11-Feb-2015 12:27 PM

Thai Lion Air domestic expansion continues, pressuring Thai AirAsia and Nok Air

Analysis

Competition in Thailand's domestic market will intensify further in 2015 as Thai Lion Air pursues further expansion. Thai Lion has quickly established a significant presence on a handful of trunk routes and will likely be competing on all the main domestic routes of Nok Air and Thai AirAsia by the end of 2015.

The Lion Group affiliate launched services at the end of 2013 and already accounts for 17% of domestic LCC seat capacity in Thailand. Thai Lion could potentially capture a 25% share by the end of 2015 as it takes delivery of several additional 737s.

Seat capacity and passenger numbers in Thailand's domestic LCC sector increased by over 30% in 2014. But the growth has come at the expense of yields and profitability. More rapid domestic growth is expected in 2015 and the intense competition could make it difficult for the market to return to profitability even with the reduction in oil prices.

Thailand's domestic LCC sector has expanded by more than 30% over the last year

Thai Lion launched services in Dec-2013, becoming Thailand's third LCC after AirAsia Group affiliate Thai AirAsia and Thai Airways affiliate Nok Air. All three LCCs pursued rapid domestic expansion in 2014, partially in response to the more challenging conditions in the international market because of the civil unrest in Bangkok.

As CAPA previously highlighted, domestic LCC traffic across the six airports operated by Airports of Thailand (AOT) increased by 32% in 2014 to 23.8 million passengers. International LCC traffic at the same six airports increased by a more modest 9% in 2014 to 11.2 million passengers. (The AOT portfolio includes six of the 10 largest airports in Thailand and over 85% of total seat capacity in the Thai market.)

Over the last decade the LCC penetration rate in Thailand has been consistently increasing. Full-service carriers ceded more market share to LCCs in 2014 as FSC domestic traffic at the six AOT airports decreased by 3% to 14.6 million passengers while FSC international traffic decreased by 9% to 40.9 million passengers. Thai Airways accounted for nearly the entire decline in the FSC sector as the struggling flag carrier's passenger numbers dropped by 17% to 17.8 million, its lowest level since 2004.

LCC domestic seat capacity increased in 2014 by about 36% to almost 20 million, according to OAG data. LCC domestic seat capacity in Thailand has increased four-fold since 2009 with annual increases of at least 25% every year.

Thai Lion Air already accounts for 17% of Thailand's domestic LCC capacity

Currently there are over 520,000 LCC seats in Thailand's domestic market, representing an increase of over 40% compared to Feb-2014. Lion accounts for a 17% share of this capacity, up from only 3% in Feb-2014. Thai AirAsia has a leading 43% share with Nok slightly behind with a 41% share.

Thailand domestic LCC capacity share: Feb-2015 vs Feb-2014

Feb-2015

Feb-2014

Thai AirAsia has increased domestic seat capacity by about 20% over the last year while Nok has increased domestic seat capacity by about 26%. One year ago Thai Lion only operated one domestic route, Bangkok-Chiang Mai, with four daily frequencies.

Thailand domestic LCC capacity by carrier: Feb-2014 vs Feb-2015

Airline	Week of 10-Feb-2014	Week of 9-Feb-2015	% change
Thai AirAsia	186,480 seats	224,280 seats	20.3%
Nok Air	169,184 seats	212,912 seats	25.9%
Thai Lion Air	12,040 seats	85,570 seats	611%
Total	367,704 seats	522,762 seats	42.2%

Thai AirAsia and Nok both focused on domestic expansion in 2015 as they continued to expand their fleets. Thai AirAsia added five aircraft in 2014 for a total of 35 while Nok expanded its fleet in 2014 from 17 to 24 aircraft.

Nok is almost entirely a domestic carrier with just one international route. Nok initially planned to pursue modest international expansion in 2014 but ended up again focusing on the domestic market.

Thai AirAsia has a sizeable international operation which accounts for about 40% of its total seat capacity. Thai AirAsia was initially planning to pursue a roughly even mix of domestic and international expansion in 2014 but also ended up focusing mainly on the domestic market.

