CAPA Yearbook 2013 - Southeast Asia

WORLD AVIATIONYearbook 2013southeast asia

2 2 aiRLiNe LeaDeR | MAR-APR 2012

PROFILES

southeast asia toP 10 aiRLiNesSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

southeast asia toP 10 aiRPoRtsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Southeast Asia OutlookSoutheaSt aSia continueS to be a

region of rapid growth driven by low-coSt carrierS, including budget subsidiaries and affiliates of full-

service carriers. For the first time LCCs accounted for over 50% of seat capacity within Southeast Asia in 2012. The region has seen a steady rise in LCC penetration rates since the turn of the century from a base of virtually zero ... southeast asia caPacity seats PeR week

SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

RaNkiNg caRRieR NaMe seats

1 Lion air 856,932

2 thai airways 541,436

3 airasia 525,240

4 garuda indonesia 471,698

5 Malaysia airlines 461,134

6 singapore airlines 444,125

7 Vietnam airlines 372,916

8 cebu Pacific air 333,010

9 thai airasia 236,160

10 sriwijaya air 207,396

RaNkiNg caRRieR NaMe seats

1 Jakarta soekarno-hatta international airport 1,400,299

2 singapore changi airport 1,371,158

3 Bangkok suvarnabhumi international 1,237,778

4 kuala Lumpur international airport 1,134,217

5 Manila Ninoy aquino international airport 824,383

6 ho chi Minh city tan son Nhat airport 482,968

7 surabaya Juanda airport 452,707

8 Denpasar Bali Ngurah Rai airport 381,732

9 Bangkok Don Mueang int'l airport 359,626

10 sultan hasanuddin international airport 330,293

Lion Air

Thai Airways

AirAsia

garuda Indonesia

Malaysia AirlinesSingapore

AirlinesVietnam Airlines

Cebu Pacific

Thai AirAsia

Other

0M 1M 2M 3M 4M

856,932

541,436

525,240

471,698

461,134

444,125

372,916

333,010

236,160

3,714,324

3

southeast asia fLeetSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southeast asia PRoJecteD DeLiVeRy Dates foR aiRcRaft oN oRDeRSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southeast asia BReakDowN foR aiRcRaft iN seRViceSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southeast asia Most PoPuLaR aiRcRaft tyPes iN seRViceSOURCE: CAPA - CENTRE FOR AVIATION

southeast asia caPacity seats shaRe By aLLiaNceSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Narrowbody Jet

Widebody Jet

Regional Jet

Piston Engine Aircraft

Military Transport

Turboprop

Small CommercialTurboprop

51.6%24.0%

13.0%

9.3%1.4%

0.5%0.1%

A320

737

A330

777

ATR

Others

747

CARAVAN

26.9%

23.0%

8.6%

8.5%

7.3%

3.6%

2.1%

20.1%

Unaligned

SkyTeam

oneworld (affiliate)

Star

oneworld

57.7%15.6%

15.3%

11.2%0.2%

1,456

67

1,533

2,000

1,500

1,000

500

0In service In storage On order

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

0

50

100

150

200

ATR CRJ A320 A330 A350 A380 737

777 787 DHC6 SSJ YUN7 ARJ21

Lcc caPacity shaRe (%) of totaL seats: 2001-2013SOURCE: CAPA - CENTRE FOR AVIATION WITh DATA PROVIDED by OAg

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Mar

2013

0

10

20

30

40

50

60

70

3.3% 4.6% 4.0%

9.8%13.6%

18.1%

23.2%26.8%

30.9% 30.7%32.4%

52.0%

57.4%

4

50%

Based on CAPA data, the region’s LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft.

... The four largest domestic markets in Southeast Asia – Indonesia, Philippines, Malaysia and Thailand – all now have LCC penetration rates exceeding 50%. The Philippines has the world’s highest domestic LCC penetration rate among medium and large size countries – 80% in 2012, which is likely to increase to about 85% in 2013. But there is still room for more LCC growth in Southeast Asia as the size of the overall market, and in many cases LCC penetration rates, continue to increase.

2013 will again see more LCC capacity pouring into Southeast Asia. Based on CAPA data, the region’s LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft. This includes almost 300 aircraft from Asia’s top two LCC groups – AirAsia and Lion -– and over 100 aircraft from affiliates or subsidiaries of Southeast Asian full-service carriers. Singapore Airlines, Thai Airways, Garuda Indonesia, Philippine Airlines and Vietnam Airlines are all now participating in the budget end of the market, allowing these groups to pursue growth while demand for long-haul and premium passenger services remains relatively flat and as demand in the cargo sector continues to be depressed.

There are now 25 LCCs operating in Southeast Asia, five of which have launched since the end of 2011. More new LCCs will enter the market in 2013, including Malaysia’s Malindo, and most of the region’s existing LCCs continue to expand rapidly.

Some LCC markets in Southeast Asia may be approaching saturation and some routes will suffer from over-capacity in 2013. But market conditions overall remain favourable and can support rapid growth, driven by the continued strength of the region’s economy and the continued rapid rise of the middle class. The increase in discretionary incomes feeds into the hands of LCCs as a larger portion of the population can afford to fly but generally only on budget airlines. Southeast Asian flag carriers are also growing, particularly their budget and regional full-service subsidiaries, albeit at slower rates.

Indonesia, the region’s largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world. Indonesia’s domestic market grew 20% in 2012 to 72.5 million passengers, making it the world’s fifth largest domestic market after US, China, Brazil and Japan. It has been growing at a double-digit clip since 2008 and this is expected to continue in 2013 despite the bankruptcy and suspension of operations in Jan-2013 of Batavia, which accounted for about 8% of the domestic market. Indonesia’s four LCCs have quickly filled the void left by Batavia and will add approximately 50 aircraft in 2013, more than twice the size of the fleet Batavia operated in 2012.

With Batavia exiting, the outlook has improved for market leader Lion, Garuda budget subsidiary Citilink, Indonesia AirAsia and new Tiger affiliate Mandala. All four LCCs are growing at rapid clips easily exceeding 20%. Garuda also continues to expand its domestic and regional full-service operation rapidly while Lion plans to launch in 2013

new full-service subsidiary Batik Air. Smaller domestic carriers also continue to expand and enter the market. But some will likely fail as they are stuck in the middle of the market, wedged between the low-cost and full-service business models.

The combination of the world’s fourth largest population, a rapidly expanding middle class, a booming economy and an archipelago geography are driving soaring demand for domestic air travel. Indonesia’s much smaller international market, which consisted of less than 10 million passengers in 2012, also has big potential. Indonesia’s international market is now primarily exploited by Gulf carriers and the big airline groups of Asia as Indonesian carriers generally remain domestic-focused.

Thailand will also see more LCC expansion in 2013, led by Thailand’s two main LCCs, Thai AirAsia and Nok. Thai AirAsia completed an IPO in 2012, giving it the capital to accelerate domestic and international expansion. 2013 will see IPOs from Nok and full-service carrier Bangkok Airways. Nok, which now only operates scheduled services in the domestic market, plans to launch international services in 3Q2013.

2013 will also see growth for new Thai Airways regional unit Thai Smile, which launched services in Jun-2012 following a hybrid model. The expansion of Thai Smile and Nok are important components of Thai Airways’ new multi-brand strategy as the group looks to reduce its reliance on long-haul routes to Europe, where market conditions remain challenging. Thai Airways is also investing in fleet renewals and cabin retrofits as part of an attempt to improve yields and boost premium traffic. But competing at the top end of the market with Asia’s leading premium carriers and Gulf carriers, which have expanded rapidly in Thailand, is difficult while fast-growing LCCs led by Thai AirAsia pose a threat at the other end.

2013 will be a landmark year for Malaysia as

ProPortion of LCC seat CaPaCity in southeast asia

5

Indonesia, the region’s largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world.

the country’s flag carrier attempts to turn the corner and a new LCC aims to launch services. Malaysia Airlines (MAS), which spent most of 2012 in restructuring mode, entered the oneworld alliance on 01-Feb-2013. oneworld membership was a major milestone for MAS and a key component of its new strategy, which focuses on the premium market.

Like most other Southeast Asian flag carriers, MAS is focusing capacity growth in 2013 on the regional market within Asia as conditions on long-haul routes remain challenging. Of Southeast Asia’s six main flag carriers, MAS is now the only one without a budget subsidiary. This puts it in a weak position as it is unable to participate in the faster growing bottom end of the market. It also creates a void in the Malaysian market for a second LCC, which is now being exploited by Lion.

Malindo, a joint venture between Indonesia’s Lion and a Malaysian company, aims to launch services at the end of Mar-2013 and operate a fleet of about 12 737-900ERs by the end of the year. Malaysia-based AirAsia in recent years has been pursuing more ambitious expansion in other markets but is re-focusing on Malaysia in 2013 as part of an effort to fend off Malindo.

AirAsia Malaysia plans to add 10 A320s in 2013 for a total of 74 aircraft. Long-haul sister AirAsia X also plans to add seven aircraft. As a result, Malaysia’s total LCC fleet is expected to grow by 40% in 2013 to 102 aircraft, outstripping the LCC growth at the other five major ASEAN countries. The sudden surge in LCC capacity will likely lead to over-capacity on some domestic and regional international routes but there is also still room in Malaysia to stimulate demand through lower fares as Malindo breaks the AirAsia-MAS duopoly.

