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Malaysia’s Malindo Air Part 1: network model emerges. Focus on international market expansion & KLIA

Lion Group Malaysian affiliate JV Malindo Air has accelerated expansion of its international network, adding three destinations in three new countries in recent weeks. Malindo now has 19 international destinations and is planning more rapid growth in 2016, including another two destinations over the next two months.

Malindo has focused entirely on international expansion in 2015 after mainly pursuing domestic growth in 2013 and 2014. Malindo’s current domestic seat capacity is down 7% year over year while its international capacity is up 66%. Malindo carried nearly 4 million passengers in 2015, giving it about a 6% share of the total Malaysia market.

Less than three years after commencing operations the hybrid airline has become a relatively significant force in a market previously dominated by AirAsia and Malaysia Airlines, evolving from a point to point domestic operation to an international network airline.

This is Part 1 in a two part series of reports on Malindo. This Part will review Malindo’s achievements since launching in Mar-2013 and its expansion in 2015. Part 2 will focus on Malindo’s plans for 2016, including the launch of Ho Chi Minh and Hong Kong in the early part of the year, and its overall outlook.

Malindo's international network now spans 19 destinations in nine countries

Malindo currently operates a fleet of 27 aircraft consisting of 11 ATR 72-600s, 10 737-800s and six 737-900s. It has a network of 33 destinations, including 13 in Malaysia and 19 international destinations across nine countries.

Malindo has added three countries to its network in recent weeks.

Its first destination in China and nineteenth international destination overall, Sanya, was launched on 20-Dec-2015. Colombo in Sri Lanka was launched two days earlier, on 18-Dec-2015, while Perth became Malindo’s first destination in Australia on 11-Nov-2015.

Malindo also currently serves seven destinations in India, its largest international market based on number of destinations and seat capacity. Singapore is its second largest international market based on seat capacity as Kuala Lumpur-Singapore is its biggest international route. Malindo currently has four daily flights from Kuala Lumpur to Singapore and one daily flight from Ipoh to Singapore.

Malindo Air international capacity share (% of seats) by country: 28-Dec-2015 to 3-Jan-2016

Malindo also has five destinations in Indonesia and one destination in Bangladesh, Nepal and Thailand. Indonesia is a strategically important market given its role as the largest international carrier within the Lion Group.

Malindo is a network carrier with high ratio of transit traffic and agent bookings

As it has rapidly expanded its international network Malindo has emerged as a network carrier, using its main hub at Kuala Lumpur International Airport (KLIA) to connect with South Asia to the northwest and to Indonesia, Singapore and Western Australia to the southeast.

About 30% to 40% of Malindo's traffic at KLIA is now transfer, Malindo CEO Chandran Rama Muthy told CAPA. Some markets including Australia and India see 50% or more of passengers transit beyond KLIA.

Malindo relies heavily on travel agents to sell connecting itineraries as well as in the outbound and inbound international markets. Overall travel agents account for 60% to 70% of Malindo sales.

Malindo has labelled itself as a hybrid carrier and from its inception and has always been counted in Southeast Asian LCC data, driving further increases in Malaysia’s LCC penetration rate. But the airline has always essentially followed a full service model although with a low cost base, making it essentially a new generation network carrier.

Malindo offers economy passengers complimentary bags, seat assignments, meals, drinks and seatback in-flight entertainment. It also has a premium cabin across its 737 fleet with four seats abreast at a 42in pitch and recently opened a lounge at KLIA for its business passengers. Economy seats offer a relatively generous 32in pitch.

Malindo is considering dropping the hybrid label in 2016 to reinforce its full service position and make it easier for potential customers originating in its new markets to understand its product. Mr Chandran said customers unfamiliar with Malindo in new market markets such as Australia often assume the hybrid label means it follows a buy on board model.

A new label is sensible given its distribution strategy, international expansion and increased reliance on inbound and transit traffic.