Thai Lion focuses on domestic market

Thai Lion focused entirely on domestic expansion in 2014 as it grew its fleet of 215-seat 737-900ER aircraft from two to eight aircraft. Thai Lion was initially planning to pursue a roughly even mix of domestic and international capacity in its first phase but its launch came just after the start of civil unrest in Bangkok. The resulting large drop in demand in the regional international market prompted Thai Lion to rethink capacity deployment plans - just as it did with Nok and Thai AirAsia.

Thai Lion currently only operates one international route, Bangkok Don Mueang to Jakarta, which is served with five weekly flights. All three of Thai Lion's other international routes have been suspended.

Thai Lion currently operates seven domestic routes. Its initial domestic route, Bangkok-Chiang Mai was launched in Dec-2013 with two daily flights. Two more daily flights were added to Chiang Mai in Jan-2014 and three more were added in Mar-2014 for a total of seven daily frequencies.

Bangkok-Hat Yai was launched in Mar-2014 after the delivery of Thai Lion's fourth 737-900ER. Hat Yai was launched with three daily flights but ambitiously was increased to six daily flights within two weeks after launching.

Twice daily Bangkok-Udon Thani and daily Bangkok-Phuket services were launched in Sep-2014 as a fifth 737-900ER was added to the fleet. Twice daily Bangkok-Surat Thani, daily Bangkok-Krabi and three times per week Hat Yai-Udon Thani services were launched in Oct-2014 following the delivery of a sixth 737-900ER.

Thai Lion bolsters frequencies as three more 737s are added

Thai Lion has since added three more 737-900ERs, including two in late 2014 and one in Jan-2015. These aircraft have been used to add capacity across existing domestic routes.

Thai Lion's original and largest route, Bangkok Chiang Mai, is now served with 61 weekly flights including nine on weekdays and eight on weekends. Bangkok-Hat Yai is now served with 56 weekly flights, including nine daily frequencies on weekends and between seven and eight on weekdays.

Bangkok-Udon Thani is currently served with 33 weekly flights, including five on weekdays and four on weekends. Bangkok-Surat Thani is served with 25 weekly flights (between three and four per day). A second daily flight to Krabi also has been added but the Bangkok-Phuket schedule remains at one daily flight due to slot constraints at Phuket.

Thai Lion route network: as of 11-Feb-2015

Route	Launch date	Launch Frequency	Current Frequency	Other scheduled carriers*
Bangkok-Chiang Mai	Dec-2013	14 weekly	56 weekly	Bangkok Airways, Nok Air, Thai Airways, Thai Smile, Thai AirAsia
Bangkok-Jakarta	Dec-2013	14 weekly	5 weekly	Indonesia AirAsia, Garuda, Thai Airways
Bangkok-Hat Yai	Mar-2014	21 weekly	61 weekly	Nok Air, Thai Airways, Thai Smile, Thai AirAsia
Bangkok-Phuket	Sep-2014	7 weekly	7 weekly	Bangkok Airways, City Airways, Nok Air, Orient Thai, Thai Airways, Thai Smile, Thai AirAsia
Bangkok-Udon Thani	Sep-2014	14 weekly	25 weekly	Bangkok Airways, Nok Air, Thai Smile, Thai AirAsia
Bangkok-Surat Thani	Oct-2014	14 weekly	33 weekly	Nok Air, Thai Smile, Thai AirAsia
Bangkok-Krabi	Oct-2014	7 weekly	14 weekly	Bangkok Airways, Nok Air, Thai Airways, Thai Smile, Thai AirAsia
Hat Yai-Udon Thani	Oct-2014	3 weekly	3 weekly	No competitors

Thai Lion builds up significant presence on five domestic routes

Thai Lion has focused in its initial phase on establishing a sizeable presence on five domestic routes rather than trying to provide a comprehensive network.

Thai Lion is now the largest LCC in the Bangkok-Hat Yai market, a significant accomplishment as this is the third largest domestic route for Thai AirAsia and the fifth largest for Nok. Thai Lion is also now only slightly behind Thai AirAsia and Nok in the Bangkok-Chiang Mai market, which is the largest route for all three LCCs.