Singapore will see slower growth in 2013 than the 10% increase in passenger traffic recorded in 2012, as its LCC market is now approaching saturation. LCCs now account for 30% of capacity at Singapore’s Changi Airport, which in 2012 passed the 50 million passenger milestone, an incredible achievement for a country of only five million people.

Singapore’s three largest LCCs – AirAsia, Jetstar and Tiger – will continue to expand but

at modest levels. Faster growth will come from Scoot, SIA’s new long-haul low-cost carrier which launched in mid-2012. Unlike short-haul routes within Southeast Asia, medium-haul markets to Australia and North Asia remain relatively untapped by LCCs. Scoot and Jetstar, which has a small widebody operation in Singapore, are trying to fill this void.

SIA regional subsidiary SilkAir also plans to pursue rapid expansion in 2013, growing capacity at a clip exceeding 20%. SilkAir and Scoot, as well as increased involvement in Tiger, have emerged as important components in the new SIA Group strategy, which aims to pursue growth at the budget end of the market and within the region to offset weak market conditions on long-haul routes.

The Philippines will see the launch of at least one and possibly two long-haul low-cost operations in 2013. The new long-haul unit from short-haul Philippine market leader Cebu Pacific – which will launch in mid-2013 with services to Singapore, Seoul and Dubai – will open a new chapter in the Philippines’ dynamic LCC market. LCCs will account for about 85% of domestic passenger traffic in the Philippines in 2013, but there are still huge opportunities for LCCs to make inroads in the international market.

Cebu Pacific will become the fourth widebody low-cost operator in Southeast Asia, joining Jetstar, Scoot and AirAsia X. Philippine Airlines (PAL) is planning to fight off its rival by also expanding its LCC subsidiary, AirPhil Express, into the long-haul market by the end of 2013. PAL is also planning to expand its own long-haul operation as the carrier takes delivery of another batch of 777-300ERs.

PAL has struggled in recent years but is investing significantly in upgrading itself, including through fleet renewal, following the sale of a majority stake in 2012 to Philippine conglomerate San Miguel. 2013 could see further strategy changes as San Miguel looks to make its mark at PAL. Long-haul expansion could be unlocked if the Philippine authorities succeed at getting off the EU blacklist and being upgraded by the US FAA to Category 1 status.

Consolidation in the highly competitive Philippine market is also likely, with the Mar-2013 equity tie-up between LCCs Zest and AirAsia Philippines a potential first move. There are now five LCCs competing in the domestic market, which is clearly too many. Over-capacity and irrational competition already resulted in losses throughout 2012 at all

Of Southeast Asia’s six main flag carriers, MAS is now the only one without a budget subsidiary.

6

Philippine carriers except Cebu Pacific.Vietnam will see significant LCC growth

as it starts to catch up with the more mature markets elsewhere in Southeast Asia. VietJet, which launched services in Dec-2011, has already surpassed Jetstar Pacific as Vietnam’s largest LCC. VietJet expanded into the international market in Feb-2013 with the launch of a Ho Chi Minh-Bangkok service and is expected to add at least two more international routes by the end of the year. Jetstar Pacific will also likely enter the international market in 2013. The carrier, which is partly owned by Australia’s Jetstar, has new life after a majority stake was transferred to Vietnam Airlines in early 2012.

Vietnam’s fast-growing economy and increasing popularity as a tourism destination should also support further rapid growth at Vietnam Airlines. The flag carrier is preparing for an initial public offering in late 2013, which would unlock a new phase of growth. The carrier already has ambitious plans to expand its fleet by 35 aircraft over the next three years and grow its long-haul operation, which is very small compared to its Southeast Asian peers. Of Southeast Asia’s six main flag carriers, Vietnam Airlines is now the only group that is not publicly traded and remains 100% government-owned.

Among Southeast Asia’s four smaller markets, Myanmar is a clear stand out. International seat capacity in Myanmar surged by over 60% in 2012 as the country opened up following the landmark election of Apr-2012. Capacity will continue to increase at a very rapid clip in 2013 as carriers from abroad look to exploit the opportunities in this frontier market.

Domestically several local carriers are also expanding as they aim to profit from the boom

in tourism and business travel. In Jan-2013, the country’s first LCC, Golden Myanmar Airlines, launched services and is now operating domestic and international routes. There is huge potential for LCCs in both the domestic and international markets as Myanmar continues to open up.

Cambodia also has seen rapid growth, with total passenger traffic growing 18% in 2012, making it quietly one of the fastest growing countries in Asia. More expansion is expected in 2013 as Cambodia Angkor Air, one of the smallest flag carriers in the region, expands its network to greater China.

For Laos, 2013 should also bring more growth albeit on a very small scale. Laos has seen capacity double since 4Q2011, when Lao Airlines added two A320s. Previously there were no jet aircraft operating in the small country. More capacity will be added in 2013 as Lao Airlines continues to expand its A320 fleet and start-up Lao Central Airlines, which launched services in May-2012, adds 737s and Sukhoi Superjet 100s.

In the smallest ASEAN country of Brunei, Royal Brunei Airlines (RBA) will mark a significant milestone in 2013, as it becomes the first carrier in Southeast Asia to operate the 787. RBA’s five 787s, all of which are slated to be delivered by early 2014, will replace 777s and allow the flag carrier to complete a restructuring it began in 2011.

Overall market conditions in Southeast Asia remain favourable and conducive for growth. Rising discretionary incomes and rapid growth in the middle class is creating particularly favourable conditions for LCCs. Demand for travel within the region and to other parts of Asia-Pacific will once again grow rapidly in 2013. Long-haul markets will remain challenging but should see some outbound growth as an increasing portion of the population is able to afford overseas trips.

The Philippines will see the launch of at least one and possibly two long-haul low-cost operations in 2013.

Vietnam will see significant LCC growth as it starts to catch up with the more mature markets elsewhere in Southeast Asia.

Overall market conditions in Southeast Asia remain favourable and conducive for growth.

1 AIRLINE LEADER | FEB-MAR 2013

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8

LioN aiR gRouP ............................................................pp.10“indonesia’s Lion air group has the growth opportunities to support the 600 aircraft on order”first published on www.centreforaviation on 20th March, 2013

MaLiNDo aiR .................................................................pp.18“Lion’s Malindo breaks airasia-Mas duopoly in Malaysian domestic market. Next stop: Delhi...and asia”first published on www.centreforaviation on 23rd March, 2013

aiRasia ..........................................................................pp.28“airasia’s 2013 outlook marred by intensifying competition and continued losses at new affiliates”first published on www.centreforaviation on 5th March, 2013

MaLaysia aiRLiNes .......................................................pp.43“Malaysia airlines 2013 outlook clouded by increasing competition and launch of Malindo”first published on www.centreforaviation on 6th March, 2013

SOuTheAST ASIA:Selected airlines

9

ceBu Pacific .................................................................pp.58“cebu Pacific sees bright outlook for 2013 as rationality returns to Philippines market”first published on www.centreforaviation on 19th March, 2013

PhiLiPPiNe aiRLiNes ....................................................pp.69“Philippine airlines group faces challenging future after exiting budget carrier sector”first published on www.centreforaviation on 3rd april, 2013

siNgaPoRe aiRLiNes ....................................................pp.79“singapore airlines looks to ride out the storm as profits continue to slide”first published on www.centreforaviation on 9th february, 2013

tigeR aiRways ..............................................................pp.91“tiger returns to profitability but still faces challenges in australia, indonesia & the Philippines”first published on www.centreforaviation on 25th January, 2013

thai aiRways ................................................................pp.102“thai airways faces challenging 2013 as competition within asia increases”first published on www.centreforaviation on 7th March, 2013

VietJet aiR ....................................................................pp.114“VietJet to pursue more rapid expansion in 2013; Jetstar Pacific needs to respond – fast”first published on www.centreforaviation on 26th March, 2013

10

Lion Air Group Key Data Fleet and Orders Lion Air Group Fleet Summary: as at 10-Apr-2013

Source: CAPA Fleet Database

Lion Air Group projected delivery dates for aircraft on order: as at 8-Apr-2013


11

Route area pie chart Lion Air Group international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Lion Air Group top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

12

Premium/Economy profile Lion Air schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013


Indonesia’s Lion Air Group has the growth opportunities to support the 600 aircraft on order The Lion Air Group has a massive 600 aircraft on outstanding order following its landmark order for 234 A320 family aircraft, which was signed on 18-Mar-2013. The figure at first glance seems overly ambitious given the intensifying competition in Southeast Asia’s low-cost carrier market. But Lion enjoys a very strong position in its massive and fast-growing home market of Indonesia, which could easily support, over the next decade, at least half of the additional aircraft it has committed to acquiring. Lion also has ambitions of establishing new affiliates and subsidiaries, following the model of rival LCC group AirAsia. The Lion Air Group is launching Malindo, a joint venture carrier in AirAsia’s original home market of Malaysia, on 22-Mar-2013. The group also has the option of placing some of the 600 aircraft it has on outstanding order with airlines outside Lion through its new leasing subsidiary. This gives Lion unique flexibility should its growing portfolio of airlines not require all 600 aircraft for their own growth and replacement needs. Lion to consider new affiliates but focus for now is on Indonesia and Malaysia

