Australia-Bali airline market: full service airlines Qantas and Lion Group accelerate Bali growth

Summary

• Lion Group's Malindo Air plans to launch daily services from Melbourne to Bali in late Mar-2018.
• Qantas plans to launch daily services from Melbourne to Bali on 23-Jun-2018.
• Qantas and Malindo will use two-class 737-800s on the Melbourne-Bali route, providing a full service product.
• Lion Group launched Brisbane and Perth to Bali services in 2017, using Malindo Air and Batik Air, while Qantas introduced year-round services on Sydney-Bali.
• Batik Air has ambitious expansion plans for the Australia-Bali market, with potentially several new routes to be launched in 2019 using A321neoLRs.

Australia-Indonesia market consists of nearly 3 million annual passengers

Indonesia is Australia's sixth largest international market based on nonstop passenger traffic, after New Zealand, Singapore, the UAE, China and the US.

The 12 nonstop routes connecting Australia with Indonesia generated a combined 2.873 million passengers in the year ending Nov-2017, according to BITRE data. Australia-Indonesia traffic has increased by 35% over the past four years, but declined by 5% in the year ending Nov-2017.

Australia-Indonesia nonstop passenger traffic (in millions): year ending Nov-2013 to year ending Nov-2017

Year ending	Passengers (m)
Nov-2013	2.125
Nov-2014	2.549
Nov-2015	2.632
Nov-2016	3.083
Nov-2017	2.873

Source: CAPA - Centre for Aviation & BITRE.

In Nov-2017 (the latest month of available data) there were slightly more than 200,000 passengers in the Australia-Indonesia market, including 182,000 to Bali and 23,000 to Jakarta. The Australia-Bali market consists almost entirely of outbound leisure passengers, whereas the much smaller Australia-Jakarta market consists mainly of inbound leisure passengers, along with some business traffic (both outbound and inbound).

There are more than 1.3 million annual Australian visitors to Indonesia, compared to only 200,000 Indonesian visitors to Australia. There is very limited sixth freedom traffic flying beyond Bali or Jakarta; domestic connecting traffic volumes are higher, but not too significant.

Australian visitor numbers to Bali have doubled over the past five years, prompting airlines to add Australia-Bali capacity and launch new services. Indonesian visitor numbers to Australia have increased by nearly 40% over the past four years, including by 14% in the 12 months ending Nov-2017, but on a much smaller base.

Jetstar is the largest player

There are currently approximately 40,000 weekly one-way seats from Australia to Indonesia, including approximately 36,000 weekly seats from Australia to Bali.

Jetstar has a leading 43% share of Australia-Indonesia seat capacity, followed by Garuda with slightly more than 20%. AirAsia Group and Lion Group each have approximately a 10% share of seat capacity, while Virgin Australia has 9% and Qantas 6%, according to CAPA and OAG data.

In the Australia-Bali market, Jetstar has a nearly 50% share of seat capacity, while Garuda has nearly 15%. The AirAsia Group and Lion Group each have approximately 11%, Virgin Australia slightly more than 10%, and Qantas slightly less than 4%.

Lion Group and Qantas Airways are the newest competitors in the Australia-Bali market, driving capacity increases but a decline in the LCC penetration rate.

Qantas too is now expanding in Bali

Qantas returned to Bali after a seven-year hiatus in late 2015 and early 2016, when it operated a seasonal four times weekly service from Sydney.

Qantas introduced a year-round daily service between Bali and Sydney at the end of 2016, using 737-800s. On 7-Feb-2018 Qantas unveiled plans to launch a daily year-round 737-800 service from Melbourne to Bali on 23-Jun-2018.

The new Melbourne-Bali service will boost Qantas' share of Australia-Indonesia capacity to approximately 9%. In addition to the Sydney-Bali service, Qantas currently operates from Sydney to Jakarta with four to five weekly A330 frequencies.

Qantas' expansion in the Bali market over the past two years is driven by strong demand from passengers seeking a full service product.

