Southeast Asian Carriers Poised for Solid Growth
Southeast Asia benefits from having one of the fastest growing economies in the world, driven by the expansion of the trade and tourism sectors. While a rising middle class and higher discretionary incomes have led to an increase in demand for air travel in the region, deregulation and liberalization of the airline industry has allowed the Association of South East Asian Nations (ASEAN) carriers to restructure both operationally and financially to increase growth and competitiveness. Many network carriers are aggressively expanding into new markets, launching subsidiaries and developing partnerships while governments and airport authorities are enlarging their infrastructure to meet demand.
From April 2012 to October 2013, Southeast Asia’s international aviation market increased by about 20 percent, fueled primarily by the expansion of the low-cost carrier (LCC) sector. Myanmar posted the highest growth rate on the international market–77 percent–since it opened nearly two years ago. Government regulatory changes in 2012 have made the country a burgeoning frontier market poised for further expansion in 2014 as foreign carriers move in and local LCCs are launched.
Indonesia has emerged as the fifth-largest domestic aviation market globally and ranks first in Southeast Asia. The archipelago is made up of 17,508 islands and is home to half of ASEAN’s population, accounting for over one third of the region’s GDP. Indonesia’s international market grew by 29 percent in 2013, posting the second highest growth rate after Myanmar. Both Laos and Cambodia posted 28-percent growth on the international market, followed by Malaysia at 25 percent and Thailand at 21 percent.
Full-service carriers account for 44 percent of the region’s fleet and have about 35 percent of the total market share. While their shares have been reduced with the emergence and expansion of LCCs, many flag carriers remain profitable and have been able to retain shares in their home markets. Cambodia, Laos and Brunei have all seen surges in capacity, driven primarily by their flag carriers.
Two full-service carriers, Malaysia Airlines (MAS) and Indonesia’s Garuda, have posted the fastest growth in 2013 due to regional expansion. In five months MAS’s total seat capacity grew by 6 percent, while Garuda’s capacity increased by 7 percent. MAS expanded its fleet from 121 aircraft to 127. Garuda added 14 aircraft to an existing fleet of 88.
Flag Carriers Expand with LCCs
Relaxation of market restrictions has allowed flag carriers, including Singapore Airways, Garuda, Thai Airways and Vietnam Airlines, to expand to include new LCC affiliates and subsidiaries; regional subsidiaries of flag carriers–including Thai Airways’ unit Thai Smile and Singapore Airlines’ subsidiary SilkAir–were among the fastest growing carriers in Southeast Asia in 2013.
The recently established NokScoot is a joint venture between Thai Airways’ short-haul LCC affiliate Nok Air and the Singapore Airlines Group (SIA) long-haul, low-cost subsidiary Scoot. SIA will provide up to three Boeing 777-200ERs for the Thai LCC start up, which will operate medium- and long-haul services from Bangkok Don Mueang.
SIA also recently acquired an additional 7.3-percent stake in Tigerair, increasing its total share to 40 percent. The LCC accounts for 6 percent of LCC capacity within Southeast Asia and operates international routes throughout Asia and to Australia from Singapore Changi’s Budget Terminal. Three carriers operate under the Tigerair brand, including Tigerair Mandala (Indonesia), Tigerair Philippines and Tigerair Australia. A fourth affiliate, Tigerair Taiwan, is expected to be launched this year.
Garuda Indonesia’s budget subsidiary, Citlink, is one of the fastest growing LCCs in the ASEAN region. Passenger traffic grew by 171 percent in eight months between 2012 and 2013. Citilink has phased out seven 737-300/400s and will add four ATR 72 turboprops and 35 A320neos to its existing fleet of A320 Airbuses. Also under consideration is a mix of narrowbody and widebody aircraft, including the new-generation Boeing 787 and Airbus A350. The carrier is expected to increase its fleet to 80 aircraft by the end of 2015 and will expand to include regional routes.
