16-Sep-2014 6:00 PM

Singapore LCCs: growth slows and penetration rate falls as Jetstar Asia & Tigerair incur losses

Analysis

Singapore has seen traffic growth slow significantly over the last year driven by challenges in its previously booming short-haul market. Total passenger traffic at Singapore Changi grew by only 5% in 2013, ending a three-year run of double digit growth, and is on pace to grow by less than 2% in 2014.

Profitability in the Singapore market meanwhile has tumbled driven by losses at Singapore's three LCCs - Tigerair Singapore, Jetstar Asia and Scoot. Singapore Airlines regional subsidiary SilkAir also has seen profits slide as it has been impacted by the overcapacity and intense competition in Singapore's short-haul market.

Tigerair, Jetstar Asia and SilkAir have all responded by halting or slowing down expansion. Singapore's LCC penetration rate has started to slip, ending a decade of steady gains.

This is the first in a series of reports on the Singapore market. This report will focus on the slowdown in growth and the recent lack of profitability in the LCC sector. The next report will look at Singapore-based full-service carriers, particularly the slowdown in growth and slip in profits at SilkAir.

A subsequent CAPA report will look at the outlook for Changi and initiatives to stimulate growth, including the potential to accelerate growth by pursuing and incentivising LCC transit traffic.

Singapore airline sector profitability falls in FY2014

All four of Singapore's four longstanding passenger airlines have generally been profitable over the last several years. Singapore Airlines (SIA) has never had an annual loss while SilkAir has been in the black for 13 consecutive years. Jetstar Asia and Tigerair Singapore, both of which launched services in 2004, have been profitable most years.

But Singapore's three narrowbody operators all saw a large drop in profitability for the year ending 30-Jun-2014 due to challenging conditions in the short-haul market. SilkAir's operating profit dropped by 77% while Jetstar Asia and Tigerair recorded their largest losses since they began reporting results several years ago.

Singapore's airline sector excluding Scoot turned a collective operating profit of only SGD49 million (USD39 million) in the year-ending 30-Jun-2014 (FY2014) compared to SGD170 million (USD137 million) the prior year.

Profitability in the Singapore passenger airline sector excluding Scoot dropped from SGD346 million (USD279 million) in the year ending 30-Jun-2013 to SGD127 million (USD100 million) in FY2014. These figures exclude SIA Cargo, which has been able to narrow its losses over the last year but remains the least profitable Singaporean carrier as the Asian cargo market remains challenging.

Among the three narrowbody operators the year over year swing was an alarming SGD248 million (USD199 million). The swing at the two short-haul LCCs was SGD170 million (USD137 million).

Operating profits/losses (in SGD million) for Singapore-based carriers: year ending 30-Jun-2014 vs year ending 30-Jun-2013

Carrier	2014 operating result	2013 operating result
Singapore Airlines	212m profit	183m profit
SilkAir	23m profit	101m profit
Jetstar Asia*	35m loss	3m profit
Tigerair Singapore	73m loss	59m profit
SIA Cargo	78m loss	176m loss
TOTAL	49m profit	170m profit

Scoot, which launched services in Jun-2012, is not included in this sampling as the SIA Group does not yet report any breakout figures for Scoot. But it is safe to assume the long-haul LCC was also unprofitable in the year ending 30-Jun-2014. Scoot is not expected to become profitable for at least another year.

(Scoot along with all the airlines in the SIA and Tigerair groups use the fiscal year ending 31-Mar but in this report we have calculated all data so it reflects the year ending 30-Jun, which is the fiscal year followed by Jetstar Asia and its parent Qantas.)

LCCs once again drove the growth at Changi over the last year

Singapore's five passenger carriers transported 33.2 million passengers in the year ending 30-Jun-2014, representing an 8% increase over the prior year. This includes estimated figures for Scoot, which transported about 1.8 million passengers in the year ending 30-Jun-2014 and about 1 million passengers the prior year.