Lion Group has quickly established a significant presence in Australia-Bali market

Lion Group entered the Australia-Bali market in 1H2017, providing a full service product at a very competitive price.

The group launched Brisbane-Bali at the end of Mar-2017 using the Malaysian full service airline Malindo Air. Perth-Bali was launched in Jun-2017 using the Indonesian full service subsidiary Batik Air. Malindo operates one daily 737-800 flight from Brisbane to Bali, which continues to Kuala Lumpur. Batik operates two daily flights from Perth to Bali, mainly using 737-900ERs.

In late Mar-2018 Lion Group plans to launch its third Australia-Indonesia route with a new daily 737-800 flight from Melbourne to Bali operated by Malindo. This flight will continue to Kuala Lumpur, but will primarily carry local Australia-Indonesia passengers - as does Malindo's Brisbane-Bali flight.

With the new service, Lion will become the third largest competitor in the Australia-Indonesia market, with a 13% share of total capacity (up from 10% currently).

Lion Group is not discouraged from expanding by its low load factors

Lion's share of Australia-Indonesia traffic has been lower than its capacity share because its load factors are significantly below those of competitors. In Nov-2017 Lion Group accounted for only a 5.2% share of total Australia-Indonesia traffic, and a 5.8% share of total Australia-Bali traffic (based on BITRE data).

Lion Group's load factors on the Brisbane-Bali and Perth-Bali routes were less than 60% in 2017, according to BITRE data. However, low initial load factors are not discouraging the group from pursuing further expansion in the Australia-Indonesia market while it builds brand awareness.

The group believes it has a significant cost advantage over Garuda and all Australian carriers, enabling it to offer competitive prices and operate with load factors as low as 50%. Australia-Indonesia routes help Lion Group achieve high average aircraft utilisation rates, which in turn drives down its unit costs.

Batik Air aims to launch several Australia-Bali routes in 2019

Lion is generally an ambitious airline group, and is particularly bullish about growth prospects in the Australia-Bali market. The group aims to launch several Australia-Bali routes over the next couple of years.

Batik Air CEO Achmad Luthfie told CAPA on 5-Feb-2018 that the airline plans to pursue significant expansion in the Australia-Bali market in 2019 as it takes delivery of new-generation A320neo family aircraft. Capt Luthfie said Batik is looking at serving several Australian airports including smaller regional destinations.

There are currently 10 airports in Australia that are served from Bali, although one, Townsville, will lose its link with Bali in Mar-2018 when Jetstar suspends the route. Only two airports in Australia - Melbourne and Sydney - are linked with Jakarta.

Australia-Indonesia routes: one-way weekly seat capacity (Feb-2018) and monthly passenger traffic (Nov-2017)

Rank	Origin	Destination	One-way weekly seats	Monthly passengers
1	Perth Airport	Bali Denpasar Ngurah Rai Airport	11,565	61,836
2	Sydney Kingsford Smith Airport	Bali Denpasar Ngurah Rai Airport	6,625	39,840
3	Melbourne Tullamarine Airport	Bali Denpasar Ngurah Rai Airport	6,472	34,332
4	Brisbane Airport	Bali Denpasar Ngurah Rai Airport	5,239	21,926
5	Sydney Kingsford Smith Airport	Jakarta Soekarno-Hatta International Airport	2,419	12,074
6	Adelaide Airport	Bali Denpasar Ngurah Rai Airport	1,260	8,254
7	Melbourne Tullamarine Airport	Jakarta Soekarno-Hatta International Airport	1,188	6,846
8	Darwin Airport	Bali Denpasar Ngurah Rai Airport	720	8,136
9	Cairns Airport	Bali Denpasar Ngurah Rai Airport	720	4,551
10	Perth Airport	Jakarta Soekarno-Hatta International Airport	624	4.012
11	Townsville Airport	Bali Denpasar Ngurah Rai Airport	540	2,834
12	Port Hedland Airport	Bali Denpasar Ngurah Rai Airport	176	510

Note: seat figures are approximate and based on OAG schedules for week commencing 5-Feb-2018.
Source: CAPA - Centre for Aviation, OAG and BITRE.

