Thai Lion Air focuses on domestic expansion, quickly gains scale on Bangkok to Chiang Mai & Hat Yai

This is the fifth in a series of reports on the Thai market. The first part analysed the outlook for long-haul low-cost start-ups NokScoot and Thai AirAsia, both of which plan to launch scheduled services in 4Q2014. The second part analysed the outlook for Thai Smile, which is focusing mainly on domestic expansion as it assumes its own AOC. The third part analysed the outlook for Thai Airways, which is shrinking its mainline fleet in 2014 and taking a hiatus from network expansion. The fourth part analysed Thai Airways short-haul LCC affiliate Nok, which is also focusing mainly on domestic expansion as it looks to cement its strong position in the domestic market as competition intensifies.

See related reports:

• Thai Airways plans flat capacity for 2014 in bid to boost profitability amid challenging conditions
• Thai Smile focuses on turning around unprofitable Thai Airways routes as new AOC is secured
• Thai AirAsia X and NokScoot both target Thailand-Japan market, starting with Bangkok-Tokyo Narita
• Nok Air will continue its domestic focus as competition within Thailand intensifies

Thai Lion sees better traction domestically as civil unrest impacts international operation

Thai Lion Air launched services in early Dec-2013 with an initial fleet of two 737-900ERs in 215-seat single class configuration. The carrier's first route, Bangkok Don Mueang to Chiang Mai, was launched on 4-Dec-2013 with two daily flights.

International services were launched on 18-Dec-2013 with two daily flights from Bangkok to Jakarta and one daily flight to Kuala Lumpur. But in early Jan-2014 Bangkok-Jakarta was reduced to one daily frequency while two daily frequencies were added on Bangkok-Chiang Mai for a total of four.

See related report: AirAsia and Lion Air rivalry intensifies as Thai Lion rapidly expands

Bangkok to Jakarta and Kuala Lumpur were recently cut back to a less than daily service and Kuala Lumpur is about to be suspended entirely. Both markets have proven to be more challenging than expected due to political unrest, which began just as Thai Lion launched operations and has significantly impacted most inbound international markets. The domestic market also has been impacted but not as much and more limited to certain periods while international demand has seen a more consistent drop.

For example, Thai Lion carried 22,504 domestic passengers (according to Thailand DCA data) in Dec-2013 despite only operating the two daily flights to Chiang Mai for 28 days or four weeks. This equates to an average load factor for Thai Lion of 93.5% for Dec-2013 - an excellent result, particularly given the civil unrest during this period, even with low promotional fares that started at THB500 (USD15) including taxes.

The Lion Air Group, which owns a 49% stake in the new carrier with two passive yet to be named Thai investors holding the remaining 51%, says domestic load factors remained high in 1Q2014. The load factor was not nearly as high on the Jakarta and Kuala Lumpur routes despite promotional fares, prompting the carrier to focus on adding domestic capacity.

Thai Lion builds up Bangkok-Chiang Mai to seven daily frequencies

Another three daily frequencies were added on Bangkok-Chiang Mai at the end of Mar-2014 following the delivery of the carrier's fourth 737-900ERs. The seven daily frequencies Thai Lion now operates between Bangkok and Chiang Mai currently gives the carrier an 18% share of capacity in Thailand's largest domestic market, according to CAPA and OAG data.

With another three daily frequencies Thai Lion would match the market leaders, Thai Airways and Thai AirAsia. Thai Airways and Thai AirAsia currently each have about a 26% share of the market while Nok has an 18% share and Bangkok Airways has a 12% share.

Bangkok to Chiang Mai capacity by carrier (one-way seats per week): 19-Sep-2011 to 28-Sep-2014

Note: includes both Bangkok airports
Source: CAPA - Centre for Aviation & OAG

Thai AirAsia currently operates 12 A320 daily flights between Bangkok Don Mueang and Chiang Mai while Nok offers eight daily 737-800 flights on the same route. Thai Airways offers eight daily flights between Bangkok Suvarnabhumi and Chiang Mai, using a diverse mix of aircraft consisting predominately of widebodies, while Bangkok Airways operates six daily frequencies on Suvarnabhumi-Chiang Mai with A320 family aircraft.

The three flights added at the end of Mar-2014 significantly improved Thai Lion's schedule on Chiang Mai. As CAPA previously reported, the initial four frequencies were bunched together within a five hour window from late morning to late afternoon, shutting Thai Lion out of the same day return business market.

Thai Lion now offers departures in both directions from about 06.00 to 22.00, roughly matching the schedule of the four other carriers serving the market. Thai Lion overnights one of its 737-900ERs in Chiang Mai and also has an early departure from its Bangkok base, giving it two morning departures from Chiang Mai when previously its first departure was not until after midday.