13

Lion has talked about new potential affiliates in other Southeast Asian countries and Australia. But establishing such ventures could be challenging given its brand is not well known outside Indonesia. AirAsia has a more powerful pan-Asian brand and also has first mover advantage in every market except Indonesia. As Indonesia is by far the largest market in Southeast Asia, Lion has been able to quietly surpass AirAsia as a larger airline group based on seat capacity within ASEAN. But Lion is predominately a domestic carrier while AirAsia is much larger in the international market, including to and from Indonesia. AirAsia is now trying to push into the Indonesian domestic market, where it has a very small presence. The Lion Air Group dominates the Indonesian domestic market with nearly a 50% share of the market compared to less than 2% for Indonesia AirAsia. The Lion Air Group includes regional subsidiary Wings Air and within the next few months will include a third Indonesian carrier, Batik Air, which will operate on domestic trunk routes as a full-service carrier. Indonesia’s domestic market has nearly doubled in size since 2008, reaching 72.5 million passengers in 2012. The market is projected by the Indonesia National Air Carriers Association (INACA) to reach 100 million passengers in 2015 and 180 million passengers in 2018. The Lion Air Group currently has an active fleet of 125 aircraft, according to CAPA’s new fleet database. This includes 123 aircraft in Indonesia – 94 at Lion mainline 29 at Wings Air – and two in Malaysia at Malindo. Lion Air Group fleet: as of 19-Mar-2013

Note: includes aircraft operated by Lion Air and Wings Air; Malindo aircraft excluded Source: CAPA – Centre for Aviation

14

Indonesian domestic market could easily absorb 300 additional aircraft from Lion Given the projected growth of the Indonesian domestic market, the Lion Air Group will need approximately 300 aircraft in Indonesia by 2018 simply to maintain its current share of the market. As Lion has ambitions to grow its domestic market share and to become a more significant player in Indonesia’s international market, a 400 aircraft fleet by the end of 2018 in Indonesia between its Lion, Wings and Batik brands is a feasible scenario. The group now allocates 96% of its seat capacity to the Indonesian domestic market. Lion currently only has a 5% share of seat capacity in Indonesia’s international market, compared to about 25% for the AirAsia Group and about 16% for Garuda, according to Innovata data. Lion is keen to close the gap with its rivals internationally while maintaining the big gap it now enjoys domestically over its largest competitors. The Lion Air Group is slated to take delivery of 247 additional aircraft between now and the end of 2018, according to CAPA data. This includes 162 737s, five 787s, 35 ATR 72s and the first 45 A320s from its new 234-aircraft order with Airbus. (The Airbus order consists of 60 A320 current generation aircraft, 109 A320neo and 65 A321neo.) Lion Air Group projected deliveries for aircraft on order: 2013* to 2028

Note: only includes aircraft coming directly from OEMs. 2013 figures reflect aircraft to be delivered the remainder of this year Source: CAPA – Centre for Aviation As a result the Lion Air Group will likely have a fleet of about 350 aircraft at the end of 2018, taking into account the expected phase out of its approximately 20 older generation aircraft. Lion’s existing portfolio should be able to support such growth, with between 250 and 300 aircraft in Indonesia and the remainder in Malaysia. Malindo plans to have a fleet of 12 737s by the end of 2013 and add approximately one aircraft per month over the medium to long term. This would give Malindo a fleet of about 70 aircraft

15

by the end of 2018, which is slightly bigger than the current size of AirAsia’s Malaysia-based A320 fleet. The Malindo fleet plan could prove to be overly ambitious given the size of the Malaysian market. But Lion could also establish affiliates or subsidiaries in other countries. Lion to accelerate rate of aircraft deliveries from 2017 Lion would potentially benefit from a bigger portfolio of carriers by the end of this decade given that the rate of deliveries from both Airbus and Boeing will increase in the 2017 to 2018 timeframe. Lion now plans to take 36 737s per year, or three per month from 2017, compared to its current rate of 24 737s per year, or two per month. Meanwhile, Lion’s rate of A320 deliveries will reach 24 per year in 2018. But even if Lion does not succeed at establishing more affiliates, it has sufficient options for all the aircraft it has ordered. While taking narrowbody jets at a rate of 60 aircraft per year seems astronomical, that would equate to annual fleet growth late this decade of between 15% and 17% – a plausible figure given the recent growth trajectory of the Southeast Asian market. Lion could also start to phase out its 737NGs during this period which would allow it to grow its fleet in the 10% to 15% range. Lion also has the option of leasing out aircraft to other carriers as the group has established a Singapore-based leasing company, Transportation Partners. Transportation Partners so far has only placed aircraft with airlines within the Lion Air Group. But the new lessor recently established a sales and marketing division and plans to eventually lease aircraft to airlines outside the Lion Air Group. Transportation Partners is not expected to place its own orders and instead have access to a portion of Lion’s order book, including some of the just-ordered 234 A320s and the 230 737s ordered in Nov-2011. But it is not yet decided what portion of Lion’s order book may be allocated to Transportation Partners for third-party transactions or when the first batch of aircraft will be made available to other carriers. Given the in-house requirements for Lion, Batik, Wings and Malindo over the near to medium term, it is unlikely a large number of aircraft (if any) will be made available to other carriers until Lion’s rate of narrowbody deliveries reach the 60 aircraft per year rate in 2018. Even then Lion may not have the need to use Transportation Partners to place aircraft outside the group, depending on what market conditions are like in Indonesia and Malaysia at that time and whether the group launches any new subsidiaries or affiliates in new markets. Several leasing companies, including lessors which have been working with Lion on 737 sale and lease backs, tell CAPA they do not expect Transportation Partners to emerge as a major competitor and believe airlines will be reluctant to lease aircraft from a Lion Air Group company, particularly airlines in Asia. Leasing to outside companies could be a fall back option should Lion end up with more aircraft than they need for their own group of companies, a scenario which is unlikely to occur at least for the next several years. Lion has over 200 more outstanding orders than AirAsia Lion’s decision to order 234 A320s supplements the over 300 Boeing 737s it has on order, including the 201 737 MAX 9s and 29 additional 737NGs that Lion agreed to order in Nov-2011. The Lion 737 MAX order was by no coincidence one aircraft more than the 200 A320s

16

ordered by AirAsia in mid-2011. AirAsia added 100 A320 orders in Dec-2012, lifting its total A320 family commitments to 475 (including aircraft already delivered). The AirAsia Group, which consists of affiliates in four Southeast Asian countries and Japan, currently operates 121 A320s. As this includes five leased aircraft, it has commitments remaining for 387 additional aircraft compared to 601 for the Lion Air Group. Unlike Lion, the AirAsia Group has not yet diversified by adding Boeing to its all-Airbus fleet and has not yet added regional aircraft. But AirAsia, which previously has considered the Bombardier CSeries and 737, could eventually add a second aircraft type and commit to more aircraft to close the gap with Lion. AirAsia in 2013 is growing faster than Lion as AirAsia is keen to regain its status as the largest LCC group within Southeast Asia. The AirAsia Group is adding 32 A320s in 2013, including 29 at affiliates in Southeast Asia, for a year-end total of 150. In comparison Lion is only expected to add six 737s in 2013 as it allocates a majority of its deliveries to Malindo and Batik. But Wings Air is expected to take delivery of 12 ATR 72s in 2013. LCC fleet in Southeast Asia to grow by over 20% in 2013 Overall the LCC fleet in Southeast Asia is expected to grow in 2013 by between 20% and 25% to approximately 520 aircraft. Roughly 100 aircraft will be added, intensifying competition and potentially resulting in over-capacity in some markets such as Malaysia. Projected fleet growth for LCCs in Southeast Asia by carrier for 2013

Note: Rank based on current fleet size.. List based on individual carrier/AOC rather than group Jetstar Group fleet plan for 2013 still in process of being finalized *AirPhil recently re-branded as PAL Express Source: CAPA – Centre for Aviation fleet database and company reports

17

Lion’s latest order, and the AirAsia order from Dec-2012, means the LCC fleet in Southeast Asia will continue to grow at similar rapid clips over the medium to long term. While LCCs have already captured over 50% of passenger traffic within Southeast Asia large growth opportunities remain given the rapid growth in the region’s economy and middle class. The orders placed over the last two years by AirAsia and Lion are eye-popping given their huge sizes and fact that traditionally airlines order aircraft in smaller bunches with deliveries spread out over shorter periods. But Asia is different. The growth trajectory is unrivalled and the cultures and strategies of the region’s largest LCC groups are unique. AirAsia and Lion will likely prove the sceptics wrong and successfully place into service all the aircraft they have committed to acquiring.