Malindo shifts focus to establishing an international hub

Malindo currently operates 20 international routes, including 16 from its main hub at Kula Lumpur International Airport (KLIA). Malindo also has one international route from Kuala Lumpur’s old airport Subang, which has only been accessible to turboprops since the opening of KLIA, one from Penang, one from Ipoh and one from Malacca.

Malindo currently has 13 domestic routes, including four from KLIA, seven from Subang, one from Ipoh and one from Penang. The KLIA domestic routes mainly cater to passengers connecting to Malindo’s expanding international network. The Subang operation follows a point to point model and uses ATR 72s in all economy configuration without in-flight entertainment.

Malindo currently operates an average of 26 international departures, including an average of 23 from KLIA. It has a larger domestic operation with an average of 43 departures but 33 of these are from Subang where smaller aircraft are used.

Malindo focused expansion primarily on Subang from Jun-2013 to Oct-2014. During this period Malindo placed into service all 11 of its ATR 72-600s and launched 11 routes launched from Subang including nine domestic.

Malindo only added four jets during this period – four 737-900s which were added in the last seven months of 2013, supplementing the two 737-900s which were delivered prior to its Mar-2013 launch. Its 737s were initially mainly used to expand domestically from KLIA although Malindo also began a limited international operation from KLIA in 2H2013.

Since Oct-2014 Malindo has directed its focus entirely to expanding its international operation.

It has only taken jets over the last 15 months, including two 737-800s in 4Q2014 and eight 737-800s in 2015.

Malindo shifts its focus from domestic to international growth

Over the last 14 months Malindo has launched 13 international routes, with three in the last two months of 2014 and 10 in 2015. During this span it has launched only three small domestic routes which were short-lived and have already been suspended. (Two of the 10 international routes launched in 2015 have also already been suspended and a third is being suspended in Feb-2016.)

The rate of international expansion has further accelerated in 2H2015 as six new routes were launched, including four in 4Q2015. No domestic routes were added in 2H2015.

Malindo also has added capacity on several of its existing international routes in 2H2015, including KLIA to Bali, Bangkok, Delhi, Kochi and Tiruchirappalli.

As a result Malindo’s international seat capacity has expanded by 66% over the last year, from about 35,000 seats in late Dec-2014 to 58,000 seats in late Dec-2015, according to CAPA and OAG data. Most of this capacity has been added since Jul-2015, when Malindo had about 42,000 weekly return seats in the international market.

Malindo Air weekly one-way international seat capacity: Aug-2013 to Feb-2016

Over the last year Malindo’s domestic capacity has dropped by 7% from about 60,500 to about 56,500 weekly seats. At the end of 2014 Malindo's domestic capacity was up by almost 60% compared to late Dec-2013 levels as Malindo focused mainly on domestic expansion in 2014.

Malindo Air total weekly domestic seat capacity: Jun-2013 to Feb-2016

Malindo shifts its focus to KLIA

The domestic reductions over the last year have been limited to cuts at Subang and the suspension of several low frequency point to point routes connecting secondary cities.

Malindo’s total capacity at Subang is down 16% year over year. Its domestic operation at Subang, which accounts for almost all its Subang flying, is down 15%.

Malindo Air weekly one-way seat capacity at Kuala Lumpur Subang Airport: Jun-2013 to Feb-2016

At the KLIA hub Malindo has added domestic capacity in 2015 by adding a second daily flight to Langkawi and Penang and reinstating a third daily frequency to Kota Kinabalu. This more than offset the suspension of services from KLIA to Kota Bahru, which was served with one daily flight until Nov-2015. Malindo also serves KLIA-Kuching with two daily flights, giving it an average of eight daily domestic departures from KLIA.

Malindo’s current domestic capacity at KLIA is up by 18% compared to Dec-2014 levels. Its total KLIA capacity is up 46% year over year to 76,000 weekly seats. KLIA now accounts for 66% of Malindo’s total seat capacity while Subang accounts for about 30% and point to point routes account for the remaining 4%.