Thai Lion already has six daily flights on Bangkok-Hat Yai

Thai Lion also has entered its second domestic market, Bangkok-Hat Yai, with a significant level of capacity. Bangkok Don Mueang to Hat Yai was initially launched on 21-Mar-2014 with three daily frequencies and was increased to six daily flights at the end of Mar-2014. The Hat Yai launch was made possible by the delivery of the carrier's third 737-900ER in mid-Mar-2014, while the fourth delivery only about two weeks later enabled the increase in capacity to both Chiang Mai and Hat Yai.

Thai Lion has quickly secured a 24% share of capacity in the Bangkok-Hat Yai market, according to CAPA and OAG data. With two more frequencies, Thai Lion would be the market leader, surpassing Thai AirAsia and Nok Air.

Thai Lion already has more capacity in the Bangkok-Hat Yai market than Thai Airways/Thai Smile, which currently has only a 16% share. Thai AirAsia has a market leading 31% share while Nok has a 29% share. But Nok and Thai AirAsia have been exchanging turns as market leader, depending on the season, and Nok is poised to take the lead back in late Apr-2014 with Thai AirAsia reducing to approximately Thai Lion levels based on forward capacity figures from CAPA and OAG.

Bangkok to Hat Yai capacity by carrier (one-way seats per week): 19-Sep-2011 to 28-Sep-2014

Note: includes both Bangkok airports
Source: CAPA - Centre for Aviation & OAG

Thai AirAsia currently operates nine daily A320 flights from Bangkok Don Mueang to Hat Yai, which will reduce to seven daily flights from late Apr-2014, according to OAG data. Nok operates eight daily 737-800 frequencies on the same route and is expected to keep the same level of flights as Thai AirAsia reduces for the off-peak season.

Thai Smile currently operates five daily A320 flights between Bangkok Suvarnabhumi and Hat Yai. Thai Airways handed Thai Smile its remaining flights to Hat Yai at the end of Mar-2014 but the group's capacity level remained flat as Thai Smile increased frequencies to offset the reduction as Thai Airways previously operated widebody aircraft on the route.

Thai Lion launches regional routes from Hat Yai base

At the same time as launching Bangkok-Hat Yai, Thai Lion began serving two small regional routes connecting Hat Yai with Hua Hin and Surat Thani. Thai Lion is initially serving Hat Yai-Hua Hin with three weekly ATR 72-600 frequencies and Hat Yai-Surat Thani with five weekly ATR 72-600 frequencies. Thai Lion took its first ATR 72-600 in early Mar-2014 and is basing the aircraft in Hat Yai, which is located in southern Thailand and is the country's largest city outside the central region.

Thai Lion domestic routes based on weekly return frequencies: 7-Apr-2014 to 13-Apr-2014

Source: CAPA - Centre for Aviation & OAG

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.

(While Thai Lion for now plans to end 2014 with a fleet of eight 737-900ERs and one ATR 72-600 this could change as the Lion Group often makes adjustments in aircraft allocations at the last second. In theory 737-800s or 737-900ERs which are for now allocated to Lion Air in Indonesia could quickly be moved to Thai Lion if the group sees an opportunity to expand in Thailand as the two carriers have identical 737 configurations and almost identical liveries.)

In addition to the adjustment in its network and fleet strategy, Thai Lion also recently had a change at the top with Aswin Yangkirativorn taking over as CEO from Darsito Hendroseputro who has returned to Lion Air in Indonesia. Mr Darsito was always expected to be a temporary CEO to lead the start-up phase as the Lion Group has always maintained that its Thai affiliate would later have a Thai CEO. However, another Lion Air executive, Andi Burhan, will remain in Bangkok and is now serving as executive managing director.

Thai Lion drops plans for Chiang Mai-Krabi route

The two 737-800s initially intended for Thai Lion were redirected at the last second to Lion Air in Indonesia. The group has the flexibility to switch aircraft between Thai Lion and Lion at practically zero notice as both carriers operate 737s in identical configuration and have similar liveries. Both carriers have the same logo on the tail and the only difference in the fuselage is the word Thai in front of Lion.

Thai Lion initially planned to use 737-800s to launch services between Chiang Mai and Krabi, which meets the Thailand DCA criteria for a secondary route, as well as use the type for some of its frequencies from Bangkok to Chiang Mai and Hat Yai. But as CAPA previously reported, Thai AirAsia applied for Chiang Mai-Krabi shortly after Thai Lion initially applied for the route in late 2013 (in Thailand airlines need to apply for domestic routes).

