Tiger and SIA/SilkAir lead race to expand in Indonesia-Singapore market with AirAsia lagging behind

SIA Group carriers have an advantage in responding to increasing demand in the Indonesia-Singapore market, as well as opportunities made available from the new bilateral agreement, because they seem to have at their disposal a sufficient number of additional slots at Changi.

Tiger is particularly in a strong position in the Indonesia-Singapore market as the only airline group with subsidiaries or affiliates in both Singapore and Indonesia. This gives Tiger an edge over rival LCC groups AirAsia, Lion and Jetstar as it has the flexibility to access slots and traffic rights from either side.

Tiger to add Bandung and Yogyakarta services

On 6-May-2013 Tiger unveiled plans to launch services from Singapore to Bandung and Yogyakarta. Yogyakarta will be served daily from 1-Jul-2013 while Bandung will be served daily from 1-Aug-2013.

The expansion will give the Tiger Group seven routes connecting its main hub in Singapore with Indonesia. Just over a year ago the group only had one route and two daily flights from Singapore to Indonesia.

The expansion will give Tiger more routes than any other LCC group serving the Singapore-Indonesia market. AirAsia currently has five routes between the two countries while Jetstar has four and Lion only two.

SilkAir and SIA to also add Indonesia services

Only full-service sister carrier SilkAir will have more routes to Indonesia than Tiger. SilkAir currently serves nine Indonesian destinations and unveiled plans on 2-May-2013 to launch two more Indonesian destinations - Semarang and Makassar - at the end of Jul-2013/beginning of Aug-2013. But SilkAir's low frequency service means it has fewer seats in the market than SIA, AirAsia, Garuda and Lion.

SIA currently accounts for about 26% of seat capacity in the Indonesia-Singapore market, driven by its high frequency widebody services to Jakarta and Bali. But SIA will see its share of capacity in the market increase to approximately 30% on 26-Jul-2013, when it introduces a ninth daily frequency to Jakarta and a fourth daily frequency to Bali. At the same time SIA will use A330-300s to take over one of SilkAir's two daily A320 frequencies to Surabaya.

The SIA expansion in Indonesia, which was announced by the carrier on 7-May-2013, results in a 27% increase in capacity as SIA adds three daily flights in the market for a total of 14. The rapid SIA expansion is made possible by a new bilateral that significantly raises the capacity caps in the Singapore to Jakarta, Bali, Surabaya and Medan routes.

AirAsia is currently the second largest carrier in the Singapore-Indonesia market with about a 19% share of capacity, followed by Garuda and Lion with about 11% each. SilkAir and the Jetstar and Tiger groups each currently have about a 9% share of seat capacity in the Indonesia-Singapore market, according to CAPA and Innovata data.

Indonesia to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Note: new flights from SIA, SilkAir and Tiger not yet incorporated
Source: CAPA - Centre for Aviation & Innovata

AirAsia frustrated in attempts to launch Singapore to Makassar, Medan and Surabaya

Indonesia AirAsia is currently seeking slots from Changi Airport to support three additional routes - Makassar, Medan and Surabaya - which would give the carrier eight total routes to Singapore, surpassing the new Tiger figure by one. But while AirAsia has been designated to serve these routes by Indonesian authorities it has so far been stymied by Changi.

AirAsia says Changi has informed the group that there are currently no available slots for new flights to Medan, Surabaya or Bandung in the current summer schedule but that it can re-apply for the winter schedule, which begins at the end of Oct-2013. Medan and Surabaya to Singapore would be new routes for Indonesia AirAsia while the carrier already serves the Bandung-Singapore market with two daily flights and has been seeking slots to support a third daily frequency.

As CAPA previously reported, Indonesia AirAsia first attempted to launch services from Singapore to Medan and Surabaya in 2012. But Singapore sat on these applications for several months last year while approving similar applications from Mandala, which launched services on the Medan-Singapore route in Apr-2012 and on Surabaya-Singapore in Jan-2013. A frustrated AirAsia re-applied for Medan and Surabaya in early 2013 but was recently rejected on the grounds that there are no available slots for these routes.