Malindo Air weekly one-way seat capacity at Kuala Lumpur International Airport: Jun-2013 to Feb-2016

Malindo's domestic market share has been flat

Under its initial more domestic-focused strategy, Malindo had a larger domestic operation at KLIA with eight routes at the end of 2013. But four routes were dropped in 1H2014 including KLIA to Johor Barhu, Miri, Sibu and Tawau.

Malindo currently does not have any service to Miri, Sibu and Tawau, which are all secondary cities in east Malaysia. Johor Barhu is currently only served with turboprops from Subang and Ipoh.

Malindo’s domestic operation at KLIA has grown in recent months to accommodate growing demand for international connections from Langkawi, Penang and Kota Kinabalu as its international network has expanded.

But Malindo’s KLIA domestic operation is still very small compared to AirAsia and Malaysia Airlines. Malindo is keen to limit its exposure on highly competitive domestic trunk routes and focus on international traffic while maintaining its niche domestic operation at Subang.

Competition at Subang is less intense as the airport is only served by Malindo and Malaysia Airlines regional subsidiary Firefly. Subang also typically commands a yield premium over KLIA due to its more convenient location although load factors are typically lower.

As CAPA outlined in the previous part in this series of reports on the Malaysian market outlook, Malindo currently has about a 9% share of Malaysia’s domestic market compared to 45% for AirAsia, 45% for the Malaysia Airlines Group and 1% for start-up Rayani Air.

At KLIA Malindo currently only has a 5% share of domestic capacity compared to 52% for AirAsia, 41% for Malaysia Airlines and 2% for Rayani Air.

New entrant Rayani, which currently only serves KLIA to Langakwi and Kota Bahru, could overtake Malindo in 2016 as the new full service carrier is planning to launch several more domestic routes from KLIA.

See related report: Malaysia domestic 2016 outlook: AirAsia impacted as Rayani enters, Malaysia Airlines resumes growth

At Subang, Malindo currently has a 39% share of domestic capacity compared to 61% for Firefly. Malindo has seen its domestic share at Subang drop by 9ppt over the last year from 48% in late Dec-2014 as Firefly has continued to expand while Malindo has reduced capacity.

Malindo’s international market share is rising, as it follows a pragmatic growth pattern

Malindo currently has a slightly more than 5% share of international seat capacity in Malaysia. Its international share has increased by 2ppts over the last year while its domestic share remained flat.

Malindo began international operations in late Aug-2013, five months after commencing domestic flights. It launched four international routes in 2013 compared to 15 domestic routes (of which five have been suspended).

See related report: Malindo Air launch drives 20% surge in Malaysia domestic traffic as MAS and AirAsia also expand

Malindo launched 13 international routes in 2014 (including five routes not currently in operation) along with 10 domestic routes (seven of which have been suspended).

See related report:

In 2015, Malindo has launched 10 international routes along with three domestic routes. (All the domestic routes and two of the international routes have already been suspended.)

In 1H2015 three international routes were launched and five international routes were suspended including one of the newly-launched routes. (The suspended routes did not have a significant impact on capacity as they were all small low frequency routes and four were operated by turboprops.)

In 2H2015 international expansion has accelerated with the launch of seven new routes (one of which was quickly suspended) plus capacity increases on several of the existing routes.

Daily Ipoh-Singapore service was launched on 14-Jul-2015, followed by four weekly KLIA-Trivandrum flights on 24-Aug-2015, three weekly KLIA-Amristar flights in 25-Oct-2015, 11 weekly KLIA-Perth flights in 11-Nov-2015, daily KLIA-Colombo service on 18-Dec-2015 and – most recently – twice weekly KLIA-Penang to Sanya service on 20-Dec-2015. Twice weekly Penang-Tiruchirappalli service was also launched on 26-Sep-2015 but was dropped after only one month (it is not included in the table below as it is not currently in operation).