Thai AirAsia quickly implemented its traffic rights and launched Chiang Mai-Krabi service in Dec-2013 with one daily frequency, increasing to two daily flights in Feb-2014. With Thai AirAsia offering a significant amount of capacity on the route given its small size, Thai Lion wisely decided against also entering the market. At about the same time it decided to shift gears and take one ATR 72-600 and additional 737-900ERs rather than any 737-800s.

ATR 72 opens up new options for Thai Lion

Thai Lion will likely eventually add more regional domestic routes although for now it is taking a wait and see approach to expanding its ATR fleet. While it is doubtful there is enough demand to support a second turboprop at Hat Yai, there could be opportunities to begin turboprop operations at Bangkok.

The 30-Mar-2014 suspension of services by Siam General Aviation (SGA), which operated six Saab 340s under the Nok Mini brand, creates a void that could persuade another Thai LCC to begin regional operations at Don Mueang. (Nok has moved its own fleet of ATR 72s into some markets previously operated by SGA but has not entirely filled the void, leaving some secondary routes with less capacity and some routes completely un-served.)

But for now Thai Lion prefers to focus its regional operation at Hat Yai as the civil unrest is limited to Bangkok, providing more attractive opportunities in point to point markets that bypass the capital.

Thai Lion is expected to launch services on more domestic trunk routes

While for now it is not committed to acquiring any additional ATR 72-500s, Thai Lion plans to take at least four additional 737-900ERs over the nine remaining months of 2014. As the carrier continues to expand its 737 operation the focus will again be on the domestic market as it sees the international market as more challenging given the current political instability. While Thai Lion has quickly built up scale in two of Thailand's larger domestic trunk routes there are several routes which could potentially support a new LCC entrant.

There are 10 routes within Thailand which are considered primary markets, including Bangkok to Chiang Mai, Phuket, Hat Yai, Krabi, Udon Thani, Samui, Chiang Rai, Surat Thani, Ubon Ratchathani and Nakhon Sri Thammarat (in order of current seat capacity from largest to smallest). The other markets are smaller and are generally considered secondary, which come under a regulation authorising at most two carriers per route.

Of Thailand's 10 main markets, only Phuket and Samui are currently not a possibility for Thai Lion. Samui is a restricted airport owned by Bangkok Airways while at Phuket there are no slots available except during overnight hours which are only practical for international operations. Of the six other markets not already served by Thai Lion, several could see services by the end of 2014, likely with two to four frequencies as they are not as large as Chiang Mai and Hat Yai.

Thailand top 12 domestic airports ranked by current seat capacity: 7-Apr-2014 to 13-Apr-2014

Rank	Airport		Total Seats
1	DMK	Bangkok Don Mueang Int'l Airport	387,952
2	BKK	Bangkok Suvarnabhumi International Airport	241,656
3	CNX	Chiang Mai International Airport	137,338
4	HKT	Phuket International Airport	127,952
5	HDY	Hat Yai Airport	81,196
6	KBV	Krabi Airport	53,942
7	UTH	Udon Thani Airport	49,770
8	USM	Koh Samui Airport	45,472
9	CEI	Chiang Rai Airport	36,708
10	URT	Surat Thani Airport	29,026
11	UBP	Ubon Ratchathani Mueang Ubon Airport	26,118
12	NST	Nakhon Si Thammarat Airport	25,956

Source: CAPA - Centre for Aviation & OAG

Thailand's domestic market is large enough to support at least three LCCs

Thai Lion should be particularly keen to quickly enter and establish a significant presence on most of the main domestic markets to get a leg up on another LCC start-up, Thai VietJet Air. Thai VietJet is planning to launch services in Sep-2014 and operate two or three domestic routes, along with two or three international routes, by the end of 2014.

While the Thai domestic market should prove to be large enough to support three LCCs, the launch of a fourth could prove to be challenging. There were 22 million domestic passengers in Thailand in 2014, making it among the largest 20 domestic markets in the world. Thailand has seen some of the highest domestic passenger growth rates over the past two years, including 16% in 2012 and 26% in 2013.

Thailand's domestic market previously had three LCC players in Thai AirAsia, Nok and Orient Thai (which operated domestically under the 1-2-Go brand until 2008). But Orient Thai has gradually reduced capacity since 2008 and pulled out of the Bangkok to Chiang Mai and Hat Yai markets in 2013, leaving it with only service to Phuket. Thai Lion has essentially filled the void left by Orient Thai, becoming the third LCC brand in the Bangkok to Chiang Mai and Hat Yai markets and now accounting for about a 6% share of domestic capacity. Orient Thai accounted for a 7% share of Thailand's domestic market in 2011 but in 2013 only accounted for just over 1%.