See related reports:

• Singapore Changi traffic growth to slow as Qantas drops hub and AirAsia closes base
• Why AirAsia doesn't need a new affiliate in Singapore

AirAsia's attempt to serve the Singapore-Makassar route is newer, with an initial application submitted in Feb-2013. But AirAsia says that so far Changi has not responded to this application. AirAsia intends to re-submit all its Indonesia-Singapore applications for the northern hemisphere summer season. But the group is not confident that Changi will approve its new requests and is concerned that slot constraints at Singapore will continue to impact its ability to compete and maintain its strong position in the Indonesia-Singapore market.

It is extremely frustrating for Indonesia AirAsia to see Tiger enter two routes where it is currently the only LCC (Bandung and Yogyakarta) and be unable to respond by adding capacity in these markets and by entering new markets which Tiger-Mandala already serve such as Medan and Surabaya. Indonesia AirAsia could try to persuade Indonesian authorities to raise a complaint with their Singaporean counterparts of an unlevel playing field. But Indonesia AirAsia does not have the lobbying power that Garuda enjoys and even if the concern is raised by Indonesia the Singaporean authorities may not respond favourably.

AirAsia could instead mount a campaign in Singapore, where over the years it has had a rocky relationship, to try to persuade Changi to approve its pending applications. The group appears to be trying to warm up to Changi, with AirAsia founder and group CEO Tony Fernandes attending Changi's annual airline awards dinner on 7-May-2013, where Mr Fernandes picked up two awards on behalf of AirAsia Berhad.

AirAsia unable to add capacity on Bandung-Singapore route

The proposed third daily flight to Bandung would help AirAsia respond to the new competition from Tiger as its rival launches services on the route. Indonesia AirAsia was a pioneer on the Bandung-Singapore route, becoming the first carrier to serve the market in 2009. It added a second daily frequency in May-2011. SilkAir followed AirAsia in launching Bandung-Singapore service in Oct-2011 and currently operates five weekly flights on the route.

The route has quickly proven to be successful for both carriers, leading to interest from Tiger. Bandung is Indonesia's third largest city and has a rapidly growing economy, fuelling local demand. But the market is relatively under-served, with international services available only to Singapore and Kuala Lumpur and Johor Bahru in Malaysia.

Bandung is about 150km east from central Jakarta. Jakarta's airport is heavily congested and located to the west of the city, making it a long drive to Bandung particularly during peak hours.

Bandung to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 27-Oct-2013

Note: new Tiger flights, starting 1-Aug-2013, not yet captured
Source: CAPA - Centre for Aviation & Innovata

The freedom to add capacity to existing markets such as Singapore-Bandung and add new routes from Singapore is critical for Indonesia AirAsia's future outlook. The carrier relies heavily on Singapore, which accounts for nearly 20% of its total seat capacity and about one-third of its international capacity. Singapore as a result drives Indonesia AirAsia's current position as the largest international carrier in the Indonesian market, based on passengers carried.

With eight additional A320s slated for delivery in 2013 (for a year-end total of 30 aircraft), Indonesia AirAsia has the capacity to grow further and keep up with competitors in the Singapore market while also expanding its presence domestically, where it is relatively small. But the slot constraints at Changi are starting to undermine the carrier's position and will likely result in AirAsia losing its status as the largest LCC group in the key Indonesia-Singapore market.

AirAsia for now is the largest LCC in the Indonesia-Singapore market, with 95 weekly frequencies and 17,100 one-way weekly seats. Once the new Bandung and Yogyakarta services commence, the Tiger Group will have 60 weekly frequencies and 10,800 weekly one-way seats, up from 46 weekly frequencies and 8,280 weekly seats currently. The Jetstar Group currently offers 43 weekly frequencies and 7,740 one-way weekly seats while Lion has 49 weekly frequencies and 10,437 one-way weekly seats, according to CAPA and Innovata data.

Tiger Group plans further Indonesia-Singapore expansion

While AirAsia for the time being will retain a larger share of the total market despite operating a fewer number of routes, the Tiger Group is planning to increase capacity on several of its existing Indonesia-Singapore routes by the end of 2013. Jakarta-Singapore is expected to see at least a doubling of frequencies from three to six and possibly as many as seven or eight. A second daily frequency is also likely in the other three markets covered by the Indonesia-Singapore bilateral - Bali, Medan and Surabaya.

As a result the Tiger Group will likely be operating over 100 weekly frequencies between Indonesia and Singapore by the end of 2013. If AirAsia continues to be stymied in attempts to expand in the market, Tiger will surpass it as the largest LCC group in the market by capacity.

