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Singapore LCCs part 3: Jetstar Asia increases focus on interline traffic and secondary destinations

Jetstar Asia is looking for opportunities to further boost yields and expand its network while continuing to refrain from fleet growth. The Singapore based LCC returned to the black in the fiscal year ending 30-Jun-2015 (FY2015) after enduring the most challenging year in its history in FY2014 due to overcapacity and sharp yield declines in its home market.

Jetstar Asia suspended fleet growth in early CY2014 and has since maintained a fleet of 18 A320s. But the carrier has been able to grow ASKs by improving utilisation, enabling it to add capacity in markets that have strong feed from interline or codeshare partners.

Unit revenues have been on the rise over the last several months and Jetstar Asia could see further yield improvements as it adds more new partners and expands existing partnerships. The carrier is also adding in late 2015 three secondary regional routes which are not served by any other LCCs as it tries to reduce its reliance on markets that are still suffering from overcapacity and irrational competition.

This is the third in a series of reports on Singapore’s three LCCs. The first report focused on strategic adjustments at Scoot as the long haul low cost subsidiary starts to take over routes previously served by parent Singapore Airlines (SIA) and SIA full service regional subsidiary SilkAir. The second report looked at changes in the role of short haul LCC Tigerair, including changes in its relationship with Scoot, since transitioning from an SIA Group affiliate to subsidiary in late 2014.

See related reports:

This report examines the position of Jetstar Asia, which launched in late 2004 and is 49% owned by the Qantas Group.

Jetstar Asia boosts ASKs by increasing utilisation as fleet growth remains suspended

Jetstar Asia currently operates a fleet of 18 180 seat A320s to 23 destinations, including Singapore. The size of the fleet has been maintained at 18 A320s since early 2014, when it cut back by one aircraft from an all time high of 19 A320s and announced it was suspending fleet expansion.

The LCC still has no plans for resuming fleet expansion as it does not believe market conditions in Singapore have sufficiently improved to justify adding any aircraft. But Jetstar Asia is resuming network expansion in late Nov-2015 and early Dec-2015 as it adds three new destinations – Palembang and Pekanbaru in Indonesia along with Da Nang in Vietnam. Jetstar Asia is also adding capacity on some existing routes, including to Jakarta, Phnom Penh and Siem Reap.

But the capacity expansion is relatively modest and will be achieved by using its existing fleet. Jetstar Asia has already increased aircraft utilisation rates since suspending fleet expansion and sees opportunities to squeeze even more flying out of its 18 A320s.

Jetstar Asia ASKs were up by 6.8% in the fiscal year ending 30-Jun-2015 (FY2015) despite keeping its fleet size at 18 aircraft for the entire year. The carrier has more than doubled ASKs over the last five years while consistently maintaining a load factor in the high 70s.

Jetstar Asia annual RPK, ASKs and load factor: FY2010 to FY2015

Jetstar Asia grew ASKs by a further 2.8% in 1QFY2016, including a 6.1% spike in Sep-2015.

Jetstar Asia monthly ASKs: Apr-2009 to Sep-2015

Jetstar Asia returns to profitability

The higher aircraft utilisation rates along with other cost reduction initiatives drove a 6% reduction in Jetstar Asia’s controllable unit costs in FY2015. Jetstar Asia also recorded a 2% improvement in unit revenues or RASK in FY2015 and has continued to see yields improve over the last four months.

The combination of lower controllable unit costs (ex-fuel CASK) and yield improvements along with a reduction in fuel costs led to a year-on-year AUD45 million (USD32 million) turnaround for Jetstar Asia, based on underlying EBIT figures reported by parent Qantas Group. Qantas did not disclose specific profit/loss figures but stated that Jetstar Asia was back in the black in FY2015 after incurring a loss in FY2014.

Jetstar Asia had previously been consistently in the black, posting profits for FY2010, FY2011, FY2012 and FY2013. But its margins have never been high with FY2011 being Jetstar Asia’s strongest year with an underlying profit before tax of SGD18 million (USD14 million).

