09-Mar-2016 11:45 AM

Thai Lion Air accelerates international expansion with Beijing, Hanoi, Ho Chi Minh, Jakarta & Yangon

Analysis

Thai Lion Air is planning ambitious international expansion over the next few months, with the resumption of service to Indonesia and the launch of flights to Myanmar and Vietnam. The Lion Group affiliate also seeks to add several destinations in mainland China, including Beijing and Guangzhou.

Thai Lion has primarily focused on domestic expansion since launching services in late 2013. Further domestic expansion is planned for 2016 with the launch of three new destinations and more capacity on existing routes, but the focus is shifting to Thailand's larger international market.

Domestic opportunities are becoming relatively limited as Thai Lion will soon serve all the main domestic routes and offer nearly as much domestic capacity as its two long-established LCC competitors. International expansion is necessary but also challenging, as Thailand's short haul international market has become extremely competitive.

Summary

Thai Lion Air is planning ambitious international expansion over the next few months, with the resumption of service to Indonesia and the launch of flights to Myanmar and Vietnam.
Thai Lion currently operates a fleet of 19 737NGs to 10 domestic and three international destinations. It is predominantly a domestic operator, with approximately 350 weekly domestic departures compared with only 22 weekly international departures.
Thai Lion aims to more than triple the size of its international operation over the next six months. By the end of 3Q2016 it expects to serve approximately 10 international destinations and operate nearly 100 weekly international departures.
Thai Lion is aiming to begin serving Jakarta and Yangon in Apr-2016. Thai Lion also aims to launch services to Hanoi and Ho Chi Minh in Vietnam in 3Q2016. Beijing is expected to be Thai Lion’s next Chinese destination, with a target launch date of mid-2016.
Thai Lion is also interested in serving Japan and has submitted an application to the Japanese authorities for the Bangkok-Fukuoka route.
Thai Lion transported 4.6 million passengers in 2015, which gave it a 16% share of passenger traffic flown on Thailand’s three short haul LCCs.

Thai Lion turns its attention to the international market

Thai Lion currently operates a fleet of 19 737NGs to 10 domestic and three international destinations. It is predominantly a domestic operator, with approximately 350 weekly domestic departures compared with only 22 weekly international departures.

However, Thai Lion is aiming to more than triple the size of its international operation over the next six months. By the end of 3Q2016 it expects to serve approximately 10 international destinations and operate nearly 100 weekly international departures.

Thai Lion managing director Captain Darsito Hendroseputro told CAPA's Airline Fleet and Finance Summit on 3-Mar-2016 that the LCC plans to begin serving Jakarta and Yangon in Apr-2016. Thai Lion also aims to launch services to Hanoi and Ho Chi Minh in Vietnam in 3Q2016. Beijing is expected to be Thai Lion's next Chinese destination, with a target launch date of mid-2016.

Thai Lion currently serves two destinations in China - Jinan and Taiyuan - with four weekly flights each, and Singapore with two daily flights. Singapore was initially launched in Aug-2015 with one daily flight, marking the resumption of international operations for Thai Lion: the LCC had previously served Jakarta, Kuala Lumpur and Medan.

Thai Lion ready to resume Jakarta after two year hiatus

Bangkok-Kuala Lumpur and Bangkok-Jakarta were among Thai Lion's initial three routes, along with Bangkok-Chiang Mai, after operations commenced in Dec-2013. But Bangkok-Jakarta was suspended in 2014 as political instability in Thailand impacted demand, while Bangkok-Kuala Lumpur was handed over to Malaysian sister airline Malindo Air.

Thai Lion believes that demand for Bangkok-Jakarta has sufficiently improved to support one daily flight. Thai Lion will mostly rely on sales in Indonesia, where it is able to leverage the strong distribution network and brand of its parent Lion Air.

Lion Air has never served Thailand, although Bangkok is a popular destination for Indonesians. AirAsia is currently the only LCC group competing on the Bangkok-Jakarta route and operates two daily A320 flights. Garuda is the market leader with three daily flights using 737-800s, while Thai Airways currently operates 10 weekly flights using a mix of A330s and A320s.

