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Malaysia’s Malindo Air to pursue faster expansion following rebranding and fully embracing FSC model

Malaysia’s Malindo Air is accelerating expansion as it prepares for a rebranding aimed at firmly positioning the Lion Group affiliate as a full service airline. Malindo now plans to add 10 Boeing 737s in 2016 and end the year with a fleet of 37 aircraft, including 26 737NGs and 11 ATR 72-600s.

Malindo has been rapidly expanding its international network, adding seven destinations over the last four and a half months. It plans further expansion of the network in 2016 including potential new destinations in Australia, South Korea and Japan, which would be served as part of one-stop fifth freedom routes via Indonesia and Taiwan.

However, Malindo will implement a brief hiatus from expanding its international network over the next few months, instead focusing on capacity increases and schedule changes to existing destinations. Malindo is also now focusing on its 15-Mar-2016 move back to Kuala Lumpur International Airport’s original terminal (KLIA1), which will reinforce its full service position and support a new brand being rolled out in mid-2016.

Malindo to accelerate growth in 2016

Malindo currently operates a fleet of 27 aircraft – consisting of 11 ATR 72-600s, 10 737-800s and six 737-900s – across a network of 13 domestic and 21 international destinations. The Lion Group affiliate has expanded rapidly since launching services just three years ago, in Mar-2013.

The Malindo head of sales Asia Pacific, David Raj, told the CAPA Airline Fleet and Finance Summit on 03-Mar-2016 that the airline plans to expand its fleet to 37 aircraft in 2016 as 10 more 737s are delivered. He said that Malindo aims to carry 6 million passengers in 2016, representing a 62% increase compared with 2015. Malindo grew passenger traffic by almost 50% in 2015 as it added eight aircraft – all 737-800s.

Malindo Air passenger traffic and fleet size: end 2013 to end 2016

The 10 additional aircraft now planned for 2016, none of which have been delivered yet, mark an acceleration relative to Malindo’s initial fleet plan for 2016. In our last analysis report on Malindo, which was published as a two-part series in late Dec-2015, Malindo CEO Chandran Rama Muthy said that the airline was planning to add five or six aircraft – all 737-800s – in 2016.

See related reports:

Malindo has added seven international destinations since October

Malindo began 2016 with the same 27 aircraft as it currently operates and a network of 13 domestic and 19 international destinations. So far in 2016, Malindo has launched three international destinations – Ho Chi Minh, Hong Kong and Lahore – while dropping one, Visakhapatnam.

Three times weekly service from Kuala Lumpur to Visakhapatnam was dropped in Feb-2016. India is still Malindo’s single biggest market, with six destinations accounting for approximately 25% of its total international seat capacity.

Also in Feb-2016, daily service from Kuala Lumpur to Hong Kong was launched. Daily Kuala Lumpur-Ho Chi Minh service was launched in late Jan-2016, while four times weekly service from Kuala Lumpur to Lahore in Pakistan commenced on 03-Mar-2016.

With Lahore, Malindo has now launched seven international routes within a period of less than five months. The current period of rapid international network expansion began on 25-Oct-2015 with the launch of three weekly flights from Kuala Lumpur to Amristar in India. Perth followed on 11-Nov-2015 with 11 weekly flights from Kuala Lumpur. In December two new destinations were added to the network with the 18-Dec-2015 launch of daily service from Kuala Lumpur to Colombo in Sri Lanka and the launch of two weekly flights from Penang to Sanya, Malindo’s first destination in China.

Malindo currently has 22 international routes, including two to Singapore and one to each of its other 20 international destinations. It competes with Malaysia’s largest airline group, AirAsia/AirAsia X, on 15 of the routes, and against Malaysia Airlines on 13 of the routes.

Malindo Air current international route network in order of launch date

Launch

date

Origin Destination

Current

frequency

Served by

AirAsia? 

 Served by

Malaysia Airlines?