The Qantas Group began reporting Jetstar Asia profit figures in FY2010 but since FY2012 has only provided general comments. However some limited financial figures are still available from financial filings with the Singaporean government, including a loss of SGD35 million (USD28 million) in FY2014 following small profits of SGD3 million in FY2013 and SGD2 million in FY2012.

Jetstar Asia CEO Barathan Pasupathi has not been shy to repeatedly admit that FY2014 was an extremely challenging year for the airline and was probably its most difficult year in its 11 year history.

Jetstar Asia CEO Barathan Pasupathi discusses the improvement in market conditions in Singapore and opportunities to grow the network while taking an overall cautious approach to expansion

Jetstar Asia CEO Barathan Pasupathi will be speaking at CAPA's 2015 Asia Aviation Summit in Singapore on 23-Nov-2015. To view the agenda and register for the Summit click here

LCC growth resumes in Singapore

As CAPA has previously highlighted, Jetstar Asia was impacted in FY2014 by extremely rapid and overly ambitious expansion from Tigerair and to a lesser extent by expansion from other LCCs competing in the Singapore market.

Tigerair eventually followed Jetstar in halting expansion and started reducing capacity in the 2HCY2014. AirAsia also cut capacity in Singapore, leading to an improvement in market conditions and a reduction in Singapore’s LCC penetration rate.

See related reports:

But Jetstar Asia continues to warn that the capacity added in Singapore’s short haul market during 2013 and 1H2014 has still not been fully absorbed. It is therefore concerned the recent resumption of LCC capacity growth in Singapore could again pressure yields. “My personal view I consider this to be irrational when the market capacity hasn’t yet been absorbed already by market demand,” Mr Pasupathi told CAPA TV on the sidelines of CAPA’s 15-Sep-2015 LCC Airport Congress in Bangkok.

In Oct-2015 seat capacity in Singapore was up by about 7% compared to Oct-2014 to nearly 2 million seats, according to OAG data. More significantly, LCC seat capacity was back to Oct-2013 levels, which was at the height of the overcapacity crisis in the Singapore market.

Singapore LCC monthly seat capacity (in millions) for October: 2005 to 2015

In Sep-2015 passenger traffic for the two largest LCCs in Singapore, Tigerair and Jetstar Asia, were similar to Sep-2013 levels. Tigerair Singapore ASKs were down only 3% compared to Sep-2013 levels but passenger numbers were up 1%. Jetstar Asia’s passenger numbers were also up 1% in Sep-2015 compared to Sep-2013 while its ASKs were up 14%, which indicates an average increase in stage length while seat capacity figures have been flat.

Therefore the recent resumption of overall seat capacity expansion in Singapore has been driven mainly by other LCCs, particularly long haul LCC Scoot and the Lion Group. Scoot reported a 23% increase in passenger numbers in Sep-2015 and a 15% increase in ASKs.

Tigerair Singapore flew 1.28 million passengers in the quarter ending 30-Sep-2015 compared to 1.03 million for Jetstar Asia and 572,000 for Scoot. (Tigerair is the largest LCC in Singapore by an even wider margin as Scoot operates four fifth freedom routes and Jetstar Asia has three fifth freedom routes while Tigerair allocates all of its capacity to Singapore.)

Lion Group has more than doubled its LCC capacity in Singapore over the last year from about 18,000 weekly seats in early Nov-2014 to almost 40,000 weekly seats currently, driven by the launch of flights from Malindo and Thai Lion. Batik Air also recently launched flights to Singapore but is not included in these figures as it is Lion Group’s full service subsidiary.

See related report: Lion Group continues Singapore push as Batik Air enters world’s second largest international route

The recent resumption of LCC expansion in Singapore has helped drive an overall resumption of passenger growth at Singapore Changi. The airport saw passenger traffic increase by 6% in the quarter ending 30-Sep-2015. Passenger traffic at Changi grew by only 0.7% in 2014 and by just 0.2% in 1H2015.

There are currently over 430,000 weekly LCC seats in Singapore, which represent about a 30% share of total seats. Tigerair currently has a leading 27% share of LCC capacity in Singapore and a 38% share when including sister long haul carrier Scoot.

