21-Dec-2012 2:00 AM

Tiger's Indonesian affiliate Mandala starts to pursue faster expansion but faces tall order

Analysis

Tiger Airways Indonesian affiliate Mandala Airlines has unveiled further network expansion plans as it aims to establish a meaningful presence in Indonesia’s fast-growing domestic and international markets. The carrier has grown slowly – extremely slowly for Indonesian standards – since resuming services in Apr-2012, following a 15-month suspension.

Slightly faster growth is now being pursued, with three routes being added in Jan-2013 following the launch of four routes in Dec-2012. But Tiger and Mandala will need to invest in accelerated growth if it is to become a significant player in the dynamic Indonesian market.

With the latest expansion Mandala will operate 11 routes – seven international routes and four domestic routes – with a fleet of five Airbus A320s. Further expansion is expected over the next six months as Mandala doubles its fleet to 10 A320s, meeting an Indonesian DGAC requirement for all airlines to have at least 10 aircraft, including five owned.

Mandala re-launched services on 05-Apr-2012 with three A320s, following the completion of a deal with Tiger which saw the Singapore-based LCC group take a 33% stake. Mandala had a fleet of 11 A320s with 25 more on order prior to its grounding and filing for bankruptcy protection in Jan-2011.

At its peak in 2009 Mandala transported 3.6 million passengers, making it Indonesia’s fifth largest player (See background information). Under Tiger, Mandala has adopted Tiger’s pure LCC model, dropping its previous domestic-focused full-service positioning.

Mandala incurred losses of over USD30 million in its first six months

Tiger only had to pay USD1 for its 33% stake but is investing in Mandala’s expansion and has been covering its share of the carrier’s initial operating losses. For its fiscal first half ending 30-Sep-2012, Tiger recorded a loss of SGD9.2 million (USD11.2 million) related to its investment in Mandala. This indicates Mandala incurred losses of USD34 million in its first six months, not surprising given the carrier’s start-up phase and initial ramp-up was very slow, which resulted in under-utilisation of its A320s.

Tiger and Mandala’s majority Indonesian owner, the Saratoga investment firm (with a 51% stake), will need to invest heavily to cover further expansion if the carrier is to become a meaningful player in the Indonesian market. Mandala currently has a 1% share of capacity in the Indonesian market. With 10 A320s, Mandala would still not be among the 10 largest carriers in Indonesia and would capture only about a 2% capacity share.

Mandala is by far Indonesia’s smallest low-cost carrier – behind Lion Air, Garuda Indonesia subsidiary Citilink, Indonesia AirAsia and Lion subsidiary Wings Air – and currently accounts for only 2% of LCC capacity in Indonesia. Lion/Wings, Citilink and Indonesia AirAsia are also all now pursuing very rapid growth, which means Mandala will need to pursue more ambitious expansion if it is to capture a meaningful share of Indonesia’s market.

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Even after Mandala implements the latest phase of its expansion in early Jan-2013, Manadala will account for less than 1% of capacity in Indonesia’s huge domestic market. Mandala’s share of Indonesia’s smaller international market, where it has a larger presence and a brighter outlook given its ties with Tiger, will be about 3% in Jan-2013, according to CAPA and Innovata data.

Mandala plans to focus more on opportunities in the international market, where it can leverage its Tiger branding (it also uses Tiger’s website and reservation system). But Mandala’s management also plans to pursue domestic expansion where it sees opportunities.

Mandala to enter Indonesia’s largest domestic route

On 04-Jan-2013 Mandala will enter Indonesia’s largest domestic market, Jakarta-Surabaya. This shows the carrier is not reluctant to take on Indonesia’s major carriers on trunk routes.

Jakarta-Surabaya is now served by seven Indonesian carriers – Batavia, Citilink, Garuda, Indonesia AirAsia, Lion Air, Merpati and Sriwijiya. according to Innovata data. These seven carriers are all significantly larger than Mandala and accounted for 94% of the 60 million domestic passengers which flew in Indonesia in 2011, according to Indonesian DGAC data.