(The Scoot estimates are based on when Scoot reached the 1 million, 2 million and 3 million passenger milestones, which were announced by the carrier. It took almost exactly one year for Scoot to reach the 1 million passenger mark and just under 26 months to reach the 3 million mark.)

Passenger numbers for Singapore-based carriers: year ending 30-Jun-2014 vs year ending 30-Jun-2013

Carrier	2014 traffic	2013 traffic	Year over year growth	2014 % share among Singapore carriers	2013 % share among Singapore carriers
Singapore Airlines	18.71 million	18.28 million	2%	56%	59%
Tigerair Singapore	5.27 million	4.57 million	15%	16%	15%
Jetstar Asia/Valuair	3.98 million	3.64 million	9%	12%	12%
SilkAir	3.42 million	3.33 million	6%	10%	11%
Scoot*	1.8 million	1 million	80%	5%	3%
LCC TOTAL	11.1	8.3	33%
TOTAL	33.2 million	30.8 million	8%
Singapore Changi Total	54.1 million	52.4 million	3%

Singapore's LCCs grew passenger traffic by 33% in the year ending 30-Jun-2014 to 11.1 million. Without these three airlines Changi passenger traffic would have shrunk over the last year.

This continues a trend which started when Jetstar Asia, Tigerair and Valuair launched in 2004. Changi traffic in 2004 was 30.4 million passengers with less than 1 million from LCCs. In 2014 Changi traffic was 53.7 passengers with over 16 million from LCCs.

Singapore's airline sector has grown faster than the Changi average

Changi Airport handled 54.1 million passengers in the year ending 30-Jun-2014, representing growth of only 3% compared to the 52.4 million passengers handled the prior year. As Singapore-based carriers flew 2.4 million additional passengers in FY2014 (with LCCs accounting for 1.8 million) they almost certainly accounted for all of the 1.7 million additional passengers handled by Changi while foreign carrier traffic dropped slightly. This assumes Singapore-based carriers did not significantly grow their fifth freedom traffic.

Jetstar Asia has about 9% of its seat capacity on sectors that do not tough Singapore, Scoot about 16%, SIA about 6% and SilkAir about 1% (excludes sectors which operate without pick-up rights). Tigerair is the only Singapore-based carrier that currently does not operate any fifth freedom routes.

Overall non-Singapore sectors account for about 6% of total seat capacity flown by Singapore-based carriers. But when factoring in passengers originating or heading to Singapore on the one-stop routes, fifth freedom traffic likely accounts for only roughly 4% of total passenger traffic carried by Singapore-based carriers.

ASK growth was slower due to very slow growth at Singapore Airlines

The four main-Singapore based carriers (excludes Scoot) only grew ASKs by 3% during the fiscal year ending 30-Jun-2014. But this figure is not indicative as virtually all the capacity added over the last year by Singapore-based carriers was on short and to a lesser extent medium-haul routes.

SIA, which is the only Singapore-based carrier with long-haul services, has maintained relatively flat mainline capacity over the last several years. SIA's ASKs were up only 1% in the year ending 30-Jun-2014.

SIA, which has an all-widebody fleet, accounts for over 80% of total ASKs flown by Singapore-based carriers. Even including Scoot, Singapore's only other widebody operator, SIA accounts for about 77% of total ASKs flown by Singapore-based carriers.

The three Singapore-based narrowbody operators have accounted for most of the capacity expansion in the Singapore market over the last several years. In the year ending 30-Jun-2014, Tigerair Singapore pursued the fastest growth as its ASKs were up 23% year over year (but on a relatively small base as it is a short-haul carrier). SilkAir's ASKs were up 8% year over year while Jetstar Asia's ASKs were up 6% year over year.