18

Malindo Air Key Data Fleet and Orders Malindo Air Fleet Summary: as at 10-Apr-2013


Malindo Air average fleet age

Source: CAPA Fleet Database Malindo Air owned vs leased for aircraft in service: as at 8-Apr-2013


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Lion's Malindo breaks AirAsia-MAS duopoly in Malaysian domestic market. Next stop: Delhi...and Asia Lion Air Group affiliate Malindo launched services on 22-Mar-2013 with seven daily flights spread across Malaysia’s two largest domestic routes – Kuala Lumpur to Kota Kinabalu and Kuching. With its hybrid business model and low fares, Malindo will impact both AirAsia and Malaysia Airlines (MAS), which were previously the only two carriers on domestic trunk routes within Malaysia. Malindo is planning rapid domestic and international expansion, leveraging Lion’s huge order book for 737s. India is poised to become Malindo’s first international destination with service to Delhi starting in Jun-2013, exploiting a market which is under-served due to cuts last year at AirAsia X. Several planned destinations in India and China will allow Malindo to increase aircraft utilisation and tap into the lucrative Malaysia-India and Malaysia-China markets. It also seeks to tap the fast-growing Indonesia-India and Indonesia-China markets, which Malindo will serve by offering connections to Lion. From a wider market perspective, Lion's entry into Malaysia almost certainly signals the sprouting of a new pan-Asian low priced competitor, something that will tilt the balance again. It is relatively late onto the scene, but a multitude of growth potential promises ample time to establish. And Lion will not be the last. Kuala Lumpur-Kota Kinabalu is the largest route for AirAsia and MAS Malindo is initially operating three daily flights on Kuala Lumpur-Kota Kinabalu and four daily flights on Kuala Lumpur-Kuching. Kuala Lumpur-Kota Kinabalu is currently the largest domestic route in Malaysia with about 59,000 weekly seats prior to Malindo's launch, which makes it the 12th largest route within Southeast Asia. It is the largest route based on seat capacity at both the AirAsia Group and MAS. AirAsia’s Malaysian subsidiary currently operates 15 daily or 105 weekly flights between Kuala Lumpur and Kota Kinabalu with A320s in 180-seat single class configuration. MAS currently operates 68 weekly frequencies but is adding 12 weekly frequencies in early Apr-2013 for a total of 80 weekly frequencies, according to Innovata data. MAS serves the route with a mix of 737-800s and 737-400s. Its 737-800s are configured with 16 business and 150 economy class seats. Its 737-400s are equipped with 128 economy and 16 business class seats. Malindo adds 7,560 weekly return seats to the Kuala Lumpur-Kota Kinabalu market as it has configured its 737-900ERs with 168 economy and 12 business class seats. As a result Malindo’s entry has led to an 11% increase in total weekly capacity to over 66,000 return seats.

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Malindo captures 11% share of Kuala Lumpur-Kota Kinabalu market By mid Apri-2013, when MAS increases seat capacity on the route to about 25,000 return seats, there will be over 70,000 return seats in the Kuala Lumpur-Kota Kinabalu market. Malindo will account for an 11% share of capacity between Kuala Lumpur and Kota Kinabalu for the week commencing 15-Apr-2013, compared to 54% for AirAsia and 36% for MAS. Just prior to Malindo’s launch on 22-Mar-2013, MAS accounted for a 36% share of capacity while AirAsia accounted for 64%. But back in Jan-2013, prior to AirAsia adding one daily flight for a total of 15, MAS captured a 38% share and AirAsia accounted for 62%. Kuala Lumpur to Kota Kinabalu capacity and capacity share by carrier: 15-Apr-2013 to 21-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Kuala Lumpur to Kota Kinabalu capacity by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

Note: Malindo capacity not displayed Source: CAPA – Centre for Aviation & Innovata

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In terms of economy class seats, AirAsia will still have a 56% share of the market while MAS will capture a 33% share and Malindo will account for the remaining 11%. In the much smaller business class market, MAS will capture 84% and Malindo 16%. Malindo targets both MAS and AirAsia with hybrid product From a product standpoint, Malindo is targeting MAS. But its low fare structure is aimed more at the low end of the market. With its hybrid model and “not just low cost” marketing slogan the carrier is trying to woo passengers by offering a low fare while still providing a relatively high level of service. Its economy class seat offers a 32in pitch, which is about 3in better than AirAsia and 2in better than MAS. Malindo offers some frills in economy, including seatback in-flight entertainment and a 15kg luggage allowance, which gives it a clear differentiator over AirAsia. MAS has seatback IFE on its 737-800s (but not its 737-400s, which will be phased out over the next couple of years). In Feb-2013 MAS increased its economy class luggage allowance to 30kg, in a bid to retain customer loyalty ahead of Malindo’s entrance. Both MAS and Malindo provide complimentary drinks and snacks in economy class while AirAsia follows a pure LCC model and charges for drinks, food and checked bags. A key differentiator for MAS is its strong frequent flyer programme and membership in the oneworld alliance. Malindo’s business class product features wide leather recliner seats in two-by-two configuration with 45in pitch, seatback IFE, meals, drinks and a 30kg luggage allowance. MAS has a similar business class seat on its 737-800s with seatback IFE and a pitch of 42in (the 737-400 does not have any IFE and has a slightly smaller pitch). In Feb-2013 MAS increased its business class checked luggage allowance from 30kg to 40kg. Malindo and MAS both operate at the main terminals at Kuala Lumpur and Kota Kinabalu. AirAsia uses the basic low-cost terminals at both airports and does not use air bridges. Malindo’s low fares to pressure yields at MAS and AirAsia Malindo is offering one-way all-inclusive economy class fares on Kuala Lumpur-Kota Kinabalu as low as MYR68 (USD22) and one-way all inclusive business class fares as low as MYR588 (USD189). Malindo has said these promotional prices will continue for at least the next six months. MAS one-way all-inclusive economy class fares on the Kuala Lumpur-Kota Kinabalu route start at MYR150 (USD48). MAS one-way all-inclusive business class fares on the route started at MYR983 (USD316) until Malindo's entry, now reduced to MYR856. MAS will want to keep most of its business class seats available to higher yielding connecting passengers, particularly premium passengers coming off its long-haul network. MAS generally has a relatively small bucket of seats available at LCC type fares. It has a premium focus, which was reinforced as part of its new business strategy that included joining oneworld on 01-Feb-2013.

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As part of its new strategy, the portion of transit passengers has increased to 65% as the carrier has rescheduled flights to maximise connections. MAS is hoping its focus on premium and high yielding economy passengers – in both the point-to-point and connecting markets – will mitigate any potential impact on yields as Malindo expands. But inevitably yield on some routes will suffer as MAS will need to compete directly with Malindo for some types of passengers. AirAsia could be more impacted as it relies more heavily on local point-to-point passengers. AirAsia is currently selling one-way economy class tickets on Kuala Lumpur-Kota Kinabalu that start at MYR89 (USD29) with fares for most days starting at MYR 134 (USD43). These prices, which can be even lower during promotional periods, include taxes but extra charges apply for checked luggage, drinks and food. While AirAsia generally sets aside larger buckets of low fares than MAS, its average fare has been increasing over the years as it has been able to take advantage of the strong position in the Malaysian market it has built up and the lack of LCC competition. AirAsia Malaysia in recent years has been one of the most profitable carriers in the world, with operating margins exceeding 20%. This clearly caught the attention of the Lion Air Group and its Malaysian partner, NADI. Firefly’s exit left room for a third airline on domestic Malaysian trunk routes Malindo is also taking advantage of the fact that there is no longer a budget airline subsidiary in the MAS Group portfolio. MAS subsidiary Firefly in 2011 briefly had an LCC 737 operation on trunk routes, including Kuala Lumpur to Kota Kinabalu and Kuching. At one point in 2011, Firefly had a 25% share of capacity in the Kuala Lumpur-Kota Kinabalu market. But the Firefly-branded 737 operation was shut down in late 2011 following a partnership agreement and stock swap between MAS and AirAsia. Firefly returned to its roots as a turboprop operator following a full-service regional carrier model. The MAS-AirAsia stock swap was subsequently unbundled in May-2012 but MAS has since been adamant that it does not need to re-establish a budget brand. But with only one LCC and one FSC competing on trunk routes, the market became ripe for penetration by a new carrier. Sceptics believe the Malaysian domestic market is too small to support a third carrier. But domestic routes in Southeast Asia that are similar in size to Kuala Lumpur-Kota Kinabalu have several operators. For example, the similarly sized Jakarta-Yogyakarta route in Indonesia is currently served by four carriers. In the Philippines, Manila-Davao is served by four carriers including three LCCs, while Ho Chi Minh-Danang in Vietnam is served by three carriers including two LCCs. Both these routes are similar in size to Kuala Lumpur-Kuching, which had about 51,500 weekly return seats prior to Malindo's launch, according to CAPA and Innovata data. Malindo captures a 15% share of Kuala Lumpur-Kuching market as MAS adds capacity Kuala Lumpur-Kuching is AirAsia’s second largest route with 14 daily frequencies. It is currently the third largest route for MAS with seven daily frequencies. But MAS over the next two weeks is adding three daily frequencies for a total of 10, making it the carrier’s second largest route.