Aug-2013 KLIA Dhaka Hazrat Shahjalal International Airport 1 daily Yes Yes
Sep-2013 KLIA Jakarta Soekarno-Hatta International Airport 10 weekly Yes Yes
Sep-2013 KLIA Bali Denpasar Ngurah Rai Airport 13 weekly Yes Yes
Dec-2013 KLIA Delhi Indira Gandhi International Airport 10 weekly Yes Yes
Jan-2014 KLIA Tiruchirappalli Airport 2 daily Yes No
Feb-2014 KLIA Mumbai Chhatrapati Shivaji Airport 6 weekly No Yes
Apr-2014 KLIA Kochi (Cochin) Airport 1 daily Yes No
Apr-2014 KLIA Bangkok Don Mueang International Airport 17 weekly Yes Yes*
May-2014 KL Subang Batam Hang Nadim Airport 6 weekly No No
Nov-2014 Malacca Pekanbaru Sultan Syarif Kasim II Airport 4 weekly No No
Nov-2014 KLIA Singapore Changi Airport 4 daily Yes Yes
Dec-2014 KLIA Bandung Husein Sastranegara Airport 1 daily Yes No
Feb-2015 KLIA Kathmandu Tribhuvan Airport 4 weekly Yes Yes
Jul-2015 Ipoh Singapore Changi Airport 1 daily Yes Yes*
Aug-2015 KLIA Thiruvananthapuram Trivandrum Airport 3 weekly No No
Oct-2015 KLIA Amritsar Sri Guru Ram Dass Jee Airport 4 weekly No No
Nov-2015 KLIA Perth Airport 11 weekly Yes Yes
Dec-2015 KLIA Colombo Bandaranaike International Airport 1 daily Yes Yes
Dec-2015 Penang Sanya Airport 2 weekly No No
Jan-2016 KLIA Ho Chi Minh City Tan Son Nhat Airport  1 daily  Yes  Yes
Feb-2016 KLIA Hong Kong International Airport  1 daily  Yes Yes
Mar-2016 KLIA  Lahore Allama Iqbal International Airport  4 weekly  No No 

Malindo takes short break from expanding its network

Our last analysis report on Malindo also flagged Taipei and Wuhan as new destinations planned for 1H2016. However Malindo has not yet set a launch date for any new international routes and Mr Raj said at the CAPA Summit that Malindo plans to take a pause in its international expansion to focus on frequency adjustments and service delivery.

Network expansion will inevitably resume in 2H2016 as Malindo rapidly expands its 737 fleet. By early 2H2016 the airline will also have completed a rebranding and a transition to Kuala Lumpur International Airport’s original terminal (KLIA1), enabling Malindo to focus on network expansion again.

More Chinese destinations are still in the pipeline for 2016. In addition to Wuhan, Malindo has been assessing several other Chinese destinations including Guangzhou and Kunming. Malindo will rely heavily on block bookings from Chinese agents – as it does with the Penang-Sanya service – while it expands its Chinese network.

As CAPA highlighted in the last report, the Malaysia-China market is expected to grow rapidly in 2016, driven primarily by inbound demand. Several airlines are now planning new Malaysia-China routes, including AirAsia and Malaysia Airlines, and to add capacity on existing routes. Malindo is obviously keen to carve out a stake in this increasingly important market.

New Taipei operation may include fifth freedom sectors to Korea and Japan

Malindo is also still considering services to Taipei, but is now considering not only a Kuala Lumpur-Taipei service but also linking Taipei with destinations in South Korea and Japan.

Malindo was previously planning to launch services to Korea and Japan in 2017 using 737 MAX aircraft which, unlike the current generation of 737s, will have the range to reach South Korea and most of Japan from Kuala Lumpur nonstop. However, Malindo was recently informed that it will not be allocated aircraft from Lion Group’s initial batch of 737 MAX 9s, to be delivered from 2017.

The 2017 fleet plan could still change as Lion Group maintains an extremely flexible approach to fleet planning. However for now Malindo is not expecting to receive any 737 MAX aircraft in the near to medium term, and is therefore now considering services to Japan and South Korea via Taipei from 2H2016.

Malindo should be able to secure rights to pick up passengers from Taiwan to South Korea and Japan since fifth freedom rights are part of the relevant air service agreements between Malaysia and these countries. Several other Asian airlines now serve the Taiwan-South Korea and Taiwan-Japan market on a fifth freedom basis. For example, Singapore Airlines LCC subsidiary Scoot operates from Taipei to Tokyo Narita and Seoul Incheon and is planning to launch a second Taiwan-Japan route in 2H2016. Another Singapore-based LCC, Jetstar Asia, operates from Taipei to Osaka Kansai.