RPKs and ASKs (in billions) for Singapore-based carriers: year ending 30-Jun-2014 vs year ending 30-Jun-2013

Carrier	2014 ASKs	2013 ASKs	YoY ASK growth	2014 RPKs	2013 RPKs	YoY RPK growth	2014 Load Factor	2013 Load Factor
Singapore Airlines	120.76	119.29	1%	95.17	94.12	1%	79%	79%
Tigerair Singapore	12.34	10.04	23%	9.68	8.43	15%	78%	84%
SilkAir	7.98	7.38	8%	5.55	5.32	4%	70%	72%
Jetstar Asia/Valuair	7.89	7.47	6%	6.12	5.90	4%	78%	79%
TOTAL	148.97	144.18	3%	116.52	113.77	2%	78%	79%

The 2% RPK growth figure is also not indicative. While RPKs at SIA were up only 1%, matching the ASK increase, RPKs at the narrowbody carriers were up significantly but not nearly enough to match the capacity growth.

As a result the load factor at Tigerair Singapore, SilkAir and Jetstar Asia all slipped with Tigerair recording by far the largest drop (6ppts).

Tigerair Singapore expands too fast

Tigerair's rapid expansion has been the main cause of the overcapacity that has plagued the Singapore market over the last year. As CAPA previously analysed Tigerair Group accelerated expansion in Singapore as it was unable to allocate additional aircraft to its oversaeas affiliates.

See related reports:

Tigerair initially hoped the Singapore market could absorb a surge capacity but this quickly proved to not be overly optimistic. Singapore is a small and relatively mature market that had already seen a large increase in LCC capacity in recent years. Tigerair's expansion also came at a challenging time in two of the three largest short-haul markets from Singapore, Thailand and Indonesia. (Malaysia is the other large short-haul market from Singapore.)

Tigerair has responded to the overcapacity by slowing down expansion in recent months. This has been achieved by deferring new aircraft deliveries and grounding the aircraft that have come back to the group from its former affiliates in the Philippines and Indonesia.

The group's Indonesian joint venture Tigerair Mandala, which operated nine Tigerair-sourced A320s, ceased operations at the beginning of Jul-2014. Tigerair Philippines was sold to Cebu Pacific in Mar-2014 but the acquisition did not include the three A320s and two A319s, which have all since been returned to Tigerair Singapore.

Tigerair initially grounded in calendar 2Q2014 eight A320s and in Jul-2014 grounded another four A320s. Tigerair in Aug-2014 grounded two A319s. The A319s were initially moved from the Philippines to Singapore, where they flew for a few months before the group decided they were not needed.

The Tigerair Group has been trying to sublease the grounded A320s and is also now seeking early returns on its two A319s. No subleases or aircraft sales have been completed yet but the group is expected to finally close on and announce deals for most or all of these aircraft within the next few weeks. The deals should help Tigerair Singapore's financial position as the carrier will no longer have to be saddled with the cost of carrying excess aircraft. (But the group may have to take a one-time hit to reflect it is committed to paying more for the aircraft than what it is likely to fetch on the open market.)

Tigerair ASKs start to decline

Following the recent grounding of the A319s Tigerair Singapore's operating fleet returned to a more rational size of 25 aircraft. Capacity levels have also been reduced to the lowest levels in a year, essentially erasing some of the increases from 2H2013 and 1H2014.

Monthly ASKs were again under the 1 billion mark in Jul-2014 and Aug-2014. This suggests ASKs for the year ending 30-Jun-2015 will likely come in under the 12.34 billion figure for the year ending 30-Jun-2014.

In Aug-2014 ASKs were down 2% year over year. This marked the first time in several years that Tigerair Singapore recorded a monthly decline in ASKs.

Tigerair Singapore monthly ASKs: Jan-2012 to Aug-2014

Tigerair Singapore passenger numbers were up by only 2% in Jul-2014 and Aug-2014 while RPK figures were up 4% for both months. This marks the lowest monthly passenger growth figures for Tigerair Singapore since Sep-2012 and the lowest RPK growth figures since at least 2011.

For the year ending 30-Jun-2015 Tigerair Singapore is likely to have very modest passenger growth, with the growth coming from much needed load factor improvements rather than capacity increases. The focus is currently on turning around the carrier's financial performance as load factors and yields are improved.