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By mid Apr-2013, MAS will have a 33% share of capacity in the Kuala Lumpur-Kuching market compared to 52% for AirAsia and 15% for Malindo. Just prior to Malindo’s launch, MAS had only a 30% share while AirAsia had a 70% share. Kuala Lumpur to Kuching capacity share by carrier: 15-Apr-2013 to 21-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Kuala Lumpur to Kota Kuching capacity by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

Note: Malindo capacity not displayed; Transmile is a cargo carrier Source: CAPA – Centre for Aviation & Innovata Lion is currently offering one-way all inclusive fares between Kuala Lumpur and Kuching of only MYR38 (USD12) for economy class and MYR338 (USD109) for business class. MAS all inclusive one-way fares on the route currently start at MYR150 (USD48) for economy and MYR783 (USD252) for business. AirAsia fares start at MYR79 (USD25) including taxes.

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For most dates, Malindo’s economy fare is MYR78 (USD25) compared to MYR79 (USD25) for AirAsia but when factoring in the extra charges Malindo becomes the better deal. AirAsia accelerates expansion in Malaysian domestic market For most of 2012 AirAsia operated 12 daily flights between Kuala Lumpur and Kuching. The additional two flights have been added since the beginning of 2013. AirAsia is expected to continue adding capacity on domestic routes ahead of Malindo’s entrance. AirAsia’s Malaysian subsidiary is taking delivery of 10 A320s in 2013, two of which it has already received, for a total of 74. As CAPA reported on 05-Mar-2013:

Growth in Malaysia has taken a back seat in recent years as the focus has shifted more to Indonesia and Thailand to prepare the group’s second and third affiliates for IPOs. Passenger traffic at AirAsia Malaysia only grew by 9% in 2012 to 19.7 million while Thai AirAsia saw 21% growth to 8.3 million and Indonesia AirAsia saw 17% growth to 5.8 million. With the upcoming launch of Malindo, now is the time to again pursue growth in Malaysia. The 10 A320s being added to AirAsia Malaysia’s fleet in 2013 will be used to “dominate” domestic trunk routes as frequencies are increased. The carrier says capacity will in particular be added on domestic routes to East Malaysia and Johor Bahru. Some new international routes will also be added in a bid to further improve international connectivity. But the focus will be on maintaining AirAsia’s leading position in Malaysia’s domestic market, where it currently accounts for 52% of seat capacity.

Malindo expected to launch several more domestic routes in Jun-2013 Malindo is planning to grow its fleet to 12 737-900ERs by the end of 2013. The carrier states on its website that services from Kuala Lumpur to Miri, Sandakan, Bintulu and Sibu will “start soon”. Miri, Bintulu and Sibu will reportedly be launched in Jun-2013, when Malindo expects to receive two more aircraft. alindo has not yet cited possible routes within peninsular Malaysia, which are shorter flights than those connecting peninsular Malaysia with eastern Malaysia. But three routes within peninsular Malaysia – Kuala Lumpur to Penang, Langkawi and Kota Bahru – are among the five largest domestic routes in Malaysia, according to Innovata data. Kuala Lumpur-Miri is the fifth largest domestic route in Malaysia and is served four times daily by AirAsia and three times daily by MAS. Innovata schedules show MAS adding a fourth daily flight on the route in Apr-2013 and a fifth daily flight in Jul-2013. MAS is likely ramping up capacity at Miri, which is an important business destination as it has a vibrant oil and gas industry, in a bid to fend off Malindo prior to Malindo’s entry into the market. Kuala Lumpur-Sibu is the ninth largest domestic route and is served with five daily AirAsia flights but only one MAS flight. Kuala Lumpur-Sandkan is served with three daily AirAsia flights and 11 weekly MAS flights while Kuala Lumpur-Bintulu is served with 17 weekly

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AirAsia and two daily MAS flights. Neither MAS nor AirAsia has filed capacity increases for Sibu, Sandakan or Bintulu although changes are likely once Malindo firms up plans to launch these routes. Malindo plans to launch Kuala Lumpur-Delhi in June-2013 Malindo also plans to enter Malaysia’s international market in the coming months. The carrier has said it is considering international destinations within Southeast Asia as well as China and India. During CAPA’s Aviation Finance Asia Summit 2013 in Singapore on 20-Mar-2013 the COO of Lion Air Group subsidiary Transportation Partners, John Duffy, stated that Malindo is planning to launch services from Kuala Lumpur to Delhi in Jun-2013. The Kuala Lumpur-Delhi flight will be operated during overnight ("back of the clock") hours, allowing Malindo to increase utilisation of its initial fleet of four 737-900ERs. AirAsia X dropped service between Kuala Lumpur and Delhi in Mar-2012, leaving MAS as the only carrier on the route. MAS currently operates 12 weekly flights on the route, including seven with 777s and five with 737-800s. Kuala Lumpur to Delhi capacity share by carrier (one-way seats per week): 19-Sep-2011 to 08-Sep-2013

Source: CAPA – Centre for Aviation & Innovata

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While AirAsia currently serves four cities in southern India and Kolkata in eastern India from its Kuala Lumpur hub, the Malaysian carrier is not interested in central, western or northern India as it tries to keep the duration of its flights to four hours or less. AirAsia is however in the process of establishing an Indian-based JV airline, which will, if approved, change the LCC's operating dynamics. Malindo has a different perspective as it operates narrowbody aircraft in dual-class configuration and offers a more spacious economy class product with IFE. Malindo is looking at several destinations in India and other medium-haul destinations in Asia, particularly greater China, that would be served in the overnight hours. Such operations are ideal as the fleet can be used to focus on shorter flights in the domestic market during daylight hours. Malindo can also make medium-haul routes such as Delhi work by offering connections within its own network and to flights to and from Indonesia operated by sister carrier Lion. India-Indonesia is a particularly attractive market as it is growing rapidly but not served non-stop by any carrier. Lion currently serves Kuala Lumpur from Jakarta with three daily flights. Lion and Malindo are expected to launch services over the next year on several routes connecting Kuala Lumpur with secondary cities in Indonesia. Malaysia-Indonesia is a big local market now dominated by the AirAsia Group, which accounts for 59% of seat capacity between the two countries, according to CAPA and Innovata data. The Lion Group (including regional carrier Wings Air) now accounts for only 7% of capacity in the Malaysia-Indonesia market while MAS (including regional carrier Firefly) accounts for 21%. Now that it has launched an affiliate in Malaysia, the Lion Group will look to close this gap and exploit network synergies between the Lion and Malindo operations. Malindo will be able to woo passengers but profits may prove to be elusive Malindo should succeed at carving out a niche in the Malaysian domestic and international markets by differentiating itself from the two incumbents and by using an aggressive pricing programme. Malindo’s product and strategy will allow the carrier to open up new routes that are not currently served by any LCCs while competing on a majority of its routes with both AirAsia and MAS. Prior to Malindo’s launch AirAsia and MAS (including regional subsidiaries Firefly and MASWings) accounted for over 98% of domestic seat capacity in Malaysia. The AirAsia and MAS groups (including AirAsia sister carrier AirAsia X) accounted for about two-thirds of international seat capacity to and from Malaysia. The market was ripe for a shake-up. Succeeding at carving out a profitable niche, however, will be challenging. Malindo has stated it expects to break even or be slightly in the black by the end of 2013. But even if it is able to meet its target of 90% load factors, it will be hard to be profitable given Malindo’s combination of offering frills and very low fares. Inevitably Malindo will need to raise fares if it is to cover its costs. Malindo’s 737-900ERs have 33 fewer seats than the same aircraft operated in Indonesia by Lion. Malindo may struggle to generate sufficient yields and revenues to cover its higher unit costs and pay for the frills it

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provides. Trying to undercut AirAsia may not be a sustainable strategy alone and it has yet to be seen whether added frills will attract travellers who are extremely price sensitive. Where it does have a potential advantage is in attracting higher yielding business travellers and here such features as FFP and connectivity will be important. AirAsia meanwhile will not welcome the added competition in markets which had more or less settled into competitive but profitable operations. Its extremely high profit margins will suffer from added capacity and fare wars but the LCC has the benefit of high brand recognition and loyalty, along with plenty of cash to help ride out the storm. But, from a wider market perspective, Malindo's arrival signals the fact that Asia is about to see another major new low priced operator, with expansive ambitions. The Malaysian entry with Malindo is in that respect little more than a toe in the water for this looming giant.