The additional flights from Tiger-Mandala in the Jakarta, Bali, Medan and Surabaya markets are made possible by the newly expanded bilateral between Indonesia and Singapore. As CAPA reported in Feb-2013, the new agreement stipulates a 50% increase in capacity for all four of the main routes between the two countries. The most significant impact is in the Jakarta-Singapore market as carriers have been unable to add capacity in this market in recent years as both sides were fully or nearly fully utilising all the available capacity.

See related report: Jakarta-Singapore route poised for big capacity increase, led by Mandala and Tiger

While the new bilateral also provides a 50% increase in capacity for Bali, Medan and Surabaya, there was already still some room for capacity increases in some of these markets. There have historically been no capacity restrictions on secondary cities including Bandung and Makassar but demand is increasing in these markets, driven by Indonesia's surging economy.

Singapore and Indonesian authorities have been working the last few months on starting the process of distributing the traffic rights made available by the expanded bilateral. Carriers including Mandala and Garuda are expected to soon formally receive their allocations from Indonesian authorities, allowing them to tentatively schedule new flights and apply to Changi for the necessary slots.

There is no immediate benefit from the expanded bilateral for Indonesia AirAsia as the carrier already held traffic rights for Singapore to Medan and Surabaya, with slots at Changi preventing the carrier from using these rights. For now AirAsia is not interested in expanding in the Jakarta-Singapore or Bali-Singapore routes, which it already serves with six and four daily frequencies respectively.

Garuda eyes significant Indonesia-Singapore expansion; Lion expansion less likely

Lion could potentially exploit the opportunity to add capacity on its two Singapore routes, Jakarta and Surabaya, which it now serves with six and one daily frequency respectively. Lion could also potentially resume Singapore-Bali service and launch Singapore-Medan. But Lion expansion in Singapore is considered less likely than Mandala and Garuda expansion because Lion is currently more focused on the Indonesian domestic market and expanding new subsidiaries Malindo and Batik.

Lion would also likely run into the same kind of slot challenges at Changi as AirAsia. Mandala and Garuda have stronger positions when it comes to securing additional slots at Changi because Mandala is affiliated with Singapore-based Tiger, and Garuda is partially owned by the Indonesian Government, which could help lobby Singaporean authorities for preferential access to additional slots.

Garuda is expected to add capacity by up-gauging some of its eight daily flights on the Jakarta-Singapore route from 737-800s to A330s. Garuda also plans to increase capacity on the Jakarta-Bali route, which it currently only serves with one daily frequency, and launch services from Singapore to Medan and Surabaya. The new routes were recently identified as part of Garuda's network plan for 2013 but details on launch dates and frequency have not yet been provided.

Garuda currently only serves Singapore from three destinations - Jakarta, Bali and Balikpapan. The latter is served with just four weekly flights.

Garuda also codeshares with SilkAir on several Indonesia-Singapore routes. But the Garuda-SilkAir/SIA partnership, which also includes a codeshare with SIA on the Singapore-Bali route, is relatively limited and could be jeopardised as Garuda adds more routes to Singapore.

Indonesia emerges as key market for SilkAir

SilkAir operates alongside Garuda on the Singapore-Balikpapan route and already serves Bandung, Lombok, Manado, Medan, Palembang, Pekanbaru, Solo and Surabaya. SilkAir announced on 2-May-2013 plans to add Semarang and Makassar as its 10th and 11th destination in Indonesia. Semarang service will begin on 29-Jul-2013 with three weekly flights and Makassar be launched on 1-Aug-2013 also with three weekly flights.

SilkAir now competes with LCCs on four of its Indonesian routes (Bandung, Medan, Pekanbaru and Surabaya) and will compete against AirAsia in the Singapore-Semarang market. Indonesia AirAsia launched Singapore-Semarang service in Feb-2013 with four weekly flights. Indonesia AirAsia is currently the only carrier on the route although it was previously served by Batavia, an Indonesian full-service carrier which ceased operations in Jan-2013.

The SilkAir and SIA positioning in Indonesia is very different to budget carriers or even Garuda as only SilkAir/SIA offer a wide range of destinations beyond Changi, exploiting the relatively lack of non-stop international services from Indonesia. As CAPA reported in Mar-2013:

There is strong local demand for travel between Singapore and Indonesia's secondary cities. But more crucially Changi is well positioned to serve as the main hub for these growing markets because with the exception of Denpasar on the resort island of Bali these cities have limited international services.