Tigerair Singapore does not plan to add any aircraft until 2018, when the first of 37 A320neos are expected to be delivered. The A320neos were ordered in Mar-2014 as part of a deal that cancelled its last nine A320ceo orders, allowing Tigerair to take a much needed break from fleet expansion.

Jetstar Asia reports AUD40 million loss

Jetstar Asia in early 2014 also decided to suspend fleet expansion, recognising there was too much capacity in the Singapore short-haul market. The Jetstar Asia Group, which includes Valuair, currently operates 18 A320s.

(Valuair still has a separate air operators' certificate and operates all of the Jetstar Asia-branded flights to Indonesia. But over the last couple of years Valuair has not had any aircraft under its AOC and instead shares aircraft with Jetstar Asia. All Jetstar Asia figures in this report also include Valuair.)

In reporting an AUD40 million (USD37 million) FY2014 loss for Jetstar Asia in late Aug-2014, the Qantas Group pointed out that Jetstar Asia has operated in an increasingly competitive market with LCC capacity in Singapore increasing by an estimated 23% in FY2014, pressuring yields for all players. Qantas added that a market correction is now under way with "Jetstar growth suspended until the market stabilised" and "major LCC competitors also rationalising capacity".

The adjustments at Jetstar Asia and Tigerair are sensible and should help improve the financial position of both LCCs. But the adjustments mark the start an era of slower growth for Singapore's LCC sector and Changi overall.

AirAsia has also cut capacity in Singapore

The third largest LCC player in the Singapore market, the AirAsia Group, also has made adjustments in response to overcapacity. AirAsia has never had a Singaporean affiliate but over the years has been able to capture almost as much market share as the Tigerair and Jetstar groups by using its affiliates in other Southeast Asian countries.

Malaysia AirAsia for several years has been the largest foreign carrier in the Singapore market (based on passenger figures) while Indonesia AirAsia has also been among the top five. But both have cut capacity in recent months, an indication that the AirAsia Group has been impacted by the intense competition and unfavourable market conditions in Singapore as much as its Singapore-based rivals.

Indonesia AirAsia axed or reduced frequencies on several of its routes to Singapore in Jul-2014. Its current seat capacity in the Indonesia-Singapore market is 26% below Sep-2013 levels, according to CAPA and OAG data. Malaysia AirAsia has cut capacity to Singapore by 15% over the last year, driven by frequency reductions on the core Kuala Lumpur route.

Thai AirAsia also serves Singapore but after some temporary cuts during the political crisis in Bangkok its capacity is now back up to prior levels. The reductions from Malaysia and particularly Indonesia are seen as more permanent adjustments.

Overall the AirAsia brand currently accounts for about a 7% share of seat capacity in Singapore, compared to an 8% share in Sep-2013. Jetstar's share has been roughly flat at 7%. (This includes capacity from Jetstar Airways, which currently operates from Singapore to Melbourne and Bali. Jetstar Airways previously operated four long-haul routes from Singapore but over the last two years has terminated Beijing, Osaka and most recently Auckland.)

Singapore capacity share (% of seats) by brand: Sep-2014

Tigerair's market share has dropped

Tigerair also has seen its share of seat capacity drop from 10% in Sep-2014 to 8% in Sep-2013. As CAPA previously recorded, Tigerair's capacity share in the Singapore market peaked at almost 11% in late 2014.

The reduction in Tigerair's market share has been driven by the recent capacity cuts at Tigerair Singapore as well as the suspension of services at Tigerair Mandala. Mandala at one point operated about 10 daily flights from Indonesia to Singapore. Tigerair Singapore has not increased capacity to Indonesia since Mandala's suspension.

(Tigerair Philippines also stopped serving Singapore after it was sold to Cebu Pacific. But Tigerair Philippines had a very small operation in Singapore and Tigerair Singapore picked up both of its Singapore routes, Clark and Kalibo.)