Thai Lion is also only slightly smaller than its two competitors in the Bangkok-Surat Thani route. On Bangkok-Udon Thani and Bangkok-Krabi it is larger than one of its competitors but smaller than the other.

Thai Lion has an insignificant presence in the Bangkok-Phuket market but this is not intentional as slot constraints at Phuket preclude expansion for the time being. Its seventh domestic route, Hat Yai-Udon Thani, is a thin point to point route not served by another other carrier.

Thai Lion and LCC competitor one-way weekly seat capacity by domestic route: Feb-2015 vs Feb-2014

Route	Thai Lion 2015/2014	Thai AirAsia 2015/2014	Nok Air 2015/2014
Bangkok-Chiang Mai	13,115/6,020	15,120/15,120	15,867/10,584
Bangkok-Hat Yai	12,040/0	11,340/11,340	7,938/10,584
Bangkok-Udon Thani	7,095/0	2,520/3,780	15,876/10,584
Bangkok-Surat Thani	5,375/0	6,300/5,040	6,615/6,615
Bangkok-Krabi	3,010/0	10,080/10,080	2,646/2,646
Bangkok-Phuket	1,505/0	15,120/15,120	6,615/5,292
Hat Yai-Udon Thani	645/0	N/A	N/A
TOTAL	85,570/12,040	60,480/60,480	55,557/46,305

Thai AirAsia and Nok Air focus expansion on non-competing routes

While Thai AirAsia has expanded significantly in the domestic market over the last year it has not added capacity on most Thai Lion routes. Thai AirAsia capacity has been flat over the last year on four of the six competing routes and on one route it (Udon Thani) it has decreased capacity.

Overall Thai AirAsia currently has the same amount of capacity across the six routes it competes against Thai Lion as of Feb-2015. On non-competing routes Thai AirAsia has expanded capacity by 58% year over year.

Nok has been slightly more aggressive, increasing capacity on three of the six routes. But it also has reduced capacity on Thai Lion's largest route, Chiang Mai, and has maintained flat capacity on two of the overlapping routes. Overall it has added capacity on the six competing routes by 20% but has expanded capacity by 33% on non-competing routes.

The relative restraint shown by Nok and particularly Thai AirAsia is understandable as the routes Thai Lion have entered with multiple daily frequencies have become extremely competitive and are now suffering from overcapacity. The domestic routes Thai Lion has not yet entered are not as competitive. By building up capacity on these routes the two incumbents will also make it harder for Thai Lion as the start-up expands its domestic network.

Perhaps Nok and Thai AirAsia are trying to dissuade Thai Lion by placing a large amount of capacity on potential Thai Lion routes. But Thai Lion is not likely to respond to this pressure as its expansion is strategic and the airline is not expected to be profitable in its first three years.

Currently slightly over 50% of Thai AirAsia and Nok Air domestic capacity is allocated to routes that are also served by Thai Lion. Inevitably their exposure to Thai Lion will increase as Thai Lion expands.

Thai Lion plans to launch more domestic routes

Thai Lion has stated it plans to launch services to Chiang Rai and Ubon Ratchathani in 2Q2015 although it has not yet set a launch date. Both are logical as they are among the largest routes for Nok and Thai AirAsia that are not yet served by Thai Lion. Given Thai Lion's strategy so far it is likely both routes will be served with several daily flights.

Nok serves Bangkok-Chiang Rai and Bangkok-Ubon Ratchathani with seven daily flights each, making them Nok's third largest route after Chiang Mai and Udon Thani. Thai AirAsia serves Bangkok-Chiang Rai with five daily flights, making it the carrier's fifth largest domestic route, while it serves Ubon Ratchathani with two daily flights.

Once Chiang Rai (CEI) and Ubon Ratchathani (URT) are launched Thai Lion will be serving Thai AirAsia's six largest domestic routes and six of Nok's top seven routes. The largest remaining route would be Bangkok-Nakhon Si Thammarsarat (NST), which is currently served by Nok with five daily flights and by Thai AirAsia with four daily flights.

Bangkok-Khon Kaen (KKC), which is served with three daily flights by Nok and four daily flights by Thai AirAsia, could also potentially attract Thai Lion.