Malindo Air current international route network in order of launch date

Launch

date

Origin Destination

Current

frequency

Seat

share

AirAsia

share 

 MAS

share

Aug-2013 KLIA Dhaka Hazrat Shahjalal International Airport 1 daily 12% 8% 36%
Sep-2013 KLIA Jakarta Soekarno-Hatta International Airport 10 weekly 5% 32% 27%
Sep-2013 KLIA Bali Denpasar Ngurah Rai Airport 2 daily 18% 54% 28%
Dec-2013 KLIA Delhi Indira Gandhi International Airport 11 weekly 50% N/A* 50%
Jan-2014 KLIA Tiruchirappalli Airport 2 daily 40% 60% N/A
Feb-2014 KLIA Mumbai Chhatrapati Shivaji Airport 1 daily 32% N/A 68%
Apr-2014 KLIA Kochi (Cochin) Airport 2 daily 47% 53% N/A
Apr-2014 KLIA Bangkok Don Mueang International Airport 3 daily 11% 44% 25%
May-2014 KL Subang Batam Hang Nadim Airport 6 weekly 100% N/A N/A
Nov-2014 Malacca Pekanbaru Sultan Syarif Kasim II Airport 4 weekly 100% N/A N/A
Nov-2014 KLIA Singapore Changi Airport 4 daily 9% 27% 21%
Dec-2014 KLIA Bandung Husein Sastranegara Airport 1 daily 31% 69% N/A
Feb-2015 KLIA Kathmandu Tribhuvan Airport 4 weekly 12% 30% 37%
Feb-2105 KLIA Visakhapatnam Airport 3 weekly 47% 53% N/A
Jul-2015 Ipoh Singapore Changi Airport 1 daily 33% N/A 30%
Aug-2015 KLIA Thiruvananthapuram Trivandrum Airport 4 weekly 100% N/A N/A
Oct-2015 KLIA Amritsar Sri Guru Ram Dass Jee Airport 3 weekly 100% N/A N/A
Nov-2015 KLIA Perth Airport 11 weekly 20% 58% 22%
Dec-2015 KLIA Colombo Bandaranaike International Airport 1 daily 17% 19% 25%
Dec-2015 Penang Sanya Airport 2 weekly 100% N/A N/A

AirAsia and Malaysia Airlines impacted by Malindo’s international expansion

Of Malindo’s 20 international routes it currently faces no non-stop competition on five: KLIA-Amristar, KLIA-Trivandrum, Penang-Sanya, Subang-Batam and Malacca-Pekanbaru. Subang-Batam and Malacca-Pekanbaru are its only internationals route operated with the ATR fleet.

On the 15 competitive routes, AirAsia or AirAsia X currently operates 12 while the Malaysia Airlines Group operates 11. The routes Malaysia Airlines does not serve are Bandung, Kochi, Trichy and Visak while AirAsia/AirAsia X currently does not serve Delhi, Mumbai or Ipoh-Singapore. (Ipoh-Singapore is served by Malaysia Airlines regional subsidiary Firefly.)

Malaysia Airlines dropped Kochi in May-2015 as part of its network restructuring exercise. Malindo also has benefitted from Malaysia Airlines' capacity reductions in six of its international routes – KLIA to Bali, Delhi, Dhaka, Jakarta, Mumbai and Perth.

The Malaysia Airlines reduction at Delhi and Mumbai have opened up traffic rights for Malindo to add capacity in both markets. AirAsia X has also been awarded some of the newly available rights for KLIA-Delhi and plans to resume services on the route in Feb-2016. AirAsia X served Delhi and Mumbai until early 2012. AirAsia’s initial withdrawal from these markets opened up an opportunity for Malindo, which was able to secure in 2013 the traffic rights previously held by AirAsia X.

Malaysia Airlines is still much bigger than Malindo. The group currently has a 22% share of international seat capacity in Malaysia and 46 international destinations. The Malaysia Airlines network will shrink in Jan-2016 to 44 international destinations as Amsterdam and Paris are dropped, leaving the flag carrier with only one European destination.

Malindo has been narrowing the gap, particularly in terms of network size, and is not afraid to compete with the flag carrier in more markets. Malaysia Airlines is now increasing its focus on its regional international network, which could result in a further intensification of competition as Malindo also expands regionally.