Singapore Changi in many ways is the main international hub for Indonesia. Changi benefits from its close proximity to Indonesia. Changi is able to offer connecting passengers from Indonesia a much wider offering of destinations than Indonesia's largest airport, Jakarta Soekarno-Hatta.

For example, Changi is connected to 13 destinations in Europe while Soekarno-Hatta currently does not have any non-stop flights to Europe. (Garuda Indonesia now serves Amsterdam via Abu Dhabi, Turkish Airlines serves Istanbul via Singapore and KLM serves Amsterdam via Kuala Lumpur. But Garuda is planning to begin flights to London Gatwick, which will be its first non-stop destination in Europe, in late 2013.)

Within Asia-Pacific, Singapore has more than four times as many international destinations as Jakarta (102 compared to 23). As an award-winning airport, Changi also offers a far superior and less hassling transit experience compared to the congested and outdated Soekarno-Hatta.

Further expansion in the Indonesian market is strategically important to Changi, which in 2012 recorded 10% traffic growth to 51 million passengers, as it looks to continue its rapid growth trajectory. As Indonesia, which is now the world's fourth most populous country with about 240 million people, continues its rapid economic growth Changi will benefit as long as there are no restrictions on capacity increases. Indonesia now accounts for 13% of total capacity at Changi, making it the airport's largest destination country.

See related report: Singapore Changi to benefit from continued rapid growth of Indonesia market

SilkAir continues to evaluate several new secondary destinations in Indonesia that could potentially support service to Singapore. The new Indonesia-Singapore bilateral also enables more capacity from SilkAir on the Medan route.

Medan and Surabaya are the only two SilkAir Indonesian routes that are currently served daily. SilkAir currently operates 15 weekly flights on Singapore-Medan and 14 weekly flights on Singapore-Surabaya. But seven of the 14 SilkAir flights will be taken over by SIA as part of the SIA expansion in the Indonesian market that was announced on 7-May-2013.

The SIA Group will likely look to later add a third daily frequency in the Surabaya market by either adding a second SIA frequency or adding back a second SilkAir frequency. Even with SIA adding about 1,000 weekly one-way seats in the Singapore-Surabaya market and Garuda and AirAsia seeking to launch services, the route remains relatively under-served given that Surabaya is the second largest city in Indonesia. Currently there are about 8,000 weekly one-way seats on the Singapore-Surabaya route, with service from SilkAir, Lion, Mandala, Jetstar and Taiwan's China Airlines.

Jetstar may also add capacity in Indonesia-Singapore market

Jetstar is also planning to take advantage of the new bilateral to add capacity on its four Singapore-Indonesian routes - Bali, Jakarta, Medan, Surabaya. The group is expected to announce within the next week weeks capacity increases for most or all of its Singapore-Indonesian routes which will also take effect in 3Q2013.

The Jetstar Group now primarily uses its Valuair subsidiary, which was acquired by Jetstar Asia in 2005, to operate in the Indonesia-Singapore market with some capacity also provided on two of the four routes by Australia-based Jetstar Airways.

Tiger/Mandala expansion in Indonesia-Singapore market puts pressure on other LCCs

Jetstar has been impacted by the rapid rise of Tiger in the Indonesia-Singapore market as the Tiger Group has quickly built up an operation that 13 months ago consisted of just two daily flights. Tiger/Mandala now competes against Jetstar in all four of Jetstar's Singapore-Indonesia markets.

The Tiger Group expansion in the Indonesia-Singapore market began in Apr-2012, shortly after Mandala re-launched with Tiger owning a 33% stake. Mandala prior to suspending operations and entering bankruptcy in Jan-2011 was a full-service carrier operating only domestic services.

Mandala currently serves five Indonesian destinations from Singapore - Bali, Medan, Pekanbaru, Surabaya and Jakarta. Each route is operated once daily with the exception of Pekanbaru, which is served with four weekly frequencies.

Jakarta-Singapore was added in Apr-2013, using traffic rights and slots that were previously held by Batavia. At about the same time Mandala dropped service from Singapore to Padang, a secondary route which Mandala only launched in Dec-2012. Mandala's exit has left Singapore-Padang with no service. Mandala's other Singapore routes have been relatively successful and will likely see capacity increases.