Thai AirAsia top 10 domestic routes ranked by seat capacity: 9-Feb-2015 to 15-Feb-2015

Nok Air top 10 domestic routes ranked by seat capacity: 9-Feb-2015 to 15-Feb-2015

Other domestic routes in Thailand are relatively small and are served by at most five daily frequencies from Nok and Thai AirAsia combined. Sustaining three LCCs in such markets could prove to be challenging. Thai Lion also seems to be now focusing on trunk routes, having dropped an experiment with regional routes using an ATR 72.

Thai Lion Air drops its turboprop operation

In Apr-2014 Thai Lion launched services from Hat Yai to Hua Hin and Surat Thani using an ATR 72-600 turboprop. The turboprop was also used to launch in May-2014 services from Hat Yai to Medan in Indonesia and Kuala Lumpur Subang Airport.

Thai Lion quickly dropped Hat Yai-Kuala Lumpur and suspended the other three turboprop routes in late 2014. The ATR 72-600 has been returned to Lion Group, leaving it again with an all-737 fleet.

Thai Lion's suspended routes - mostly low frequency operations

Route	Launch date	Launch Frequency	Other scheduled carriers
Bangkok-Kuala Lumpur International	Dec-2013	1/day	AirAsia, Thai AirAsia, Malaysia Airlines
Hat Yai-Hua Hin	Mar-2014	5 weekly	No competitors
Hat Yai-Surat Thani	Mar-2014	3 weekly	No competitors
Hat Yai-Medan	Apr-2014	3 weekly	No competitors
Hat Yai-Kuala Lumpur Subang	Apr-2014	4 weekly	N/A

Thai Lion viewed the turboprop and second base at Hat Yai as a sort of experiment with regional operations. If the test succeeded it would have added more ATR 72s and potentially also used the aircraft type from its main base at Bangkok Don Mueang.

Nok has a fleet of turboprops based at Don Mueang, which it uses for thinner domestic routes. As CAPA wrote in Mar-2014:

Thai Lion views the regional routes as experiments as they were previously un-served. Turboprops were previously not in the Thai Lion business plan as the carrier was planning to keep a simple operation with an all 737-fleet. But the carrier's executive team decided in early 2014 there were network opportunities that can only be tapped with smaller aircraft and that turboprops were a better option for meeting Thailand DCA requirements for operating regional routes.

Thai AirAsia and Thai Airways/Thai Smile meet these requirements by operating secondary routes with A320s while Nok and Bangkok Airways operate ATR 72s. Thai Lion initially planned to acquire 737-800s for thinner routes but switched gears just before the 737-800s were to be delivered and instead sourced ATR 72s from the Lion Air Group order book. The group has extensive experience with turboprops which were already operated in Indonesia by Lion Air sister carrier Wings Air and in Malaysia by Malindo Air.

The 2014 original fleet plan for Thai Lion envisioned eight additional aircraft consisting of two 737-800s and six 737-900ERs. Thai Lion is no longer planning to add 737-800s, which originally the carrier was going to take in Feb-2014. It still plans to take the six 737-900ERs, starting with the two aircraft received in Mar-2014. For now it only plans to take the one ATR 72-600 which has already been delivered.

Thai Lion ended up taking six additional 737-900ERs in 2014 as planned but decided to return its ATR 72. Thai Lion will instead meet Thai government requirements for allocating a certain portion of its capacity to regional routes by using its 737 fleet.

To qualify as a regional route it must be unserved or only operated by one other airline. Hat Yai-Udon Thani is the only route in the Thai Lion network currently meeting these requirements and will therefore likely be maintained. Thai Lion will likely also need to add at least one more regional route as it expands its domestic operation. These can be a point to point route connecting two secondary cities such as Hat Yai-Udon Thani or a route from Bangkok to a second or third tier city that is only currently served by one carrier.

Thai AirAsia expands its Thai domestic network

Thai Lion's decision to drop its turboprop operations leaves Nok as the only LCC with a turboprop fleet. Thai AirAsia has followed a different model and successfully expanded its domestic network without having to add a second aircraft type.