The Malaysian subsidiaries of the AirAsia and AirAsia X Groups currently have about a 38% share of international seat capacity in Malaysia, according to CAPA and OAG data. When including fights operated to Malaysia by its overseas affiliates, AirAsia/AirAsia X has about a 43% share of Malaysian international seat capacity. The Malaysian subsidiaries of AirAsia and AirAsia X currently serve a combined 78 international destinations (excludes destinations served from Malaysia only by its foreign affiliates).

Over the last year Malindo has been expanding more rapidly in Malaysia’s international market than AirAsia and particularly AirAsia X, which has been reducing capacity as part of a turnaround effort. Malindo has expanded in several AirAsia markets but also has not been shy to retreat when conditions are clearly unfavourable.

Malindo has so far suspended more than 20 routes

Malindo has axed more than 20 routes over the last two years. This includes eight routes that are served by AirAsia while most of the other suspended routes were not served non-stop by any carrier.

Visakhapatnam in India recently became the latest Malindo destination to be axed. KLIA-Visakhapatnam is currently only served by Malindo and AirAsia with three weekly flights from each carrier.

Malindo has decided to suspend Visak from 13-Feb-2016, or almost exactly a year after its launch. Malindo concluded the market was too small and would not be viable over the long run.

Malindo Air routes which have been suspended

Year

suspended

Origin Destination

Type

2013 KLIA Tawau Airport Domestic 737
2014 KLIA Sibu Airport Domestic 737
2014 KLIA Johor Bahru Senai International Airport Domestic 737
2014 KLIA Miri Airport Domestic 737
2014 Johor Bahru Kota Kinabalu Airport Domestic 737
2014 Penang Kota Bharu Sultan Ismail Petra Airport Domestic ATR
2014 Penang Johor Bahru Senai International Airport Domestic ATR
2014 KL Subang Ipoh Sultan Azlan Shah Airport Domestic ATR
2014 KLIA Ahmedabad Airport International 737
2015 KLIA Kota Bharu Sultan Ismail Petra Airport Domestic 737
2015 Penang Langkawi Airport Domestic ATR
2015 KL Subang Kuantan Airport Domestic ATR
2015 Malacca Kota Bharu Sultan Ismail Petra Airport Domestic ATR
2015 Ipoh Kota Bharu Sultan Ismail Petra Airport Domestic ATR
2015 Johor Bahru Kuala Terengganu Sultan Mahmud Airport Domestic ATR
2015 Johor Bahru Kerteh Airport Domestic ATR
2015 KLIA Chittagong Shah Amanat International Airport International 737
2015 Penang Tiruchirappalli Airport International 737
2015 Penang Krabi Airport International ATR
2015 KL Subang Krabi Airport International ATR
2015 KL Subang Medan Kuala Namu International Airport International ATR
2015 Ipoh Medan Kuala Namu International Airport International ATR
2016* KLIA Visakhapatnam Airport International 737

A tally of 23 suspended routes seems extreme, as Malindo currently has only 32 routes (or 31 excluding Visakhapatnam). But the relatively high withdrawal rate is not too concerning as an important part of the Malindo strategy is to not be afraid to test out new routes.

More importantly, Malindo is quick to recognise when a route is not be sustainable and will simply redeploy the capacity to a more promising market.

Most of the suspended international routes have been in thinner markets that Malindo thought could be large enough to support non-stop service - but ultimately proved too small. More than half the routes were operated with the turboprop fleet, making them a relatively low risk gamble. They also, in retrospect, reflected an opportunistic refocussing towards international markets as the Malaysian market changed.

There have been only eight suspended international routes compared to 15 suspended domestic routes. Of the international routes only three were served with jets – KLIA to Ahmedabad, Chittagong and Visakhapatnam. The other four were small point to point turboprop routes which lasted less than a year: Penang-Krabi, Subang-Krabi, Subang-Medan and Ipoh-Medan.