There are currently over 68,000 weekly one-way seats in the Jakarta-Surabaya market, making it the largest domestic route in Southeast Asia and the sixth largest domestic route in the world (see background information). Mandala will initially operate the route with only one daily frequency, which will give it 1,260 weekly seats in the market – good enough for a 2% share.

Jakarta to Surabaya capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Given its limited schedule compared to its competitors, Mandala/Tiger seems to be putting a paw in the water to test out how the Jakarta-Surabaya market responds. The carrier has had a similar conservative approach to the other domestic markets it has so far launched – Jakarta-Medan, Jakarta-Padang and Bali-Surabaya. Mandala currently serves Jakarta-Medan with two daily flights while Jakarta-Padang and Bali-Surabaya are served with only one daily flight.

Mandala already competes on Indonesia’s second largest international route and third largest domestic route

Jakarta-Medan was Mandala’s first route under the Tiger-backed re-launch and was followed within one month by Medan-Singapore and Jakarta-Kuala Lumpur. Jakarta-Medan, the third largest domestic route in Indonesia and the 13th largest in the world, is nearly as competitive as Jakarta-Surabaya. Six carriers (Batavia, Citilink, Garuda, Lion, Sriwijaya and Mandala) currently serve Jakarta-Medan, offering a total of about 50,000 one-way weekly seats, according to Innovata and CAPA data.

Jakarta-Kuala Lumpur is Indonesia’s second largest international route by seat capacity with AirAsia, Lion, Mandala, Malaysia Airlines, KLM, Kuwait Airways and Yemen Airways now offering nearly 30,000 one-way weekly seats. Mandala’s two daily flights give the carrier only a 9% share of capacity in the Jakarta-Kuala Lumpur market.

Medan-Singapore is a smaller route but of strategic importance as Singapore is Tiger’s home market. Jetstar Asia, SilkAir and Mandala now provide about 4,500 weekly one-way seats on the Medan-Singapore route.

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A daily service from Jakarta to Bangkok was added on 10-Aug-2012, the only new route for Mandala in 3Q2012. Mandala currently accounts for 14% of capacity in the Jakarta to Bangkok market (includes both Bangkok airports), making it the fourth largest carrier in the market behind Indonesia AirAsia, Garuda and Thai Airways.

Mandala launched Bali-Surabaya and Jakata-Padang on 01-Dec-2012 as part of a tranche of four new routes, kick-starting a more ambitious phase of expansion. At the same time Mandala launched Bali-Singapore and Padang-Singapore, giving the carrier a total of five international and three domestic routes. Each route is served with one daily flight. The new routes marked Mandala’s re-entry into Indonesia’s second and third largest airports, Surabaya and Bali, as well as smaller Padang.

Jakarta-Padang is another major domestic route, the 11th largest in Indonesia, with six carriers (Batavia, Citilink, Garuda, Lion, Siriwijaya and Mandala) offering a total of 25,000 one-way weekly seats. Padang-Singapore is a niche route that Mandala is the now the only carrier serving.

Surabaya becomes a focus for Mandala

The latest expansion sees Mandala focusing on Surabaya, which is Indonesia’s second largest city with a population of about three million. In addition to opening Jakarta-Surabaya on 04-Jan-2013, Mandala will also begin serving Surabaya from Singapore and Kuala Lumpur. Both routes will initially be operated with one daily frequency.

With the expansion at Surabaya, Mandala is avoiding the congestion of Jakarta, where slots have become challenging to secure, and is focusing on a fast-growing city which is seen as relatively under-served. But competition at Surabaya has also become fierce as it is the largest base for Citilink and is also the second largest base for Lion. AirAsia also has a significant operation at Surabaya.

Surabaya system-wide capacity share by carrier (% of seats): 17-Dec-2012 to 23-Dec-2012

Kuala Lumpur and Singapore are by far Surabaya’s largest two international destinations. Surabaya-Kuala Lumpur is now served by Indonesia AirAsia, AirAsia Malaysia and Merpati. Malaysia Airlines dropped the route in Jan-2012 and Lion dropped it in Nov-2012, providing an opening for Mandala/Tiger.