Thai AirAsia for example launched on 8-Feb-2015 services from Bangkok to three smaller destinations that were only previously served by Nok using its turboprop fleet - Loei, Nan and Roi Et. The three new routes gives Thai AirAsia 20 domestic destinations compared to 24 for Nok and only seven for Thai Lion.

The three new domestic routes are part of Thai AirAsia's plans for further expanding domestic capacity in 2015. Thai AirAsia plans to add five more A320s in 2015 for a total of 45 aircraft. While Thai AirAsia also plans to pursue international expansion this year it will be not be afraid to pursue more strategic expansion in the domestic market.

Nok also plans to add four more aircraft in 2015, including two 737-800s and two Dash 8 Q400s. This will give Nok a year-end fleet of 28 aircraft consisting of 20 737-800s, six Dash 8s and two ATR 72-500s. (The ATRs are expected to be replaced in 2016.)

Competition in Thailand's international market also intensifies

Nok has stated it intends to launch services in 2015 to Ho Chi Minh, which was initially in its 2014 plan, as well as up to three destinations in China. But once again the focus will be on domestic expansion.

Thailand's domestic market has become extremely competitive, provoking losses at both Nok and Thai AirAsia in the first three quarters of 2014 as yields plummeted. But neither carrier can afford to slow down as Thai Lion is continuing to pursue aggressive expansion. Thai Lion is expected to add up to 10 737s in 2015, giving it a fleet of up to 18 aircraft and raising the total single-aisle LCC fleet in Thailand to 94 aircraft.

Short-haul LCC fleet growth at Thailand's LCCs: end 2012 to end 2015

Airline	Fleet as of end Dec-2012	Fleet as of end Dec-2013	Fleet as of end Dec-2014	Projected fleet as of end Dec-2015
Thai AirAsia	27 aircraft	35 aircraft	40 aircraft	45 aircraft
Nok Air	15 aircraft	17 aircraft	24 aircraft	28 aircraft
Thai Lion Air	N/A	2 aircraft	8 aircraft	18 aircraft
Thai VietJet Air	N/A	N/A	N/A	3 aircraft
Total	42 aircraft	54 aircraft	72 aircraft	94 aircraft

Competition in Thailand's dynamic LCC sector will also intensify as Thai VietJet is planning to launch services in Mar-2015. Thai VietJet will become the fourth LCC on some domestic routes but is planning to focus mainly in the international market.

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Thai Lion is also planning to resume expansion in the international market in 2015. Thai Lion is particularly keen on serving China.

The Thailand-China market has recovered in recent months after seeing a dip for most of 2014 and should see high double digit growth in 2015. But competition in this market is also becoming intense as it is being targeted by all four of Thailand's LCCs as well as several Thai leisure carriers including planned start-ups.

Thai Lion now needs international expansion and higher aircraft utilisation

Thai Lion could face challenges in the international market as it has a relatively unknown brand. Also, the Lion Group overall has limited international experience and does not have any affiliate or subsidiary currently serving China.

But Thai Lion needs to diversify its network beyond the highly competitive domestic market. International operations, particularly overnight flights to China, will also help boost utilisation, reducing average unit cost.

Thai Lion is currently only utilising its 737-900ERs an average of nine hours per day, a very low figure for an LCC. All of its competitors have significantly higher utilisation rates. Thai AirAsia currently has an average aircraft utilisation rate of about 11 to 12 hours per day. Even full-service flag carrier Thai Airways currently utilises its fleet an average of 11 hours per day despite recent capacity cuts.

Thai Lion faces challenges as ambitious expansion continues

Thai Lion will also have opportunities to expand its domestic operation further. By adding 10 aircraft and improving utilisation the LCC could potentially double domestic capacity in 2015, which would give it about a 25% share of total domestic LCC capacity, as well as add several international routes.

Although adding capacity and frequency can generate disproportionate additional traffic, rapid expansion comes with risks and challenges. Thai Lion is competing against two well established LCCs on routes which are generally suffering from overcapacity.

Recovering inbound visitor numbers to Thailand and lower fuel prices offer some relief. But more capacity is being poured in and competition remains aggressive. Thailand, particularly the domestic market, will be one to watch closely in 2015 as the battle between LCCs intensifies.