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AirAsia Key Data Fleet and Orders AirAsia Fleet Summary: as at 10-Apr-2013


AirAsia projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart AirAsia international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table AirAsia top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile AirAsia schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Share price 2012/2013

Source: CAPA - Centre for Aviation and Yahoo! Financial

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AirAsia’s 2013 outlook marred by intensifying competition and continued losses at new affiliates AirAsia faces a potentially challenging 2013 as it accelerates expansion in its three core markets as part of an attempt to fight off intensifying competition within Southeast Asia. Meanwhile, the group will continue to incur losses at the two affiliates it launched during 2012, in the Philippines and Japan, and will incur start-up costs for its new joint venture in India. The AirAsia Group plans to focus growth in 2013 at the three affiliates which are profitable – AirAsia Malaysia, Thai AirAsia and Indonesia AirAsia. This established trio of LCCs, all of which are now at least seven years old, will take a record 25 aircraft in 2013 for a total of 138 A320s, representing 22% fleet growth. AirAsia Philippines, AirAsia Japan and AirAsia India are only expected to take about seven A320s in 2013, a surprisingly small figure for the Philippine and Japanese affiliates given they have not yet reached initial economies of scale. The group is waiting for AirAsia Philippines and AirAsia Japan to move into the black, which could take a few years, before pursuing more ambitious expansion. AirAsia pours additional capacity into Malaysia, Indonesia and Thailand AirAsia Malaysia is slated to grow its fleet in 2013 from 64 to 74 A320s as the carrier adds domestic capacity ahead of the planned late Mar-2013 launch of Malindo, which will become the second LCC in the Malaysian market and is partially owned by the Lion Air Group. Indonesia AirAsia plans to grow its fleet from 22 to 30 A320s as it tries to establish a bigger presence in the crowded but promising Indonesian domestic market, which is dominated by rival Lion. Thai AirAsia will take seven A320s in 2013 for a total of 34, with the additional aircraft being used primarily to increase domestic capacity as competition intensifies with Thai Airways and its LCC affiliate Nok Air. The result will be a significant increase in capacity for AirAsia within Southeast Asia, a market which already has a LCC penetration rate exceeding 50%. AirAsia is trying to tighten its grip on this market and fend off rapidly expanding competitors, particularly Lion. AirAsia and Lion both control about 30% of LCC capacity within ASEAN. But there is a risk of over-capacity and irrational competition on several routes. In Japan, which has a LCC penetration rate below 15%, AirAsia will grow its fleet in 2013 from three A320s to a still modest seven aircraft. Assuming the group takes a total of 32 A320s from Airbus during 2013, the last three aircraft will be left for AirAsia India. The new carrier, a joint venture between the AirAsia Group and the Tata Group, has said it aims to launch in 4Q2013 with an initial fleet of three or four aircraft.

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AirAsia Group fleet by affiliate

Note: *projected Source: CAPA – Centre for Aviation and company reports AirAsia Group projected delivery dates for aircraft on order*

Note: *only includes aircraft being purchased directly from manufacturers Source: CAPA – Centre for Aviation Any of the AirAsia affiliates could end up with more A320s than currently planned by going to the leasing market. The group traditionally has relied on its own A320 orders but over the last two years has also taken five A320s that were ordered by lessors. Currently the AirAsia Group operates 120 A320s, including 115 from its orders and five from leasing companies, and has another 360 A320s on outstanding order. The 360 figure includes 30 A320s for delivery over the last 10 months of 2013. AirAsia has already taken two aircraft this year (one each for AirAsia Malaysia and Thai AirAsia) and is slated take two more aircraft before the end of 1Q2013 (one for Japan and one more for Malaysia). AirAsia Malaysia leads the way in profits Once again AirAsia’s original business in Malaysia was the stellar performer in 2012, with the carrier’s 23% operating profit margin among the highest airline profit margins in the world. Thai

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AirAsia, which has been profitable for several years and completed an IPO in May-2012, also had a respectable operating profit margin of 11%. Indonesia AirAsia, which became profitable in 2010 after an initial several years of losses, reported an operating profit margin of only 3%. Indonesia AirAsia, which on a cumulative basis is still in the red, is planning its own IPO with a listing on the Indonesia Stock Exchange slated to debut in 2H2013. The Malaysia-listed AirAsia Group currently has a 49% stake in Indonesia AirAsia and owns a 45% stake in Thai AirAsia. AirAsia’s Malaysian operation, which is a fully-owned subsidiary of the AirAsia Group, saw its net profit increase by 238% in 2012 to MYR1.88 billion (USD610 million), driven by one-time items (see background information). The carrier’s operating profit was unchanged at RM1.16 billion (USD370 million) while revenues were up 11% to MRY5.00 billion (USD1.6 billion). As a result its operating profit (EBIT) margin slipped slightly from the 26% recorded in 2011 to 23%. Thai AirAsia recorded a 10% decrease in net profit to THB1.81 billion (USD61 million) and a 2% decrease in operating profits to THB2.15 billion (USD72 million) as revenues were up 20% to THB19.35 billion (USD650 million). Indonesia AirAsia recorded a 129% increase in net profits on a low base to IDR142 billion (USD15 million) while operating profits were up 136% to IDR353 billion (USD36 million) and revenues were up 18% to IDR4.36 trillion (USD449 million). The AirAsia Group was able to recognise its share of the Thai AirAsia profit as Thai AirAsia is cumulatively in the black. But the group will not be able to recognise any profits from Indonesia AirAsia until MRY163 million (USD52 million) of cumulative unrecognised losses have been reversed. The same policy applies to its new affiliates, which means it could be several years before the AirAsia Group is finally able to start booking profits from more than two its six airline affiliates or subsidiaries. AirAsia Philippines and AirAsia Japan are still in the red and are unlikely to become profitable in the near term. AirAsia Philippines recorded a net loss of MYR93 million (USD30 million) for 2012, including MYR23 million (USD7 million) for 4Q2012. AirAsia Japan recorded a net loss of MYR97 (USD31 million) million for 2012, including MYR40 million (USD13 million) for 4Q2012. The AirAsia Group owns 40% of AirAsia Philippines and 49% of AirAsia Japan. AirAsia Philippines off to rough start The continued losses in the Philippines are particularly concerning as the carrier has now been operating almost one year. The carrier still only operates two A320s and has not yet been allocated a single additional aircraft from AirAsia Group’s 2013 deliveries. AirAsia Philippines could still add aircraft in 2013 by taking aircraft directly from leasing companies but the AirAsia Group is clearly taking a very conservative approach to expansion in the competitive Philippine market. The Philippine domestic market is particularly challenging with five LCCs competing, leading to over-capacity and irrational competition. The LCC penetration rate in the Philippines domestic market is currently 85% with AirAsia Philippines accounting for only 1% of domestic capacity within the country, according to Innovata data.

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AirAsia Philippines is now focusing more on the international market, with flights from its base at Manila alternative airport Clark, to Hong Kong, Kuala Lumpur, Singapore and Taipei. Its domestic network has been reduced to just 11 weekly flights and two destinations – Davao and Kalibo. The AirAsia Group has said the Philippines affiliate will focus more on China markets and regional connectivity as it tries to improve profitability. The Clark-Taipei route, launched in Dec-2012, has been successful and has already been boosted from four to seven weekly flights. But the carrier has already struggled in other markets in greater China, pulling off the Clark-Macau route. AirAsia Philippines is keen to open new routes to mainland China but this is unlikely to occur until tensions between China and the Philippines ease. AirAsia Philippines’ lack of slots at Manila, where its four LCC competitors all operate, puts the carrier at a competitive disadvantage. The AirAsia Group noted within its results announcement for 2012 that Clark’s airport authority will commence shuttle bus services from Manila, improving connectivity from the city centre. But it is unclear if passengers will be swayed to take a bus through Manila’s notoriously bad traffic when there are generally low fare flights available from Manila International. AirAsia Philippines has quickly discovered it is difficult to serve the domestic market from Clark. International services can potentially work with the right low fare stimulation. But there are not many potential international markets to serve given the tensions with mainland China and the fact the two other key North Asia markets – Philippines-South Korea and Philippines-Japan – are currently not open to additional Philippine carriers. Southeast Asia is open but AirAsia already has affiliates in three other Southeast Asian countries, making the new Philippine operation unnecessary except in the Philippines-Singapore market. But the Philippines-Singapore market is already served by several LCCs, making it tough for AirAsia to carve out a profitable niche. In hindsight, establishing a Philippine affiliate was probably not the smartest move. But the decision was made before an opportunity to join with All Nippon Airways in Japan surfaced and long before India’s airline sector opened up to foreign investment. The AirAsia Group did not necessarily need a fourth affiliate in Southeast Asia, particularly in such a highly competitive and challenging market as the Philippines. AirAsia will try to ride out the storm, hoping consolidation will occur, leading to an improvement in market conditions. In the meantime, the group will retain a very small presence in the market in a bid to minimise losses while it invests more heavily in bigger and more promising markets. AirAsia Japan also off to a rough start but has more promising future AirAsia also has had its share of challenges at AirAsia Japan since the carrier launched in Aug-2012. As reported by CAPA in Jan-2013, AirAsia Japan’s load factors dropped below 60% in Oct-2012 and Nov-2012 and to around 10ppt below rival Jetstar Japan despite the two carriers having similar networks. AirAsia Japan also has reportedly suffered from poor on-time performance rates. In Dec-2012, the carrier’s initial CEO, Kazuyuki Iwakata, resigned.