The Jetstar Group has about a 23% share of LCC seat capacity in Singapore, when including flights operated by Australia’s Jetstar Airways and Jetstar Pacific. AirAsia’s share of LCC capacity in Singapore is currently only slightly less than Jetstar, at about 22%, despite the group not having a Singapore-based affiliate, while the Lion Group has about a 9% share.

Singapore LCC capacity and capacity share (% o seats) by group: 9-Nov-2015 to 15-Nov-2015

Rank Airline Group Total Seats Percentage Market Share
1 SIA 164,338 38%
2 Jetstar 99,816 23%
3 AirAsia 97,920 22%
4 Lion 37,898 9%
5 Cebu Pacific 20,216 5%
6 Air India 2,604 <1%
7 IndiGo 2,520 <1%
8 VietJet 2,520 <1%
9 China Airlines 2,160 <1%
10 Spring 1,980 <1%

Jetstar Asia increases reliance on codeshare and interline traffic

While Jetstar Asia will be impacted if irrational competition returns to Singapore’s short haul LCC sector in the coming months, its higher reliance on connecting traffic and pursuit of new unique routes should help insulate the blow. Jetstar Asia is trying to stay away from the main competition by expanding partnership traffic.

Jetstar Asia has carved out a growing and profitable niche providing regional connections to full service airlines serving Singapore. It has significantly expanded its partnership portfolio over the last year, driving more connecting traffic. This has been a key driver in its improvement in unit revenues and overall turnaround in FY2015 as the seats sold by its full service partners generally come with a significant yield premium compared to point to point traffic sold through the Jetstar website and other distribution channels.

Jetstar Asia added four interline partners in FY2015 for a total of 25. It also added a third codeshare partner in FY2015 with SriLankan Airlines joining Qantas and Emirates.

Qantas Group stated in its FY2015 results presentation that Jetstar Asia plans to add at least two more codeshare partners in FY2016. It stated that the focus at Jetstar Asia for FY2016 will be to further leverage interline and codeshare partners.

Jetstar Asia is now discussing upgrading some of its existing interline partnerships to codeshares and is also talking to several additional airlines about interlines or codeshares. “We have a lot of knocks on the door but we take time to develop these relationships, get the systems and settings right,” Mr Pasupathi told CAPA TV.

Emirates has been the biggest driver of Jetstar Asia’s partnership traffic growth

Jetstar Asia has not disclosed transit passenger figures since 2011, when it stated that about 15% of its passengers connect to other Jetstar Asia or partner flights. But Jetstar Asia’s transit passenger traffic portion has clearly grown significantly as back in 2011 it had a limited number of interlines or codeshares in place.

Jetstar Asia has been codesharing with parent Qantas since late 2005 but the number of connecting passengers from Qantas increased significantly after Qantas retimed its Australia-Singapore flights in 2013. Qantas previously timed most of its Singapore flights to land at Changi late in the evening, ideal for its flights from Singapore to Europe but inconvenient for regional connections within Asia on Jetstar. As Qantas moved the stopover of its London flights to Dubai as part of a new partnership with Emirates it was able to move up its remaining Singapore flights, opening up more connections with Jetstar Asia while also increasing local Australia-Asia capacity as it no longer had to set aside a majority of its Australia-Singapore capacity for passengers heading to or from Europe.

See related report: Australia-Asia market shake-up Pt 1: Qantas increases focus on Asia with new targeted schedules

Jetstar Asia also benefited from the Qantas-Emirates partnership as it led to a partnership between Emirates and Jetstar Asia. Emirates began codesharing with Jetstar Asia in Apr-2014 to 10 destinations and added three more destinations in Oct-2014. The two carriers also interline on several other Jetstar Asia routes from Singapore, including some routes where codeshares are not permitted because of regulatory restrictions.

Emirates is now Jetstar Asia’s largest single partner. This is hardly a surprise as Emirates now has more than twice as much seat capacity in Singapore as Qantas.

Of the top 35 foreign full service carriers serving Singapore, Jetstar currently interlines with 22. Jetstar also has codeshares in place with three of these carriers – Emirates, Qantas and Sri Lankan. Partners which do not make the top 35 include El Al (which does not serve Singapore but connects with Jetstar Asia in Bangkok) and Lao Airlines (which less than 1,000 weekly seats in the Singapore market).