Singapore Changi's LCC penetration rate slips

Overall LCCs currently account for about 28% of seat capacity in Singapore compared to 30% in Sep-2013. The LCC penetration rate in Singapore reached 31% in late 2013 and early 2014 but has been on the decline over the last few months due to cuts at the Tigerair and AirAsia groups. (Jetstar capacity levels in Singapore have been relatively flat while Scoot capacity levels also have been flat in recent months.)

The rather surprising reduction in the LCC penetration rate ends nearly 10 years of steady gains which began in 2004, when Jetstar Asia, Valuair and Tigerair launched services. (Jetstar Asia subsequently acquired Valuair in 2005.)

Singapore's LCC sector grew rapidly in its first three years and by 2007 captured 10% of the Singapore market. But it was between 2008 and 2012 that Singapore's LCC sector really took off, growing steadily and rapidly including during the global financial crisis when Singapore's FSC sector declined. In 2012, LCCs accounted for 28% of total passenger traffic at Changi, or 14.4 million of the 51.2 million total passengers handled by the airport.

An LCC figure for 2013 has not been provided but CAPA estimates from capacity figures that LCCs carried between 16 and 17 million passengers, or about 30% to 31% of the total 53.7 million total. Total growth at Changi slowed to 5% in 2013 with most of the growth again being driven by LCCs.

Changi annual LCC and FSC passenger traffic: 2007 to 2014*

Singapore LCC sector may not see any growth until 2016

CAPA expects LCC passenger traffic at Changi will likely be flat in 2014 due to the capacity adjustments. Through the first seven months of 2014 total passenger traffic at Changi was up by only 1.3%. A similar very modest rate of growth is expected through the rest of 2014.

LCC traffic will also likely not increase in 1H2015, leading to a roughly flat growth figure for the year ending 30-Jun-2015. All three of Singapore's main short-haul LCCs - Jetstar, Tigerair and AirAsia - are expected to continue following a disciplined approach to capacity. (The trio accounts for about 90% of total narrowbody LCC capacity in the Singapore market.)

Scoot is also not expected to pursue expansion in the year ending 30-Jun-2015 as it continues its moratorium on capacity growth. Scoot currently only accounts for about a 3% of total seat capacity in Singapore, up from about 2% in Sep-2013.

Scoot over the last year has added only one aircraft and two routes, which were introduced in late 2013. The carrier is now about halfway through an 18-month hiatus from expanding its fleet. Scoot is slated to take its first 787-9 in Nov-2014 but this aircraft and its first six 787s are intended to replace its 777s. Expansion will resume in mid-2015 when the seventh 787 is delivered.

Scoot plans to take delivery of nine 787s in 2015. As the final four aircraft are all growth aircraft there will be significant capacity expansion at Scoot during 2H2015. But this expansion will have no impact on Changi traffic for the year ending 30-Jun-2015 and will have a relatively modest impact on traffic for calendar 2015 as the growth will all take place in the second half. Changi will likely see a return of LCC growth in 2016, driven primarily by Scoot as well as the potential return of some expansion by short-haul LCCs.

With all of Singapore's LCCs currently taking a breadth from expansion it is not surprising Changi's overall passenger numbers are no longer on the rise. LCCs have accounted for about three-quarters of Changi's growth over the last seven years.

Singapore market could see several years of limited or no growth

Singapore's short-haul market has been extremely challenging over the last year for both LCCs and FSCs. The three main LCC groups in Singapore's short-haul LCC market have responded by making sensible adjustments.

But it could take at least several months for the market to recover. In the meantime passenger growth at Changi will slow to a crawl - or a complete halt.

LCCs have driven Singapore's rapid growth in recent years. Without their participation Changi finds itself in a challenging position.

Part Two of this report: SilkAir, Singapore Airlines' successful regional carrier, and Changi Airport

In subsequent instalments in this series of reports, CAPA will look more closely at SilkAir. CAPA will also examine how Changi is trying to drum up long-haul growth, which has been lacklustre for years. Changi has a better opportunity of unlocking new growth in the emerging LCC transit traffic sector, which it is also starting to incentivise.