Domestically Malindo has pulled out of five domestic trunk routes from KLIA (Johor Bahru, Kota Bahru, Miri, Sibu and Tawau) which were very competitive but not strategically important. The other 10 suspended domestic routes were point to point including two routes from Subang which had no competition and eight routes connecting secondary cities. Nine of these routes were served with turboprops; the short-lived Johor Bahru-Kota Kinabalu was the only point to point domestic route which Malindo has operated with its 737 fleet.

Malindo pulls back on plans for a Penang hub

Malindo at one point was planning to operate a large network of point to point secondary domestic routes including several routes from a Penang base. But it closed its Penang ATR 72 base in 2015 less than a year after it opened and now bases all 11 of its turboprops at Subang.

In addition to both Kuala Lumpur airports, Penang is currently only linked domestically with Malacca. Routes to Johor Barhu, Kota Bahru and Langkawi have been dropped. Penang-Malacca and Ipoh-Johor are now the only remaining domestic routes that do not touch Kuala Lumpur.

Malindo Air current domestic route network in order of launch date

Launch

date

Origin Destination

Current

frequency

Seat

share 

AirAsia

share 

MAS*
share 

Mar-2013 KLIA Kota Kinabalu Airport 3 daily 11% 52% 38%
Mar-2013 KLIA Kuching Airport 2 daily 8% 53%  40% 
Jun-2013 KL Subang Kota Bharu Sultan Ismail Petra Airport 7 daily 36% N/A 64%
Jun-2013 KL Subang Penang International Airport 62 weekly 38% N/A 62%
Jun-2013 KL Subang Johor Bahru Senai International Airport 25 weekly 26% N/A  74%
Aug-2013 KL Subang Langkawi Airport 4 daily 57% N/A  43%
Aug-2013 KL Subang Kuala Terengganu Sultan Mahmud Airport 4 daily 44% N/A  56%
Aug-2013 KL Subang Alor Setar Airport 34 weekly 44% N/A  56%
Sep-2013 KLIA Langkawi Airport 2 daily 54% 31%  9% 
Sep-2013 KLIA Penang International Airport 16 weekly 10% 55%  35% 
Nov-2014 KL Subang Kerteh Airport 10 weekly 63% N/A  37% 
Oct-2014 Ipoh Johor Bahru Senai International Airport 4 weekly 36% N/A 64%
Nov-2014 Penang Malacca Batu Berendam Airport 4 weekly 100% N/A N/A

Malindo also has in 2015 dropped international routes from Penang to Krabi in Thailand and Tiruchirappalli in India. The latter was dropped after operating for only one month – from late Sep-2015 to late Oct-2015.

Malindo also unveiled plans in Sep-2015 to launch daily Penang-Singapore service from 25-Oct-2015. But the route was cancelled prior to its launch. (As it never operated Penang-Singapore is not included in the table of suspended routes.)

Sanya is now its only international route from Penang. But this new flight operates on a Kuala Lumpur-Penang-Sanya routing with passengers embarking as an international passenger at either Malaysian airport. (Malindo does not carry any domestic passengers on this flight.)

Malindo focus on KLIA and international market is sensible

The focus on the Kuala Lumpur market makes sense as Malindo evolves its position as a network carrier. Sanya and potential other China routes from Penang are exceptions as travel agents are committing to most of the seats.

At KLIA Malindo can maximise transit traffic while also tapping into the largest catchment area in Malaysia by a wide margin and growing inbound demand. While there are opportunities on point to point routes connecting secondary cities, Malindo should first build up its presence in Kuala Lumpur, particularly in the international sector as the domestic market is relatively saturated and highly competitive.

Mr Chandran said Malindo will end 2015 with about 3.9 million passengers compared to 2.5 million in 2014 and just under 1 million in 2013. The 3.9 million passengers gives Malindo a 6% share of total Malaysian passenger traffic, compared to 4% in 2014. (There were 62 million passengers in Malaysia in 2014 and 57 million through the first 11 months of 2015.)

Malindo has quickly had an impact in Malaysia’s dynamic aviation market but is just starting to scratch the surface.

Its plans and outlook for 2016 – and beyond – will be examined in Part 2 of this report.

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