Bangkok-Jakarta capacity is currently at its lowest level since 2012, according to CAPA and OAG data. It therefore seems to be an opportune time to enter the market.

Bangkok to Jakarta total one-way weekly seat capacity: Sep-2011 to Mar-2016

However, outbound demand for leisure travel from Indonesia remains relatively weak, given the economic situation in Indonesia and the depreciation of the Rupiah. Thai Lion will also have to overcome intense competition from AirAsia for both local and connecting passengers. Thai Lion can offer domestic connections beyond Jakarta on its sister airlines, as well as some connections beyond Bangkok. AirAsia has a much stronger network beyond Bangkok but a much smaller network beyond Jakarta.

Thai Lion to become fourth LCC on Bangkok-Yangon route

Yangon is a much larger market from Bangkok, with approximately three times more capacity than Jakarta. Thai Lion will become the fourth LCC and the eighth competitor overall in the Bangkok-Yangon market.

Bangkok-Yangon capacity has already more than doubled over the last four years. Myanmar National Airlines became the latest competitor on the Bangkok-Yangon route, launching services in Feb-2016.

Nok Air was the latest LCC to enter the market, launching services to Yangon in late 2013, and has since steadily expanded. The other three Thai airlines on the route - Bangkok Airways, Thai Airways and Thai AirAsia - have also added capacity since 2012.

Bangkok to Yangon total one-way weekly seat capacity: Sep-2011 to Mar-2016

Bangkok Airways, Thai AirAsia and Thai Airways each currently operate four daily flights on Bangkok-Yangon, while Nok Air has three daily flights. Thai is the market leader as three of its flights are operated with widebody aircraft (the fourth frequency is operated by regional subsidiary Thai Smile). Myanmar Airways International has two daily flights, while Myanmar National has one daily flight.

Bangkok-Yangon will not be an easy market for Thai Lion, given the already intense competition. Thai AirAsia had an average load factor on Bangkok-Yangon of only 73% (based on Myanmar DCA data), an indication that the market could already be suffering from overcapacity.

However Bangkok-Yangon is a large and growing route, particularly at the budget end. Thai Lion may be strategically compelled to serve Myanmar as it strives to become a significant player in Thailand's international market.

Thai Lion to become fifth LCC on Bangkok-Hanoi and Bangkok-Ho Chi Minh

Vietnam is also a growing market from Bangkok and has already attracted a surge of LCC capacity. Nok Air launched services to Hanoi and Ho Chi Minh in late 2015, joining Jetstar Pacific, Thai AirAsia and VietJet Air on both routes.

Total capacity between Vietnam and Thailand has increased by approximately 18% over the last year, according to CAPA and OAG data. LCC capacity has increased by a staggering 52%, compared with Mar-2015 levels, and has more than doubled since Mar-2014. (Bangkok-Hanoi and Bangkok-Ho Chi Minh are currently the only routes from Thailand to Vietnam to have scheduled services.)

Thailand to Vietnam total one-way weekly LCC seat capacity: Sep-2011 to Mar-2016

Thai Lion Air initially plans to operate two daily flights to both Hanoi and Ho Chi Minh. Nok, Jetstar Pacific, Thai AirAsia and VietJet currently only operate one daily flight each in the Bangkok-Hanoi market. In the larger Bangkok-Ho Chi Minh market, Thai AirAsia currently has three daily frequencies, Nok and VietJet each have two and Jetstar Pacific has one.

As is the case with Myanmar, Vietnam will be a challenging market given the current extremely competitive environment, but strategically Thai Lion needs to have a presence. Vietnam and Myanmar are both among the 10 largest international markets from Thailand based on current seat capacity. China is the largest international market from Vietnam, while Singapore is the second largest based on current seat capacity.

Thai Lion to expand Chinese network

Thai Lion is eager to expand in China since it is the largest and fastest-growing source market for Thailand's tourism sector. Thailand recorded a 71% increase in Chinese visitor numbers in 2015, to 7.9 million.