Tiger Singapore also operates two daily flights between Jakarta and Singapore. Tiger has long been interested in increasing service on this route but was unable to because of the previous bilateral constraints.

SIA low-cost widebody operator Scoot also has looked at potentially launching service to Jakarta using traffic rights available under the new bilateral but could be constrained by the lack of slots at Jakarta. Mandala has an advantage in this respect as it has succeeded at securing a new batch of Jakarta slots that were previously held by Batavia.

While Mandala has been the vehicle used by the Tiger Group over the last year to expand in the Indonesia-Singapore market, the new Bandung and Yogyakarta routes will be operated by Tiger Singapore. This decision was driven partially by slot considerations at Changi. Tiger has access to a large portfolio of slots as it is based in Singapore and currently accounts for 8% of total seats and 18% of peak hour movements at Changi (excludes flights operated by affiliate carriers Mandala and SEAir).

Slots have been an increasingly valuable commodity at Singapore, with several foreign carriers not being able to launch planned new services after failing in attempts to secure slots at Changi, particularly during peak hours. This gives SIA Group carriers (SIA, SilkAir, Scoot and Tiger) an advantage in expanding in markets such as Singapore-Indonesia as the group holds about 53% of peak hour slots at Changi and seems to have set aside additional slots to support growth.

Singapore Changi Airport share of peak hour aircraft movements by carrier: 6-May-2013 to 12-May-2013

Note: peak hour is defined as 6am to 9am and 430pm to 730pm
AirAsia movements include only the Malaysian subsidiary
Source: CAPA - Centre for Aviation & Innovata

Aircraft rotation issues also factored into the Tiger Group's decision to use its Singapore entity to operate the new Bandung and Yogyakarta routes. Mandala currently does not operate domestic services to Bandung but is launching Jakarta-Yogyakarta service on 16-May-2013.

In many cases Mandala has been launching domestic routes in combination with new Singapore routes. Rotations such as Jakarta-Medan-Singapore-Medan-Jakarta have enabled the carrier to expand without operating at peak hours in Jakarta, where slots have generally not been available (although the Batavia bankruptcy has opened up some slots to Mandala). Singapore currently accounts for about 30% of Mandala's total seat capacity and about half of its international capacity.

Mandala plans ambitious expansion, leading to stronger Tiger position in Indonesia-Singapore market

Singapore will continue to be a focus point for Mandala as the carrier continues to rapidly expand its fleet and network. Mandala currently operates seven A320s and is planning to add five additional A320s in 2013, six more in 2014 and seven more in 2015, giving it a fleet of 25 aircraft by the end of 2015. While its entire current fleet was sourced from Tiger and delivered as brand new aircraft, Mandala plans to soon start taking second-hand aircraft from leasing companies. It expects about 40% of its fleet will eventually be second-hand aircraft that are six to eight years old.

Mandala fleet plan: 2012 to 2015

Source: Mandala at CAPA's Aviation Finance Summit, 20-Mar-2013

Mandala plans to use some of the additional aircraft to add capacity to Singapore, where Mandala is able to leverage the strong network of its shareholder Tiger. Expansion is also planned domestically, where Mandala has been adding routes to fill the void left by Batavia.

See related reports:

• Mandala, Indonesia AirAsia and Citilink to benefit most from Batavia bankruptcy
• Tiger's Indonesian affiliate Mandala starts to pursue faster expansion but faces tall order

Mandala and its part-owner Tiger should be able to cash in on the booming Indonesia-Singapore market, carrying more point-to-point passengers than other LCCs as well as offering connections beyond Changi onto flights operated by Tiger and long-haul low-cost partner Scoot. The Tiger Group has struggled in recent years, financially and strategically, with stiff competition in its home market of Singapore and repeated setbacks in other Southeast Asian markets and Australia. But Tiger's position in the important Indonesia-Singapore market, one of the biggest international markets within Asia for LCCs, cannot be matched.

The Tiger Group has the best of both worlds, with a local fast growing carrier in Indonesia and Singapore's largest LCC that is backed by SIA and possesses a valuable portfolio of slots. The dynamics of the Indonesia-Singapore market are ideal for LCCs given the short distance between the two countries and the fact Singapore is the easiest and most popular destination for Indonesia's fast-growing middle class. Several carriers are poised to benefit from the rapid growth in the Indonesia-Singapore market but the Tiger-Mandala and SIA-SilkAir duos will likely be the biggest beneficiaries.