Low-cost Carriers Succeed
The LCC sector in the region has made air travel more affordable and attractive through the expansion of new routes and lower fares. There are currently 23 ASEAN LCCs accounting for 31 percent of the commercial aircraft operating in Southeast Asia. The sector will continue to stimulate growth this year with the emergence of at least three new LCC startups. ASEAN LCC groups now account for some of the largest aircraft orders in recent history due to a surge in demand and a desire to expand into new, direct, long-range markets. By early 2014, LCCs will make up about one third of Southeast Asia’s total fleet.
At 37 percent and 32 percent of the total LCC seats, respectively, the Lion group and AirAsia continue to dominate the region’s domestic markets, followed by Cebu Pacific at 10 percent. The Lion group, which is the largest privately owned airline in Indonesia, has seen slow growth overall as it continues to expand and diversify. Lion launched three subsidiaries in 2013 including Malindo, a joint venture with Malaysia’s National Aerospace and Defence Industries (NADI). Considered to be a hybrid/LCC subsidiary, the airline offers full service on both the domestic and international market and has increased Malaysia’s passenger traffic by 20 percent. Lion Air and its regional subsidiary Wings Air operate a fleet of 122 aircraft and account for 50 percent of the market in terms of Indonesia’s domestic seat capacity.
Batik Air is a full-service Indonesian carrier operating as a unit of LCC Lion Air. The carrier is expected to launch international routes this year, while Asia’s newest LCC Thai Lion commenced operations in early December 2013. With almost 600 aircraft on order, the Lion group has aggressive plans to expand into Malaysia’s domestic and international market, while increasing competition in Thailand.
AirAsia, the largest LCC group operating in Southeast Asia, currently has an in-service fleet of 172 aircraft. Unlike the Lion group, AirAsia has a greater domestic and regional network and a foothold into the international market, connecting to both North Asia and Australia. Six carriers operate under AirAsia: Malaysia AirAsia, Indonesia AirAsia, Thai AirAsia, Philippines AirAsia, Philippines-based Zest Air and Malaysia-based AirAsia X. Between them, Lion and AirAsia carry two out of three LCC passengers in the region.
Vietnam LCC Jetstar Pacific accounts for 4 percent of Southeast Asia’s domestic market. The carrier plans to expand this year to include international services. Vietjet leads closely behind at 3 percent and already serves the international market, flying to Bangkok. The privately owned group currently has a 25-percent share of Vietnam’s domestic market and has ambitious plans to double this amount by 2015. The carrier is pursuing rapid growth by adding nine domestic destinations to the 11 it currently serves, and will be expanding to include seven international routes. Vietjet also plans to add 10 more Airbus A320s this year, doubling its fleet. The carrier will launch a new affiliate in Thailand and possibly in Myanmar this year.
The Lion, AirAsia, Tigerair, Jetstar and Vietjet groups collectively account for 77 percent of ASEAN’s LCC fleet.
Large Route Share
Southeast Asia now accounts for nine of the largest LCC international routes in the world, with Singapore leading: Singapore Changi to Jakarta Soekarno-Hatta, Kuala Lumpur International and Bangkok Suvarnabhumi are three of the largest LCC international routes globally. Four intra-Southeast Asian routes–Kuala Lumpur to Jakarta, Bangkok Don Mueang, Surabaya and Medan’s Kuala Namu International Airport–are among the top 15.
The Philippine domestic market has the highest LCC penetration rate, at 67 percent, followed by Indonesia with a domestic LCC penetration rate of 60 percent. The two second-largest domestic markets, Malaysia and Thailand, have surpassed 50 percent.
Malaysia and Indonesia post the highest international LCC penetration rates at 48 percent and 46 percent, followed by Singapore at 31 percent; the latter does not have a domestic market. The Philippine international LCC penetration rate of 29 percent is expected to grow this year as a result of a new air service agreement with Japan removing previous flight restrictions. Cambodia, Laos and Brunei, which all have small home markets, continues to post penetration rates below 20 percent as they lack local LCCs.
A decade ago, the LCC penetration rate within Southeast Asia was less than 5 percent, since then it has steadily risen to above 50 percent. Within the intra-Southeast Asia international market, the LCC penetration rate is 50 percent of total seat capacity. Although some key markets are approaching saturation, the LCC sector is expected to continue expanding in 2014 and beyond.