Thai Lion is currently only approved by Chinese authorities to serve Jinan and Taiyuan, but has applications pending for several new Chinese destinations. Chinese authorities typically approve new routes for foreign airlines that are new to the Chinese market on a gradual piecemeal basis, and are unlikely to allow a rapid expansion.

Captain Darsito told CAPA on the sidelines of the Airline Fleet and Finance Summit that Thai Lion is currently seeking to serve Beijing from Bangkok and Chiang Mai, Guangzhou from Bangkok and Shenzhen from Surat Thani. Flights on all four of these routes are expected to operate during overnight hours as daytime slots are not available at Beijing, Guangzhou or Shenzhen. By operating flights to China on the back of the clock Thai Lion is also able to improve aircraft utilisation rates, as it currently only has one overnight frequency per week (one of its four frequencies from Taiyuan to Bangkok).

Thai Lion hopes to launch Beijing first, with flights beginning as early as Jun-2016. It has applied for three weekly Chiang Mai-Beijing frequencies and four weekly Bangkok-Beijing frequencies, but it is unclear whether approvals can be secured for both routes.

Bangkok-Beijing would be the longest route in Thai Lion's network at slightly over five hours on the return sector. Captain Darsito said that Thai Lion is now working on revising its manuals to support a higher maximum take-off weight on its 215-seat 737-900ERs, enabling flights to northern China, including Beijing, without any payload limitations.

The Bangkok-Beijing route is slightly longer than Bangkok-Jinan, Bangkok-Taiyuan and Chiang Mai-Beijing. Thai Lion is currently only selling 200 of the 215 seats on the Bangkok-Jinan and Bangkok-Taiyuan routes but will be able to start selling all 215 seats under the upgraded maximum take-off weight.

Thailand-China market is becoming extremely competitive

Thai Lion aims to add more Chinese routes in 3Q2016 - starting most likely with Guangzhou - pending regulatory approvals. China expansion is less risky than regional expansion within Southeast Asia since Chinese agents block-book most of the seats - and on some routes, all of them.

However, successfully launching new Thailand-China routes and securing sufficient commitments from agents is become more difficult as all Thai airlines are rapidly expanding their Chinese networks. Total seat capacity in the Thailand-China market is currently up approximately 50% compared with Mar-2015 levels, according to CAPA and OAG data.

LCC capacity in the Thailand-China market has approximately doubled over the last year, and will continue to increase rapidly in 2016 as all five Thai LCCs are now pursuing rapid expansion in China - Nok, NokScoot, Thai AirAsia, Thai AirAsia X and Thai Lion. All five Thai LCCs are based at Bangkok Don Mueang, while Bangkok Airways, Thai Airways and most foreign airlines (including foreign LCCs) operate from Bangkok Suvarnabhumi.

Thailand to China total one-way LCC seat capacity: Sep-2011 to Mar-2016

Thailand's two new medium/long haul LCCs, NokScoot and Thai AirAsia X, are both focusing on China expansion in 2016 as they are currently unable to add services to Japan or South Korea until Thai authorities resolve concerns raised by ICAO. Thai Lion is overlapping with NokScoot and Thai AirAsia X as it operates routes of more than four hours to northern China, while Nok and Thai AirAsia focus on routes of four hours or less to other regions of China, leaving their sister airlines to operate the longer routes.

Overcapacity is a concern as Thailand is expecting visitor numbers from China to increase by only 8% to 10% in 2016, a modest figure given the over 70% growth from 2015. Captain Darsito said that Thai Lion and its Chinese general sales agent are closely analysing the Thailand-China market. The aim is to try to identify opportunities in unserved markets that could insulate Thai Lion somewhat from the intensifying LCC competition, at a time when the growth rate is slowing significantly.

While Bangkok-Beijing and Guangzhou-Beijing are large markets served by several airlines, Thai Lion is mainly planning to target new, unserved routes. This could include secondary cities in China, or new links from main Chinese cities to secondary Thai destinations, such as Shenzhen-Surat Thani.