From the FSC sector, Cathay Pacific has fifth freedom flights from Taipei to Osaka Kansai, Tokyo Narita and Seoul. Thai Airways also serves Taipei-Seoul, while Delta Air Lines serves Taipei-Tokyo Narita.

These are potentially large enough routes to support another fifth freedom operator, particularly given the recent growth in passenger traffic in the Taiwan-South Korea and Taiwan-Japan markets. However, Malindo is a relatively unknown brand in the North Asian market and therefore will likely need to offer very low fares to stimulate demand, in apparent contrast to its overall strategy to position itself more firmly as a FSC.

Malindo may serve Brisbane and Melbourne via Bali

Malindo is also now planning to launch one-stop service to Brisbane and Melbourne in 2H2016 via Bali. It is not currently considering Sydney.

Malindo already serves Bali with 13 weekly flights from Kuala Lumpur. Malindo would be unable to serve Brisbane and Melbourne nonstop with its current 737 fleet or the 737 MAX 9. A one-stop product is therefore its only option for the short to medium term unless it acquires widebody aircraft. Malindo has considered A330s but, at least for now, has decided to stick with an all narrowbody fleet.

If it launches services from Bali to Australia, Malindo will be able to leverage the network of its Indonesian sister Lion Air, which has a hub in Bali. However, Bali-Australia routes are extremely competitive, and it is predominantly a point-to-point inbound market.

Jetstar Airways and Virgin Australia currently serve Bali-Brisbane, while Jetstar, Virgin Australia, Garuda Indonesia and Indonesia AirAsia X already serve Bali-Melbourne. (Virgin Australia is transferring its Bali-Melbourne service to its LCC subsidiary Tigerair Australia in late Mar-2016.)

As is the case with the potential fifth freedom flights from Taipei, Malindo will likely need to offer very low fares to stimulate demand in the Bali-Australia market. In fact, yields will likely be lower than in the Taipei-Korea/Japan market since Bali-Australia is a price-sensitive leisure market, with much higher LCC penetration.

Malindo gives Lion Group an Australian presence

Lion and its full service Indonesian sister airline Batik Air are not currently authorised to serve Australia but would sell any Malindo-operated flights between Indonesia and Australia, giving the group a backdoor option to entering the Indonesia-Australia market. Jakarta-Australia services operated by Malindo are also a possibility, particularly if Batik Air encounters delays in its current application for approval from the Australian authorities.

Malindo is already approved to serve Australia and has been satisfied with the response it has received from the Australian market since launching Perth in Nov-2015. Malindo entered the Perth market with significant capacity – 11 weekly flights – and is adding one more frequency at the beginning of Apr-2016, for a total of 12.

In Apr-2016 Kuala Lumpur-Perth will be Malindo’s fourth largest international route, after Kuala Lumpur to Singapore, Bangkok and Bali. Singapore is served with four daily flights from Kuala Lumpur and one daily flight from Ipoh.

Malindo Air top 10 international routes ranked by seat capacity: 4-Apr-2016 to 10-Apr-2016

Malindo reinforces its FSC position as it prepares for rebranding

Malindo is now evaluating other frequency and schedule adjustments across its existing network of 22 international routes. The new schedule will be designed to facilitate better connections and meet the needs of business passengers, supporting its positioning as a full service network airline.

Transit traffic now accounts for over 30% and a growing portion of Malindo’s traffic at KLIA. As CAPA has noted previously, Malindo has emerged over the last couple of years as a network airline and has been keen to drop its current hybrid label. CAPA wrote in the 30-Dec-2015 report:

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 is now preparing to formally take on an FSC model as part of its upcoming rebranding. Malindo is working on a new brand and livery, which it plans to unveil in Jun-2016 or Jul-2016.

Malindo will drop its current logo of a red lion, which is identical to the logo used by Lion Air. Malindo will likely adopt a new logo and brand similar to the logo of Batik Air.