Malindo and Batik to become virtually indistinguishable

Batik is already competing in the largest Australia-Indonesia route - Perth to Bali. Melbourne-Bali and Brisbane-Bali are the third and fourth largest Australia-Indonesia routes. Capt Luthfie said Batik could supplement Malindo on these routes.

Sydney-Bali is the second largest Australia-Indonesia route and is likely Lion Group's next new Australia-Bali route (after Melbourne-Bali is launched). Malindo could operate Sydney-Bali initially. Malindo and Batik are closely aligned, coordinating their international networks and schedules.

Malindo and Batik also have exactly the same inflight product and they codeshare. To a consumer, there is hardly any difference between the two airlines. Malindo has also been planning to adopt the Batik brand, which will make the two airlines virtually indistinguishable.

Malindo is currently better positioned for expanding in Australia because it has more experience in the international market, including with Australia point of sales. However, Batik could become better positioned once it takes delivery of A320neo family aircraft in 2019, as these aircraft have better range than Malindo's 737NG fleet. Malindo has some payload limitations on some of its Australia-Bali flights.

Capt Luthfie said Batik plans eventually to operate all its Australia flights with A321neoLRs. These aircraft have sufficient range to cover all of Australia from all of Indonesia without any payload limitations.

Batik grows rapidly, focusing on domestic expansion (so far)

Batik has been one of the world's fastest growing airlines since it was launched in 2013. The airline added 10 aircraft in 2017 and ended the year with 51 aircraft, including 37 A320ceos, eight 737-800s and six 737-900ERs.

Batik has already added three A320ceos in 2018. Capt Luthfie said it expects to receive four more A320ceos by the end of 2018 and end the year with 58 aircraft.

Batik Air fleet summary: end 2013 to end 2018

Aircraft	End 2018	End 2017	End 2016	End 2015	End 2014	End 2013
Airbus A320-200	44	37	27	13	6	0
Boeing 737-800	7	8	8	14	6	0
Boeing 737-900ER	6	6	6	6	6	6
TOTAL	58	51	41	33	18	6

Source: CAPA - Centre for Aviation.

Capt Luthfie added that Batik will start taking A320neo family aircraft in 2019 with eight deliveries - a mix of A320neos and A321neoLRs. The airline plans to shift focus to international expansion in 2019, as the new A320neo and A321neoLR fleets are intended for international routes. The A321neoLRs will mainly be used for Australia and North Asia, while the A320neos will be used for shorter international routes.

So far, Batik has focused almost entirely on the domestic market. It currently has only six international destinations - Chennai in India; Guilin in China; Kuala Lumpur and Kota Kinabalu in Malaysia; Perth and Singapore.

Less than 8% of Batik's current seat capacity is in the international market. Capt Luthfie said Batik will focus almost entirely on domestic expansion in 2018, although it may add a second route to China and a second route to India.

Batik Air - a Lion in sheep's clothing?

Capt Luthfie said Batik's A320neos will have the same configuration as its A320ceos, which feature 144 economy seats and 12 business class seats. He said the A321neoLRs will have 200 economy seats and 12 business class seats.

Batik has seatback IFE monitors on all its aircraft, in both cabins. While Batik is a full service airline, it was built on a low cost platform borrowed from Lion Air, and has similar trip costs as its low cost sister.

The A321neoLR will enable Batik to reduce its already low unit costs further, given the relatively high density 212-seat configuration. Batik's largest aircraft is now the 737-900ER, which has 168 economy and 12 business class seats. Batik has considered A330s, which other Lion Group airlines operate, but has decided that large new-generation narrowbody aircraft are a better fit for medium haul international markets such as Australia-Indonesia.

Batik, which at one point had ambitions to start a domestic airline in Australia, has the ability significantly to shake up the Australia-Bali market. The Garuda, Qantas and Virgin Australia groups may need to make strategic adjustments in order to compete effectively against Batik A321neoLRs.