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But the problems in Japan can be more easily resolved than the Philippines. The larger Japanese market is now only being penetrated by LCCs for the first time while in the Philippines Cebu Pacific has been operating as a LCC for over a decade, giving it a massive first mover advantage. The AirAsia Group is optimistic the new management team in Japan can right the ship. The group is particularly bullish on the second AirAsia Japan hub at Nagoya, which will open in late Mar-2013 with two domestic routes. The Nagoya hub is made possible as the carrier takes its fourth aircraft in Mar-2013. The group has stated that the opening of the Nagoya hub will boost average aircraft utilisation rates and reduce costs as the Nagoya airport, unlike AirAsia Japan’s Tokyo Narita base, is open 24 hours per day. The group has also pointed out that the launch of agency sales in Japan should boost load factors in 1Q2013. It claims AirAsia Japan is already performing well in the international market, where it “dominates” Japan-Korea routes, and says more international routes will be launched in 2013 as the fleet is expanded. However, the group is proceeding relatively cautiously in Japan. Growth of four aircraft in a LCC’s second year of operation is modest, particularly given the size of the Japanese market. AirAsia Group CEO Tony Fernandes stated in the group’s 26-Feb earnings announcement: “The main focus for the next few years will still be the core markets – Malaysia, Thailand and Indonesia. Then grow Japan and Philippines in a way it will be profitable.” AirAsia faces new competitor in Malaysia, prompting acceleration of growth In Malaysia, the group notes that with RM2.3 billion (USD740 million) in cash in the bank it has the “strength to compete with all competitors”. Growth in Malaysia has taken a back seat in recent years as the focus has shifted more to Indonesia and Thailand to prepare the group’s second and third affiliates for IPOs. Passenger traffic at AirAsia Malaysia only grew by 9% in 2012 to 19.7 million while Thai AirAsia saw 21% growth to 8.3 million and Indonesia AirAsia saw 17% growth to 5.8 million (see background information). With the upcoming launch of Malindo, now is the time to again pursue growth in Malaysia. The 10 A320s being added to AirAsia Malaysia’s fleet in 2013 will be used to “dominate” domestic trunk routes as frequencies are increased. The carrier says capacity will in particular be added on domestic routes to East Malaysia and Johor Bahru. Some new international routes will also be added in a bid to further improve international connectivity. But the focus will be on maintaining AirAsia’s leading position in Malaysia’s domestic market, where it currently accounts for 52% of seat capacity.

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Malaysia domestic capacity share (% of seats) by carrier: 03-Mar-2013 to 10-Mar-2013

Source: CAPA – Centre for Aviation & Innovata Given the relative small size of the Malaysian market, the extra capacity will likely come at the expense of yields. AirAsia Malaysia is confident it can grow its load factor to 85%, compared to 80% in 2012. Higher loads and a renewed focus on ancillaries, which dropped by 11% in 2012 on a per passenger basis, could potentially help offset a reduction in yields brought on by a fare war. But with Lion breaking the cosy AirAsia-Malaysia Airlines duopoly in Malaysia’s domestic market it will be challenging for AirAsia Malaysia to maintain its extremely high profit margins. Indonesia AirAsia tries to establish a meaningful domestic presence In Indonesia, AirAsia is conversely looking to build from a point of weakness. While Indonesia AirAsia is the largest carrier in Indonesia’s international market, it currently has less than a 5% share of domestic capacity. Most of the eight A320s being added by Indonesia AirAsia in 2013 will be allocated to the domestic market. The 2013 push for Indonesia AirAsia (IAA) began on 01-Mar-2013 with the opening of a new hub at Makassar, where the carrier has launched five new domestic routes. Makassar is the furthest point east in Indonesia served by Indonesia AirAsia, which previously only served the western half of the massive country. The carrier will continue to extend its network eastward in 2013 as it looks to develop a more meaningful network, which currently only consists of 12 domestic destinations. In an attempt to reach a larger demographic, Indonesia AirAsia (IAA) recently strengthened its distribution channels. The carrier now has a network of 3,500 agents, enabling it to access more of Indonesia’s massive population. A large agent network is Lion’s key strength and is necessary to compete in Indonesia’s LCC sector as most of the population does not yet buy tickets on the internet or have credit cards. Prior attempts by AirAsia to compete against Lion in Indonesia’s domestic market failed as AirAsia did not recognise the importance of offline distribution. AirAsia still faces an uphill battle domestically in Indonesia but is willing to invest heavily in trying to secure a large slice of

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Indonesia’s domestic market. The recent bankruptcy of Batavia, a full-service carrier AirAsia looked at acquiring in 2012, is a boost as it means there is one less competitor to worry about. “IAA, already a leader in the international market, has a good turnaround story with high increase in revenue and profit and with the recent change in strategy to focus more on domestic growth, we will see a lot more contribution coming from them as it begins to rise and compete with the larger airlines,” Mr Fernandes stated in the AirAsia Group 2012 earnings announcement. “IAA will be going for listing in the second half of 2013. Capacity is being put into IAA to support this rapid expansion plan.” Thai AirAsia grows from position of strength The AirAsia Group says the additional capacity being added in Thailand in 2013 is part of a strategy to “dominate” the domestic market as well as the Thailand-Southeast Asia and Thailand-China markets. Thai AirAsia also expects to expand its operation in India, where it will be used as a feeder for AirAsia’s new domestic Indian joint venture. The AirAsia Group is particularly confident in Thai AirAsia’s position in the market following the carrier’s move in Oct-2012 from congested Suvarnabhumi Airport to Bangkok’s old airport, Don Muang. The move to Don Muang has lowered Thai AirAsia’s cost base and given the carrier a unique product along with Nok, which is also based at Don Muang. Thai AirAsia currently has a leading 31% share of seat capacity in Thailand’s domestic market and a 7% share of capacity in the international market, which is second to Thai Airways. But Nok has also been expanding rapidly over the last year in the domestic market and plans to launch international services in mid-2013. Thailand domestic capacity share (% of seats) by carrier: 03-Mar-2013 to 10-Mar-2013

Source: CAPA – Centre for Aviation & Innovata Thai AirAsia also faces a new competitor in hybrid carrier Thai Smile, which the Thai Airways Group launched in mid-2012 and is being used along with Nok to try to fend off Thai AirAsia. Thai Smile selected Thai AirAsia’s second international largest route, Bangkok-Macau, as its launch route and is now competing against Thai AirAsia on nearly all of its routes. Nok’s

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forthcoming initial international route, Bangkok-Yangon, is Thai AirAsia’s third largest international route. Lion poses the biggest challenge to AirAsia While the competition is intensifying in Thailand, the conditions for 2013 are not as challenging in Thailand as they are in Indonesia or Malaysia. In Thailand, AirAsia is already well established in both the domestic and international markets and its main competitor, the Thai Airways Group, has traditionally struggled to compete against LCCs. In Indonesia and Malaysia, AirAsia faces in Lion a LCC with an extremely low cost structure and an ambitious expansion plan that is supported by an order book that is almost as massive as AirAsia’s. Indonesia is a big enough market for AirAsia and Lion as well as other LCCs such as Tiger affiliate Mandala and Garuda subsidiary Citilink. But these four carriers could be in for a prolonged battle for the fast-growing lower end of Indonesia’s domestic market, resulting in over-capacity in some markets and losses for at least some of the players. Malaysia is not a big enough market for two large LCCs and there could be a blood bath if new Lion affiliate Malindo expands ambitiously. AirAsia will certainly survive any looming battle and is well positioned to remain the leading LCC in its extended home market of ASEAN as well as in the broader Asian market. But it faces a challenging chapter as competition intensifies in Asia’s dynamic LCC sector. While there is a risk of hyper competition in Southeast Asia, the group also faces two strong competitors in the new Japanese LCC market and will have to compete against several established LCCs when it launches in India in 4Q2013. AirAsia India will attempt to carve out a new niche by focusing on secondary routes from a base at Chennai but it will almost certainly face a response from India’s five existing LCCs given the LCC penetration rate in the Indian domestic market already exceeds 60%. 2012 was a milestone year for AirAsia as it added two new carriers to its portfolio, ending a hiatus of seven years without launching a new affiliate. But adding two new affiliates at almost the same time created challenges and is a drain on resources, both financial and intellectual. The launch of yet another new affiliate in 2013 will add to the short-term headache. Exacerbating the situation, AirAsia faces new competitive challenges in its original three markets. AirAsia says it is now finished with expanding its portfolio. Eventually at least some or, as Mr Fernandes hopes, all three new affiliates will be profitable. If all the ventures are ultimately successful, AirAsia will be one of the top three LCC groups in the world and the fleet of 475 aircraft that the group has committed to will easily be absorbed. But for now the pain of expansion, and in the case of Malaysia the pain of being so wildly successful to spur new competitors, is being felt. AirAsia clearly has the cash to withstand the storm of challenges that 2013 brings and the group’s strong position in its core Southeast Asian markets should allow it to stay in the black by a healthy margin.

