nok Air does not operate any scheduled services to North Asia and is currently focused only on expanding in the regional international market within Southeast Asia, NokScoot could potentially serve destinations of under four hours such as Hong Kong and Taipei. But the carrier plans to make Narita its first destination and is also looking at other destinations in Japan and South Korea.

Singapore-based sister carrier Scoot currently serves Narita and Seoul Incheon as well as Taipei, Hong Kong and four secondary destinations in northeast China - Dalian, Nanjing, Qingdao and Shenyang.

Bangkok-Tokyo is being targeted by both NokScot and TAAX as it is a large and fast-growing market that is not currently served by any LCCs. Bangkok-Tokyo is the tenth largest international city pair within Asia-Pacific, based on current capacity data from CAPA and OAG. Among the top 10 city pairs within the region, it is the only non-Hong Kong route which is not yet penetrated by LCCs.

There are currently about 30,000 weekly one-way between Bangkok and Tokyo (includes both Tokyo airports).

Thai Airways is the market leader with five daily flights, including three frequencies to Narita (one with the A380 and two with A330s) and two frequencies to Haneda (both with 747-400s), according to Innovata data. All Nippon Airways (ANA) and Japan Airlines (JAL) each have two daily flights on Bangkok-Haneda and one daily flight on Bangkok-Narita (both carriers serve Bangkok with a mix of 777s and 767s). Delta Air Lines also operates one daily 747-400 flight between Bangkok and Narita.

The other US carrier with a hub at Narita, United Airlines, is dropping its daily 747-400 service on the Bangkok-Narita route on 30-Mar-2014. While Thai Airways, ANA, JAL and Delta are the only carriers operating scheduled flights in the Bangkok-Tokyo market, several charter carriers also operate the route, particularly during peak seasons.

Bangkok to Tokyo capacity by carrier (one-way seats per week): 19-Sep-2011 to 14-Sep-2014

LCCs will initially account for only a 15% share of the Bangkok-Tokyo market

Following the United pullout, Thai Airways will have about 48% share of seat capacity between Tokyo and Bangkok followed by about 21% each for ANA and JAL and about 10% for Delta. Even with the entrance of both NokScoot and TAAX, Thai will continue to be the dominant player. The two LCCs combined will provide about 5,400 weekly seats, assuming one daily frequency, and capture about a 15% share (approximately 7% for TAAX and 8% for NokScoot).

TAAX and NokScoot should be able to stimulate enough new demand for the market to be able to absorb the additional capacity. Thai Airways somewhat optimistically believes NokScoot will be able to cater to a price sensitive segment of the market and therefore not impact its existing full-service Tokyo operation.

But clearly both carriers are hoping the current turmoil will have abated by 2H2014. All of Thailand's inbound markets have been impacted in recent months by the civil unrest and political instability. Thailand has traditionally been a resilient market following periods of instability or natural disasters, giving confidence to TAAX and NokScoot that the market will be fully recovered by the time they launch scheduled services. TAAX is not concerned about its initial charter flights as the seats are block booked by tour agents.

Potentially the Bangkok-Tokyo market is large enough to support more than seven weekly flights from both TAAX and NokScoot. But both carriers will likely add capacity in other markets, including other cities in Japan, before offering multiple flights to Tokyo.

The Thailand-Japan market has grown rapidly over the last year, driven by continued increases in demand for Japanese holidaying in Thailand (at least prior to the recent civil unrest) as well as a sudden surge in outbound numbers. Japan started providing a short stay visa free option for Thais in mid-2013, leading to a large increase in demand. Bangkok-Tokyo has seen the biggest growth and is now the most balanced of Thailand-Japan routes although the Bangkok-Tokyo market is still heavily tilted towards inbound tourists from Japan.

Japan is one of Thailand's largest and fastest growing markets

Overall Japan is Thailand's fifth largest market (after China, Singapore, Malaysia and Hong Kong) with over 90,000 weekly return seats. In terms of Thailand's inbound visitor numbers, Japan is number four after China, Malaysia and Russia. There were 1.53 million Japanese visitors to Thailand in 2013, representing a 12% increase over 2012.

Thai Airways is the market leader with about a 63% share of total non-stop seat capacity between Thailand and Japan. Thai Airways stated in late 2013 that its passenger traffic on Japanese routes was up 24% in the first three quarter of 2013.

Thailand to Japan capacity by carrier (one-way seats per week): 19-Sep-2011 to 14-Sep-2014

Thai Airways currently serves five Japanese destinations besides Tokyo - Fukuoka, Nagoya, Osaka, Sendai and Sapporo. Sendai is the carrier's newest destination, launched in Dec-2013 with three weekly A330 frequencies. The carrier has decided to suspend Sendai from Apr-2014 but it intends to resume the route in late 2014 and offer it for the time being as a seasonal destination.

Thai Airways is currently the only airline linking Bangkok with Fukuoka, Nagoya, Sendai and Sapporo (with all routes daily except Sendai). Osaka is also served by JAL with one daily 767 flights compared to three daily frequencies from Thai (two with 777s and one with A380).

Thai's use of the A380 on two Japanese routes (Tokyo Narita and Osaka Kansai) while the carrier has not yet put the super jumbo aircraft to London or Australia is an indication of the strength of the Thailand-Japan market.