Thai Lion has successfully shown there is room to stimulate further demand through low fares. While its THB500 (USD15) promotional fares are no longer being offered the carrier has promised to offer everyday low fares which currently are offered at two price points, THB1020 (USD31) and TBH1220 (USD38) including taxes, on one-way tickets on both the Bangkok-Chiang Mai and Bangkok-Hat Yai routes. Promotional one-way all inclusive fares on the shorter but exclusive regional routes from Hat Yai to Hua Hin and Surat Thani are THB420 (USD13) while everyday fares are about THB1600 (USD49).

AirAsia offers similar and sometimes slightly cheaper fares on Bangkok to Chiang Mai and Hat Yai but on a more selective basis while Nok fares on the same routes are generally about 30% more expensive. Nok is more of a hybrid carrier, offering complimentary luggage, drinks, snacks and seat assignments. Thai Lion also offers luggage and seat assignments but charges for drinks and snacks while AirAsia is the purest of the Thai LCCs, charging for all the items.

Nok and Thai AirAsia, both of which captured nearly 30% of the Thai domestic market in 2013, have clear first mover advantage. But between the two start-ups Thai Lion's head start and quick rise in the main domestic routes (except Phuket, where VietJet will also have to wait a couple of years for the airport to be expanded) should put it in a fairly good position.

Thai Lion cuts capacity to Jakarta and suspends Kuala Lumpur

There are huge opportunities in Thailand's international market for all LCCs as Thailand's LCC international penetration is still a relatively low 22% with AirAsia the only significant player (with about a 13% share). Lion and VietJet both plan to eventually pursue international expansion but at least for now the domestic market is more attractive given the political instability.

Thai Lion has further cut back Bangkok-Jakarta and is currently only offering three weekly frequencies, according to its online booking engine. After very briefly being the market leader in Dec-2013, when it offered two daily flights, Thai Lion now only has about a 6% share of capacity in the Bangkok-Jakarta market. Even with the political instability impacting demand Thai Lion's initial lack of a success in the Bangkok-Jakarta market is a concern given it should be able to leverage Lion's strong brand with Indonesia point of sales.

The Thai Lion online booking engine also shows the carrier has cut Bangkok-Kuala Lumpur to four weekly flights and is temporarily suspending the route entirely from 19-Apr-2014.

Malindo, however, is planning to begin serving Bangkok with one daily frequency from 24-Apr-2014, ensuring the Lion Group has a presence in the Bangkok-Kuala Lumpur market. Thai Lion has said the Bangkok-Kuala Lumpur route has been struggling due to the political instability with load factors of about 50% with Bangkok-Jakarta fairing only slightly better. As the Thailand-Malaysia market is predominately an inbound market, Malindo could preform better as it has a stronger brand in the local Malaysia market.

Even when it had one daily frequency Thai Lion had an insignificant 5% share of capacity between Bangkok and Kuala Lumpur. Malindo will capture about a 4% share as it operates 737-900ERs in less dense two-class configuration. The AirAsia Group has a leading 47% share in the Bangkok-Kuala Lumpur market and also has a leading 27% share of capacity between Bangkok and Jakarta, according to CAPA and OAG data.

Thai Lion also is in the process of launching two secondary international routes using its Hat Yai-based ATR 72-600. Thai Lion plans to initially operate from Hat Yai to Kuala Lumpur Subang four times per week and to Medan on the northern Indonesian island of Sumatra three times per week.

As is the case with the carrier's regional domestic routes at Hat Yai, both are seen as experiments and aimed at providing an alternative bypassing Bangkok where demand continues to be impacted by the political instability. But both routes are logical as Subang is a hub for Malindo's ATR operation while Medan is a hub for Lion and sister carrier Wings Air. Thai Lion competes with Malaysia regional subsidiary Firefly on the Hat Yai-Subang route while it is the only carrier offering non-stop services between Medan and Hat Yai. (Both flights are about an hour and a half.)

Thai Lion is off to solid start domestically but still faces challenges

Thai Lion overall is now allocating only about 5% of its seat capacity to the international market. As Thai Lion continues to expand in 2014, a similar domestic/international split is likely.

Lion in Indonesia is also predominantly domestic, with less than 5% of its capacity allocated to the international market. Over time Lion and Thai Lion will both need to accelerate international expansion and start building up the Lion brand outside the domestic markets.

Thai Lion has had a relatively successful initial phase, quickly building a significant presence on two of Thailand's three big domestic routes, despite starting at an inopportune time as civil unrest engulfed Bangkok.

But the carrier will have to overcome challenges as domestic competition continues to intensify and as several LCCs prepare to pursue expansion in Thailand's international market once market conditions improve.