In Jan-2013, the AirAsia Group will account for about 74% of capacity in the Surabaya-Singapore market compared to about 14% for Mandala and 11% for Merpati.

Surabaya-Kuala Lumpur capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Mandala will account for about 15% of capacity on the Surabaya-Singapore route compared to 25% for SilkAir, 18% for Lion, 14% for Jetstar Asia and 27% for Taiwan’s China Airlines. (China Airlines’ actual passenger share of this market is less because a portion of the passengers it carries on its daily A330-300 Surabaya-Singapore-Taipei route do not get off in Singapore).

Surabaya-Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 09-Jun-2013

Surabaya-Bali, the 12th largest domestic route in Indonesia and the largest which does not touch Jakarta, is now served by seven carriers – Batavia, Citilink, Garuda, Indonesia AirAsia, Mandala, Merpati and Wings. Mandala has captured a 6% share of capacity in this market since launching service to Surabaya on 01-Dec-2012.

Following the further expansion at Surabaya in early Jan-2013, Mandala will operate 56 weekly frequencies and 1,080 weekly seats at Indonesia’s second largest airport. This means Surabaya will be tied with Singapore for the status of being the second largest destination in the Mandala network after Jakarta. Mandala is based in Jakarta, where it offers 98 weekly frequencies and 17,640 seats, giving it only a 1% share of total capacity in the huge Jakarta market.

Mandala top bases/stations/hubs based on capacity (seats): 07-Jan-2013 to 13-Jan-2013

Mandala is keen to expand at Jakarta but faces slot constraints, which partly explains why only two of the seven routes the carrier has added or is adding in Dec-2012 and Jan-2013 touches Jakarta.

In discussing the Tiger Group’s financial results for the fiscal half ending 30-Sep-2012, Tiger Group CEO Koay Peng Yen acknowledged that there are operational constraints at expanding in Jakarta. But he said Tiger and Mandala are confident these constraints will ease, allowing for Mandala to expand in Indonesia’s capital. “We can’t speak for the regulator but we will certainly try to get as many slots as possible,” Mr Koay said.

Slow start for Mandala following re-launch

Mandala also has not added capacity on any of its initial four routes, an indication that it has struggled to gain traction in the Indonesian market in its first six months as a Tiger affiliate. Tiger Airways Group CFO Chin Sak Hin acknowledged, during the group’s analyst call for the fiscal first half ending 30-Sep-2012, that Mandala struggled in its initial six months, partially because of under-utilisation of its initial aircraft.

Mr Chin said “there are start-up challenges we are addressing” and the Mandala-Tiger team is focused on turning around the carrier. He added that Tiger remains confident in Mandala and the Indonesian market.

Mandala’s initial fleet of three A320s were only used to operate five daily flights in the May to July period, giving the carrier an average daily aircraft utilisation rate of only about seven hours, based on CAPA calculations. Mandala's daily aircraft utilisation rate improved to about nine hours after the Bangkok flight was launched in August but in November it slipped back to about seven hours after the fourth aircraft was delivered.

The initial unusually low utilisation was partially intentional as the carrier took a cautious approach and tried to minimise losses by operating a small schedule while its brand re-gained a presence in the market. The low utilisation rate also allowed Mandala to offer a highly reliable operation in its first few months.

Mr Chin said that some approvals from Indonesian authorities were slower to come than initially anticipated. Tiger management said this is no longer an issue at Mandala and the operation would be ramped up to more normal levels by the end of 2012.

Indeed, Mandala's aircraft utilisation rates significantly improved in Dec-2012 as four routes were added. It stands to further improve in Jan-2013 as the carrier will operate 13 daily flights, giving it an average utilisation rate of about 10.5, assuming a fleet of five aircraft.