Thai Lion seeks to serve Fukuoka in Japan

Thai Lion is also interested in serving Japan and has submitted an application to the Japanese authorities for the Bangkok-Fukuoka route. Fukuoka is located in southern Japan and is over five hours' flying time from Bangkok. Destinations in central or northern Japan would not be within the range of Thai Lion's current 737 fleet, but could potentially be launched in the future with 737 MAX aircraft.

Bangkok-Fukuoka is currently served daily by Thai Airways with A330s, and by Jetstar Asia with A320s. The Jetstar Asia service is a fifth freedom sector as part of a route that originates in Singapore.

Thai Lion will not be able to launch Fukuoka - or any destination in Japan - until Thai authorities resolve issues raised by ICAO in early 2015. Japanese authorities continue to enforce a ban on additional flights from any Thai airline until Thai authorities can pass a new ICAO audit. South Korean authorities have been enforcing a similar ban although Thai Lion has not yet expressed interest in serving Bangkok-Seoul, a highly competitive route served by several Korean LCCs with narrowbody aircraft, and by Thai AirAsia X with A330s.

Thai Lion passed an IOSA audit in Sep-2015, becoming the first airline in the Lion Group to go through the IOSA certification process. The IOSA approval has helped Thai Lion to secure approvals from authorities in several foreign countries - at least, countries that are currently accepting applications for new routes from Thai airlines - and it facilitates further international expansion.

Thai Lion continues to expand domestically

The focus on international expansion is sensible since opportunities for further domestic expansion are becoming more limited. Thai Lion already serves the nine largest domestic routes from Bangkok Don Mueang (based on current seat capacity) and claims to be the market leader in five of the 10 domestic destinations it serves.

In Feb-2016 Thai Lion added two daily frequencies on Bangkok-Chiang Mai, its first and largest route. It now has 11 daily flights to Chiang Mai, giving it more capacity than Nok Air or Thai AirAsia.

Captain Darsito said that Thai Lion has plans over the next few months to add capacity to Phuket, where it has been limited to two daily flights due to infrastructure restrictions. Thai Lion is hoping to secure approvals for three additional Bangkok-Phuket flights, for a total of five daily frequencies. Thai Lion is also planning to increase Bangkok-Hat Yai, from up to nine to up to 11 daily flights. (Thai Lion's Hat Yai schedule varies depending on the day of the week.)

In addition Captain Darsito said that Thai Lion is now seeking approval from Thai authorities to launch three new domestic destinations - Khon Kaen, Phitsanulok and Trang. Adding Khon Kaen, Phitsanulok and Trang would give Thai Lion a presence on all of the 12 largest domestic routes from Don Mueang (based on current seat capacity). Nok serves all three of the routes with three daily flights, while Thai AirAsia has two daily flights to Phitsanulok, three to Trang and four to Khon Kaen.

Thai Lion is currently aiming to launch services to Khon Kaen, Phitsanulok and Trang in 4Q2016, although it is possible that some of the launches could occur earlier. Thai Lion is also planning to launch services from Hat Yai to Chiang Mai, which would be its second point-to-point route after Hat Yai to Udon Thani.

Thai Lion domestic network is approaching maturity

Thai Lion has the opportunity to continue expanding across trunk routes and to launch a few new routes to secondary cities. However, such additions will be relatively small compared with the domestic capacity added in 2014 and 2015.

In the initial two years Thai Lion was primarily focused on building up a significant domestic presence and is now able to turn its attention to international expansion. Domestic trunk routes are relatively saturated and have become intensely competitive, while new secondary markets such as Trang and Phitsanulok can only support a small number of frequencies.

Thai Lion, at least for now, does not expect there will be sufficient demand to operate more than 12 domestic routes from its Bangkok Don Mueang hub. There are currently 24 domestic routes served from Don Mueang but the other 12 routes are all very small, with fewer than 10,000 weekly seats. Several of these routes are also only served with turboprop aircraft.