Top 35 foreign FSCs in Singapore ranked on seat capacity: 2-Nov-2015 to 8-Nov-2015

Rank Airline Weekly Seats Jetstar interline partner?
1 CX Cathay Pacific 39,006 Yes
2 EK Emirates Airline 38,108 Yes
3 GA Garuda Indonesia 29,934 No
4 MH Malaysia Airlines 24,776 Yes
5 TG Thai Airways 21,616 No
6 QF Qantas Airways 16,810 Yes
7 NH All Nippon Airways 13,888 No
8 MU China Eastern Airlines 13,440 Yes
9 CI China Airlines 13,072 No
10 VN Vietnam Airlines 12,880 Yes
11 BA British Airways 12,382 Yes
12 QR Qatar Airways 11,886 Yes
13 KL KLM Royal Dutch Airlines 11,472 Yes
14 JL Japan Airlines 11,340 Yes
15 PR Philippine Airlines 11,144 No
16 AI Air India 10,752 Yes
17 CA Air China 10,640 No
18 KE Korean Air 10,612 No
19 AF Air France 9,772 Yes
20 MF Xiamen Airlines 9,576 No
21 9W Jet Airways 9,408 Yes
22 UA United Airlines 7,616 Yes
23 LH Lufthansa 7,350 Yes
24 BR EVA Air 7,062 No
25 CZ China Southern Airlines 5,894 Yes
26 OZ Asiana Airlines 5,644 No
27 UL SriLankan Airlines 5,434 Yes
28 NZ Air New Zealand 4,438 No
29 BI Royal Brunei Airlines 4,256 No
30 TK Turkish Airlines 4,004 Yes
31 AY Finnair 3,312 Yes
32 EY Etihad Airways 3,290 Yes
33 DL Delta Air Lines 3,164 Yes
34 WY Oman Air 3,116 No
35 LX SWISS 3,066 Yes

Potential partnership traffic key driver in deciding to launch new destination

The decision to launch Palembang, Pekanbaru and Da Nang is driven partially by the opportunity to provide its partners new offline destinations. Jetstar Asia plans initially to serve each new destination with three weekly flights with Da Nang now slated to launch on 27-Nov-2015 followed by Palembang on 3-Dec-2015 and Pekanbaru on 10-Dec-2015.

Such markets are unlikely to attract long haul services from the Middle East or Europe but can potentially support narrowbody service from Singapore with the right mix of connecting and local passengers. While Jetstar Asia also interlines with several Asian carriers most of its partnership traffic comes from airlines from other continents that are not interested in operating to smaller Southeast Asian destinations. 

Jetstar Asia plans to add Da Nang to the Emirates codeshare while it expects to see interline traffic on Emirates to Palembang and Pekanbaru as these destinations cannot be added to the codeshare due to Indonesia-UAE bilateral restrictions. Jetstar Asia is also optimistic it will see traffic on these new routes connecting to flights operated by its European partners.

Jetstar Asia focuses expansion on routes not served by any LCCs

Jetstar Asia is also confident its three new routes will be successful as they are not currently served by other LCCs. Jetstar Asia believes Da Nang, Palembang and Pekanbaru are all underserved, resulting in latent demand.

SilkAir is the only carrier operating non-stop flights from Singapore to any of these three markets. SilkAir currently serves Palembang and Pekanbaru with three weekly non-stop flights while Da Nang is served with two weekly non-stop flights and three weekly one-stop flights via Siem Reap.

Palembang and Pekanbaru are located in the western Indonesian island of Sumatra and have airports with ample capacity. Most international passengers from these secondary Indonesian cities now connect in Jakarta but Jakarta is congested and is generally not a preferred airport for transit passengers.

Links to Singapore provide an attractive alternative but currently these markets have limited service to Singapore with relatively high fares. The only other international route from Palembang and Pekanbaru is to Kuala Lumpur, according to OAG. (Malaysia AirAsia serves both destinations while Malindo also serves Pekanbaru.)