The most recent Tiger Group fleet plan included Mandala taking its fifth A320 in Dec-2012 and adding two more aircraft in the upcoming Jan-2013 to Mar-2013 quarter for a total of seven A320s by the end of the fiscal year ending 31-Mar-2013. A further three aircraft will be subsequently added, likely in the quarter ending 30-Jun-2013, to meet Indonesia’s minimum 10-aircraft requirement. Mandala is expected to announce several additional routes in the coming weeks to ensure the aircraft being added over the next six months are fully utilised.

Mandala faces biggest test over the next six months

As the losses that have been incurred during 2012 would be expected with a start-up operation, the true test for the new Mandala will come in 1H2013 as the carrier expands its fleet and network. The biggest challenges will likely come in the domestic market given the intense and often irrational competition on Indonesia’s trunk routes. Entering a market as the seventh or eighth carrier is never an easy task. Mandala does have the advantage of having market awareness from its pre-Tiger era but back then it was a full-service carrier with a much different product proposition.

The international market should be easier to penetrate and Mandala’s reliance on the Singapore market should particularly help mitigate risks. Given its ties to Tiger it is not surprising Singapore has so far been the carrier’s second largest destination after Jakarta.

The Indonesia-Singapore market is large and growing fast but with bilateral limitations restricting further expansion, particularly on the Singapore side. With Mandala, the Tiger Airways Group can access Indonesian traffic rights and launch services it otherwise would be unable to operate with Singapore-registered aircraft.

Tiger has historically had a much smaller presence in the Singapore-Indonesia market than rival Singapore-based LCC Jetstar Asia. By having an affiliate in Indonesia, Tiger should be able to close the gap with Jetstar as well as with AirAsia and Lion, which have affiliates in Indonesia but not in Singapore.

The Tiger Group’s share of capacity in the Indonesia-Singapore market will reach 8% in Jan-2013, compared to only 3% prior to Mandala’s launch. The Tiger Group has already matched Jetstar’s 8% share in the Indonesia-Singapore market but is still smaller than Lion (11%) and AirAsia (18%). Tiger's share in this market will likely increase further as Mandala looks to launch more new routes to Singapore during 2013.

Tiger Singapore only serves one Indonesian destination with its own metal, Jakarta, with two daily flights, leaving huge opportunities for Mandala to expand in the Singapore-Indonesia market. In addition to opening up more new Singapore-Indonesia routes beyond the four it will be operating as of early-Jan-2013, Mandala would be interested in operating alongside Tiger in the Jakarta-Singapore route if slots and traffic rights open up. Jakarta-Singapore is the second largest international route in the world and Tiger now only has a 5% share of capacity in this important market compared to 8% for Jetstar, 15% for AirAsia and 17% for Lion.

Mandala will also likely look to further leverage Tiger’s presence in other international markets in Southeast Asia. It is no surprise that Mandala launched services to Bangkok and Kuala Lumpur in its first phase as these are Tiger Airways Singapore’s two largest destinations based on seat capacity. Further expansion in Bangkok and Kuala Lumpur is likely but – as is the case with the Indonesia-Singapore market – competition will be intense with other LCCs.

The Indonesia market has huge opportunities – domestically and internationally – and room for several carriers, including multiple LCCs. But competition is intense in every sector of the market as several strong airline groups pursue larger pieces of the growing pie. Mandala and Tiger, given its weak current position compared to AirAsia, Lion and Garuda-Citilink, will have to battle for even just a small slice. Losses are likely for the short and medium term and significant investment will be required for Mandala-Tiger to have just a chance to capture a meaningful portion of the Indonesian market.

This is the third article in a series of articles on Indonesian carriers. For the first two articles in this series see:

For a larger look at Indonesia’s booming market, see the following report in the latest edition of Airline Leader, CAPA’s bi-monthly strategy journal:

Indonesian growth skyrockets amidst a highly fragmented market

Background information

Annual passenger traffic for Indonesia’s leading carriers: 2006 to 2011

Positioning of Indonesia’s major airline brands

Top 20 domestic routes in the world ranked by seats: 17-Dec-2012 to 23-Dec-2012