Thai Lion fleet expansion slows slightly

Thai Lion initially flagged Khon Kaen and Trang as new domestic destinations in 2H2015, along with Nakhon Si Thammarat. All three destinations were initially expected to be added in 2H2015 as part of a fleet expansion plan that had initially envisaged seven 737-800 deliveries in 2H2015.

However Thai Lion ultimately only took delivery of five 737-800s in 2H2015 and only launched one of the three planned domestic routes, Bangkok-Nakhon Si Thammarat. The capacity from the five additional aircraft was mainly used to expand on existing domestic routes and launch international services to China and Singapore.

Thai Lion ended 2015 with a fleet of 18 aircraft - 13 215-seat 737-900ERs and five 189-seat 737-800s - instead of the originally intended 20 aircraft. Thai Lion took its first 737-800 in Jul-2015 after taking exclusively 737-900ERs in its first phase, including two in late 2013, six in 2014 and five in 1H2015.

Thai Lion has also adjusted its 2016 fleet plan. As of Aug-2015 Thai Lion was planning to add 10 737s in 2016 - a mix of -800s and -900ERs - for a total of 30 aircraft. Captain Darsito said that Thai Lion now plans to add seven aircraft in 2016, including four 737-800s and three 737-900ERs.

If the current plan remains intact - Lion Group always maintains flexibility with its fleet planning - Thai Lion will end 2016 with 25 aircraft, including 16 737-900ERs and nine 737-800s. One of the four additional 737-800s for 2016 has already been delivered in Feb-2016, resulting in the current fleet of 13 737-900ERs and six 737-800s.

Thai Lion Air fleet summary: as of 9-Mar-2016

Aircraft	In Service
Total:	19
Boeing 737-800	6
Boeing 737-900ER	13

Thai Lion captured over 20% of Thailand's domestic LCC market in 2015

The slower fleet expansion is sensible, given the current market conditions and intensely competitive environment. Thai Lion will still expand faster in 2016 than its two main rivals - Nok and Thai AirAsia - but strategically it can afford to decelerate, as it has already succeeded in establishing itself domestically.

Thai Lion transported 4.6 million passengers in 2015, which gave it a 16% share of passenger traffic flown on Thailand's three short haul LCCs. Thai AirAsia carried 14.85 million passengers for a 52% share, while Nok carried 8.76 million for a 31% share.

In the domestic market Thai Lion captured approximately a 21% share of LCC passenger traffic in 2015, compared with 38% for Nok and 41% for Thai AirAsia. Securing more than 20% of the domestic share is an impressive accomplishment, given that Thai Lion only turned three years old in Dec-2015, while Nok and Thai AirAsia have been operating for more than a decade.

Thai Lion's rapid expansion has shaken up Thailand's domestic market, driving rapid overall growth (exceeding 20% in 2015) but impacting the profitability of the incumbents. Thai Lion's load factor has been high, including 89% in Jan-2016, generally surpassing its two main competitors. However, yields have been extremely low and are potentially not sustainable.

Nok Air has been particularly impacted as it is almost entirely a domestic airline. Nok incurred approximately USD50 million in losses over the last two years, after being profitable for several consecutive years prior to Thai Lion's launch. Thai AirAsia has remained in the black, boosted by its large international operation, but profits have fallen in the last two years, compared with 2010 to 2013 levels.

Thai Lion's new international push is strategic

The impact on Nok will escalate in 2016 as Thai Lion starts to compete against Nok on several international routes, resulting in significant overlap since Nok does not have a large international network. Thai AirAsia will be impacted as well, but has the benefit of serving several international routes that are not served - or are being targeted by - Thai Lion. It also has the benefit of operating from several fast-expanding secondary hubs in addition to Bangkok Don Mueang, where Thai Lion and Nok have virtually all of their capacity.

International expansion is always more difficult, but for Thai Lion it is a necessary next step. Thai Lion cannot continue to rely almost entirely on Thailand's relatively limited domestic market.

China, Myanmar and Vietnam are logical international markets to focus on, despite the already LCC intense competition. This next phase of Thai Lion's expansion will again be strategic rather than profitable - and once again the impact on the incumbents will be significant.