Malindo has always had a similar positioning as Batik, which also launched in 2013, and the two airlines have identical on-board products. Both airlines have 180-seat two class 737-900ERs and 162-seat two class 737-800s in their fleets, with the same seats and seatback IFE monitors in both classes. However Lion, Thai Lion and Malindo now use identical images on the tails of their aircraft and on their websites, while Batik has its own logo.

Malindo reinforces its full service position with the move back to KLIA1

Malindo’s upcoming move back to KLIA1 also supports its initiative to reinforce its position as a full service airline. Malindo operated at KLIA1 from its Dec-2013 launch until May-2014, when it moved to the new terminal at KLIA2. AirAsia, Malindo and almost all foreign LCCs serving Kuala Lumpur now operate from KLIA2, which is considered a hybrid terminal. (The only LCC currently operating from KLIA1 is Air India Express.)

Malindo is moving back to KLIA1 on 15-Mar-2016. Returning to KLIA1 is sensible as the terminal is a roomier and underutilised facility, resulting in a better experience for passengers.

KLIA1 has higher passenger facility charges than KLIA2 but Malindo has received discounts and other incentives from Malaysia Airports, which is keen to secure more tenants for KLIA1 following capacity reductions at Malaysia Airlines. KLIA2 is already operating near capacity and does not have all the amenities generally preferred by full service airlines and its passengers.

Malindo plans to open a lounge at KLIA1 although it will not be ready in time for the 15-Mar-2016 move. In 2015 Malindo opened a lounge in KLIA2 which is offered as complimentary to its business class passengers, but at a fee to its economy passengers. Malindo has 12 business class seats on its 737-800s and 737-900ERs. (Malindo plans to retain an all-economy configuration for its ATR 72s, which are based at Kuala Lumpur Subang and used only on short haul point-to-point services.)

The move back to KLIA1 also facilitates Malindo’s pursuit of partnerships with foreign airlines. Interlines and codeshares are an important component of the next phase of the Malindo’s strategy. Malindo has already started talking to several airlines serving KLIA1 that are keen to use Malindo for domestic and regional international connections. Some of these potential partners have had codeshares with Malaysia Airlines that have recently been, or are in the process of being, terminated.

Malindo begins new phase with big opportunities, but also challenges

Malindo enters a new phase as it moves back to KLIA1 and prepares for the rebranding. Once the transition and rebranding are completed Malindo will turn its attention back to rapid international network expansion, picking up from where it left off after adding seven destinations in late 2015 and early 2016.

Malindo believes that the Malaysian market has huge opportunities for expansion, particularly at the full service end, following the restructuring at Malaysia Airlines. Malindo has grown rapidly in its first three years but has only just started to scratch the surface of its potential. Malindo accounted for only 6% of total passenger traffic in the Malaysian market in 2015 and even with the 60%-plus growth projected for this year it will capture a relatively modest 9% share of the Malaysian market in 2016.

However, Malindo will face intensifying competition from AirAsia and a reinvigorated Malaysia Airlines, which now has a similar regional network strategy to Malindo's, with a similar focus on the Asia Pacific region. Malindo needs to be disciplined, picking its routes – and battles with the incumbents – carefully.

Fifth freedom sectors in markets such as Taiwan-Japan and Indonesia-Australia may seem attractive but could distract from its overall Malaysia focused strategy. The Lion Group should reconsider allocating early 737 MAX 9 deliveries to Malindo, which would provide a more competitive nonstop option for competing against AirAsia X and Malaysia Airlines in the Malaysia to northern China, Korea and Japan markets.

Malindo also has enough opportunities within Asia not to have to enter the highly competitive eastern Australia market with a potentially challenging one-stop product via Bali. A330s, or potentially 321neoLRs, a new aircraft type available from 2019, would be a better solution, although long-term. The Lion Group has orders for 183 A320/A321neos, with the option of converting some to A321neoLRs, along with 203 737 MAX 9 orders, providing plenty of options as Malindo works on its long-term business plan.

Malindo is at an important juncture. With the right strategy and implementation it could succeed at carving out a significant – and eventually profitable – role in the Malaysian market.

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