Da Nang in central Vietnam has more international routes but is not well connected with Southeast Asia as almost all of its international links are with North Asia. Da Nang-Singapore fares have also traditionally been very high. Jetstar Asia sees an opportunity to stimulate local demand between Singapore and central Vietnam as well as offer its partners alternative options for accessing a fast growing market.

Jetstar Asia grows in Cambodia

Jetstar Asia also recently added capacity to two existing destinations which are also only currently served by SilkAir, Phnom Penh and Siem Reap in Cambodia. In late Oct-2015 Singapore-Phnom Penh was increased from seven to 10 weekly flights while Singapore-Siem Reap was increased from three to four weekly flights.

Cambodia has a fast growing inbound tourism market but does not currently have any non-stop services to the Middle East or Europe. Jetstar Asia has seen large and growing passenger traffic to Cambodia from Emirates and its European interline partners, which include Air France-KLM and Star Alliance members Lufthansa, Swiss and Turkish. Jetstar Asia saw in surge in traffic to Cambodia from Air France after the French flag carrier suspended services to Phnom Penh in Mar-2013.

See related report: Cambodia aviation Part 1: China visitor surge makes Cambodia the fastest growth market in SE Asia

While Singapore Airlines is closely aligned with SilkAir, which provides valuable feed to SIA’s European flights, SilkAir is not part of the Star Alliance and does not codeshare with any European carrier. SilkAir has interlines with European carriers but this is generally a much higher cost option than using Jetstar Asia.

Of Jetstar Asia’s 20 current non-stop routes from Singapore, five do not have any LCC competition – Darwin, Jieyang, Medan, Phnom Penh and Siem Reap. Jetstar Asia is the only carrier with non-stop flights from Singapore to Jieyang in China while SilkAir is currently the only competitor in the other four markets. Phnom Penh was previously served by Tigerair Singapore (until late 2014) while Medan was previously served by Indonesia AirAsia (until mid-2014) and Tigerair Mandala (until early 2014).

Jetstar Asia aims to open more secondary destinations

Jetstar Asia is keen to develop more secondary markets which are not served by other LCCs. But it will continue to take a cautious approach to network expansion and will only make a commitment to a new market under the right conditions, including support from the airport and local tourism authorities.

New secondary routes can be challenging. Over the years several new secondary routes from Singapore have been dropped by LCCs once the initial marketing incentives expire. There is no guarantee Da Nang, Palembang and Pekanbaru will be successful. Tigerair tried Singapore-Da Nang several years ago while Tigerair Mandala served Singapore-Pekanbaru from early 2013 to early 2014.

Jetstar Asia has already delayed the Palembang and Pekanbaru launches by over one month although the recent haze crisis in Indonesia could have contributed to the postponement. Jetstar Asia initially announced in early Aug-2015 the launch of Palembang from 29-Oct-2015 and Pekanbaru from 5-Nov-2015. The same thrice weekly schedule is now slated to commence on 3-Dec-2015 for Palembang and 10-Dec-2015 for Pekanbaru, according to the Jetstar online booking engine.

Despite the potential challenges, experimenting with new secondary routes is a sensible strategy for Jetstar Asia. Jetstar Asia has the partnerships in place to potentially make routes work where other LCCs that relied entirely on point to point traffic have previously failed. The risk associated with short haul routes is relatively small, particularly when incentives are being offered, but the rewards potentially could be large.

Jetstar Asia outlook hinges on further growing partnership traffic

Jetstar Asia is a pioneer in many respects as one of the first Asian LCCs – if not the first – to pursue partnerships and transit traffic. It has by far the largest portfolio of interline partners among LCCs in Asia and one of the largest in the global LCC sector. Jetstar Asia almost certainly also now has the highest portion of connection traffic among Asia’s short haul LCCs.

The connecting traffic from full service partners is an important differentiator for Jetstar Asia in the extremely competitive Asian LCC market place. It has enabled Jetstar Asia to return to the black and will play a key role in further boosting profitability and unlocking potential long-term growth.

As LCC competitors start to increase their transit traffic, including the other two Singapore based LCCs, Jetstar Asia needs to continue growing its partnership portfolio and transit traffic. Jetstar Asia has a huge head start and needs to leverage its leading position in an increasingly important niche.

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