Jetstar Asia will provide new competition for Thai Airways in the Fukuoka market from late Jun-2014, when the Singapore-based LCC plans to launch daily service from Bangkok to Fukuoka as part of a new A320 route which originates in Singapore, using fifth freedom rights. Jetstar's decision to enter the Bangkok-Fukuoka market is an indication of the opportunities for LCCs to start penetrating the Thailand-Japan market. Fukuoka is an unlikely market for TAAX or NokScoot as it is relatively small and is not yet served by AirAsia X from Kuala Lumpur or by Scoot from Singapore. Thai Airways currently serves Fukuoka with one daily A330 frequency.

Jetstar Asia could eventually be joined by Japanese LCCs in linking Bangkok with southern Japan. Overall the Thailand-Japan market is ripe for LCC stimulation but only the major cities in central Japan are likely to be viable destinations for widebody low-cost operators. NokScoot and TAX will both operate high density aircraft with over twice the seating capacity of the A320s operated by Jetstar and all of Japan's LCCs.

NokScoot preparing for 4Q2014 launch

NokScoot plans to meet Thailand's initial two aircraft requirement by operating two 402-seat 777-200s. The carrier is now preparing to retrofit two aircraft being acquired from SIA that are expected to be ready in 4Q2014.

The retrofit will be identical to the retrofits that were carried out by Singapore-based Scoot for its first five 777-200s, which were also sourced from SIA. Scoot's initial five aircraft have 370 economy seats in 10-seat abreast configuration and 32 recliner style business class seats in eight-seat abreast configuration. (Scoot's sixth 777-200 was not retrofitted and is operated in the less dense SIA configuration, with 293 economy and 30 business class seats, as it is seen as a temporary aircraft.)

The decision to retrofit two aircraft was made after NokScoot decided it did not want to wait until the five 402-seat aircraft now at Scoot become available. Scoot plans to start replacing its 777-200s in late 2014 but as it is only taking one 787 this year NokScoot would not be able to launch until 2015 if it waited for the Scoot 777s to become available.

Scoot will likely return its 323-seat 777-200 to SIA after taking its first 787-9 in Nov-2014 and subsequently phase out its 402-seat 777s as more 787s arrive in 2015.

Eventually NokScoot will likely take over some or all of the five 402-seat 777-200s that are coming out of Scoot as Scoot quickly transitions next year to an all-787 fleet. But NokScoot is still considering its fleet expansion options for 2015 and has not yet decided or committed on any aircraft beyond the initial two which are now being prepared for the retrofit process.

NokScoot is also expected to eventually transition to 787-9s. Scoot has 20 787s (10 787-8s and 10 787-9s) on order. The 777 is not seen as an ideal aircraft type for long-haul low-cost operations. But the aircraft allowed for a faster launch of Scoot and now a faster launch of NokScoot. In both cases waiting for more efficient new-generation aircraft, such as the 787, would have enabled competitors to get a big jump in the emerging medium/long-haul LCC market.

NokScoot catches up with TAAX despite its later start

NokScoot's shareholders viewed launching in 2014 as critical and worth compromising by initially operating the relatively inefficient 777 and also worth the extra cost of retrofitting two aircraft rather than waiting for the already retrofitted aircraft at Scoot to become available. The decision to move on the project quickly after an initial MOU was forged in late 2013 is driven by a need to match TAAX, which started preparations in early 2013 and already had secured an Air Operator License (which is a key step towards an AOC) before Nok and Scoot forged their MOU.

Despite the headstart for TAAX, NokScoot is now expected to launch full scheduled operations at about the same time. While TAAX could easily blame its delay in launching services on the civil unrest, which has impacted demand, the delay is more likely driven by the Thai Government's desire to level the playing field (or alternatively, tilt the balance) and have both new carriers launch at the same time.

Thai Airways, which owns a 40% stake in Nok and therefore has an indirect stake of about 20% in NokScoot, sees NokScoot as an important new component of its multi-brand strategy and a tool for competing against TAAX. The Thai Airways portfolio also includes Nok for the short-haul budget segment and Thai Smile for the full-service short-haul market.

Thai Airways prefers to have NokScoot up and running as soon as TAAX begins scheduled operations. Scoot and its 100% shareholder, Singapore Airlines (SIA), also recognise the need to move quickly. Scoot and SIA are heavily involved in NokScoot, with several personnel from both Singapore-based companies appointed to the NokScoot project. Scoot (and therefore SIA Group) will own a 49% stake in NokScoot. Nok will own most of the remaining 51%. There is consideration of setting aside a 2% share for the yet to be appointed executive team of the new carrier.

Japan and particularly Tokyo is a critical market for Thai Airways

Unlike Nok, Scoot and SIA, Thai Airways will not be as directly involved in managing NokScoot. But of all the shareholders, Thai Airways has the most at stake.

Japan is a critical and generally profitable market for Thai Airways. Japan currently accounts for 14% of Thai's international seat capacity, making it its largest single market. Bangkok-Tokyo Narita is the carrier's biggest route, with almost 18,000 weekly seats, according to CAPA and OAG data.

Thai Airways international capacity share (% of seats) by country: 24-Mar-2014 to 30-Mar-2014

With its indirect stake in NokScoot, Thai Airways is betting that it can defend its leading position in the Thailand-Japan market as it opens up to LCCs. Thai Airways is hoping NokScoot can carve out a new segment and take on Thai AirAsia X without impacting the profitability of its full-service operation.

Thai Airways will face challenges in the Thailand-Japan market as LCCs move in. But participating rather than retreating is the right strategy. Thailand-Japan, particularly Bangkok-Tokyo, will be a market to watch over the next year as a new dynamic unfolds.

Background information

This is the first in a series of analysis reports on the Thailand's dynamic market which will be published in coming days.