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BACKGROUND INFORMATION: AirAsia Malaysia operational highlights: 2012 vs 2011

Source: AirAsia Group Thai AirAsia operational highlights: 2012 vs 2011

Source: AirAsia Group

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Indonesia AirAsia operational highlights: 2012 vs 2011

Source: AirAsia Group AirAsia Malaysia financial highlights: 2012 vs 2011

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Source: AirAsia Group Thai AirAsia financial highlights: 2012 vs 2011

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Source: AirAsia Group Indonesia AirAsia financial highlights: 2012 vs 2011

Source: AirAsia Group

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Malaysia Airlines Key Data Fleet and Orders Malaysia Airlines Fleet Summary: as at 10-Apr-2013


Malaysia Airlines projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Malaysia Airlines international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Malaysia Airlines top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Malaysia Airlines schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Malaysia Airlines 2013 outlook clouded by increasing competition and launch of Malindo Malaysia Airlines (MAS) faces a challenging 2013 as low-cost carrier competition intensifies in the Southeast Asian market. The new oneworld member is back in the black, having posted profits for 3Q2012 and 4Q2012. But MAS remained in the red for the full year and will struggle to meet its goal of returning to full year profitability in 2013. MAS operates in a highly competitive home market, competing against AirAsia on a majority of its routes. Competition will intensify after new Lion Air Group affiliate Malindo launches services in late Mar-2013, becoming the second LCC in the Malaysian market. Meanwhile challenges remain on long-haul routes, where MAS one year ago reduced capacity significantly as part of a new business plan, due to rising fuel prices and unfavourable global economic conditions. MAS was back in the black in 2H2012 MAS reported on 28-Feb-2013 a small profit for 4Q2012, marking its second consecutive profitable quarter following a string of six consecutive quarters of losses. The group turned a net profit after tax of MYR51 million (USD16 million), compared to a net loss of MYR1.277 billion (USD412 million) in 4Q2011. MAS quarterly operating and net profits/losses: 1Q2011 to 4Q2012

Source: Malaysia Airlines

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The group’s operating profit for 4Q2012 was MYR44 million (USD1.18 million), compared to a MYR1.321 billion (USD426 million) operating loss in 4Q2011, as revenues increased by 5% to MYR3.66 billion (USD4.3 billion). Improvements in RASK and load factor were recorded, providing an encouraging sign to MAS’ ongoing turnaround efforts. The RASK and load factor figures were the highest in eight quarters, but passenger yield was still down slightly compared to 4Q2011 levels. MAS quarterly load factor, passenger yield and RASK: 1Q2011 to 4Q2012

Source: Malaysia Airlines For the full year MAS still incurred a net loss after tax of MYR431 million (USD139 million) and an operating loss of MYR361 million (USD116 million), compared to a net loss of MYR2.521 billion (USD813 million) and operating loss MYR2.296 billion (USD741 million) in 2011 (see background information). MAS embarked on a major restructuring programme in late 2011, cutting unprofitable routes and costs in a bid to avoid bankruptcy. MAS still has long road ahead as it continues restructuring initiative While the restructuring effort is starting to bear fruits, MAS still has a long road ahead to achieve sustainable profitability. The carrier has a dismal track record of several failed restructurings in recent years which typically show a relatively brief period of profitability followed by a return to losses. MAS is hopeful the changes implemented this time – including a smaller long-haul network, an improved premium product, an increased focus on regional flying and membership in oneworld – improve the carrier’s long-term outlook. But it is still early days and MAS should not view joining oneworld as a panacea. As CAPA reported in Jan-2013:

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With the benefits from oneworld not likely to come in the short-term, MAS needs to focus on further reducing costs and fully implementing the latest version of its business plan. The carrier’s restructuring is still a work in progress and by no means is MAS out of the woods. There have been several major adjustments to the MAS business plan over the last several months, including a reversal of capacity cuts and dropping plans to establish a new short-haul premium carrier. But the core component, a focus on premium services, remains the same. MAS is still investing significantly in fleet renewal as well as a product enhancements to reinforce its premium position.

MAS focuses more on Asia MAS is banking on Asia, where there is rapid growth and generally more profitability. MAS in early 2012 slashed nearly half of its long-haul network, dropping service to Buenos Aires, Cape Town, Dammam, Dubai, Johannesburg and Rome. The carrier now only serves seven long-haul destinations – Amsterdam, Frankfurt, Istanbul, Jeddah, London, Paris and Los Angeles. While MAS has increased capacity to London and Paris by introducing A380 services, MAS has reduced its overall exposure to long-haul markets and cut costs by eliminating several stations. The changes to the long-haul network has helped MAS improve profitability as it has reduced its exposure to the European market, which has been impacted by the economic downturn and intensifying competition from Gulf carriers. Middle East carriers currently offer approximately 25,000 weekly one-way seats from Malaysia while MAS’ entire long-haul network consists of only about 17,000 weekly one-way seats. MAS has significantly smaller long-haul networks than its two main Southeast Asian rivals, Singapore Airlines and Thai Airways, putting it at a competitive disadvantage as it tries to focus more on corporate accounts and premium passengers as part of its new business plan. But the increased focus on short and medium-haul flights within the Asia-Pacific region is logical given the growth in the intra-Asia market and MAS’ position in oneworld. MAS is the first member from Southeast Asia and significantly boosts the alliance’s position in several regional markets. For MAS, oneworld membership allows the carrier to virtually offer a comprehensive global network, a key component in winning back corporate customers, without having a large long-haul operation. (MAS, however, has not yet been able to fully exploit the benefits that oneworld can bring to its long-haul offering as it has not yet forged a codeshare deal with any of oneworld’s members from Europe or the Americas with the exception of niche carrier Finnair.) MAS exposed to intensifying competition within Southeast Asia The strategy of focusing more on the Asia-Pacific market also has its challenges as other carriers from the region – both low-cost and full-service – are similarly increasing their focus on Asia. From the full-service sector, SIA regional subsidiary SilkAir is growing at an annual clip approaching 20% while new Thai Airways unit Thai Smile is rapidly expanding its international network. But it is from the LCC sector that MAS is facing the toughest challenge.

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MAS and its biggest rival, AirAsia, have significant network overlap as AirAsia is now similarly focused on the Asia-Pacific region, having dropped European services in 2012. AirAsia already has a leading 52% share of capacity in Malaysia’s domestic market, compared to 47% for the MAS group (includes turboprop subsidiary Firefly). Malaysia domestic capacity share (% of seats): 04-Mar-2013 to 10 Mar-2013

Source: CAPA – Centre for Aviation & Innovata AirAsia Malaysia also now offers as many international seats as MAS. The AirAsia brand overall (includes all AirAsia Group affiliates and sister company AirAsia X) currently accounts for 39% of seat capacity in Malaysia’s international market compared to only 27% for MAS. Malaysia international capacity share (% of seats): 04-Mar-2013 to 10 Mar-2013

Source: CAPA – Centre for Aviation & Innovata In the Malaysia-Southeast Asia market (includes both domestic and international flights), the AirAsia Group currently has a 50% share of seat capacity compared to about 39% for the MAS group. While there is rapid growth in this market, driven by the region’s rapidly growing economies and middle class, competition is intensifying.

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AirAsia Malaysia in 2013 is pursuing the fastest growth in recent history, adding 10 A320s for a total of 74. Sister long-haul carrier AirAsia X is planning to add seven A330s, giving it a fleet of 16 A330s. Meanwhile Malindo plans to launch services in late Mar-2013 with an initial fleet of two 737-900ERs and operate a fleet of at least 12 aircraft by the end of the year. As a result, the total size of Malaysia’s LCC fleet will grown an estimated 40% in 2013 from 73 to 102 aircraft. MAS, which currently operates a fleet of over 100 passenger aircraft (excludes regional aircraft operated by Firefly and MASWings), is not expected to expand the total size of its fleet in 2013. But there will be some modest capacity growth for MAS as 737-800s continue to replace smaller 737-400s and as two additional A380s lead to the phase out of its remaining 747s. MAS continues to grow domestic and regional capacity, but modestly MAS says it plans to take delivery of 12 additional 737-800s in 2013 and will take another nine in 2014, allowing it to complete the renewal of its narrowbody fleet which now consists of a mix of 737-800s and ageing 737-400s. The carrier says it will also take four A330s in 2013 and one additional A330 in early 2014 as part of its widebody fleet renewal programme. The other part of that programme involves the A380; MAS took its fifth A380 in Feb-2013 and will take its sixth and final A380 in Mar-2013. Malaysia Airlines fleet: as of 4-Mar-2013

Note: MAS has ordered ATR 72s for its Firefly and MASWings regional subsidiaries. The fleet currently operated by Firefly and MASWings is not included in this chart Source: CAPA - Centre for Aviation

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MAS projected delivery dates for aircraft on order being purchased directly from manufacturers: as of 04-Mar-2013

Note: excludes new aircraft that are coming from leasing companies Source: CAPA – Centre for Aviation Capacity expansion will primarily be allocated to the domestic and regional international network with the exception of the Kuala Lumpur-Paris route, which saw a 75% increase in capacity on 01-Mar-2013 as A380 service was introduced. MAS reduced system-wide capacity (ASKs) by 6% in 2012. But the cuts to the long-haul network that were implemented in 1Q2012 accounted for almost the entire decrease. During the course of the year MAS added capacity, primarily within Asia and to London, and as a result the carrier’s ASKs were flat in 4Q2012 compared to 4Q2011. While international ASKs were down by 7%, domestic ASKs were up in 2012 by 5%. Domestic RPKs increased at a faster 14% clip, resulting in a 5.9ppt increase in domestic load factor to 72.9%. International RPKs dropped by 9%, resulting in a 0.9ppt drop in international load factor to 75% (see background information). The improvement in domestic load factor came as AirAsia Malaysia saw its load factor drop 0.6ppt to 80.1% (AirAsia does not break down domestic and international traffic figures). While MAS’ ability to close the load factor gap with AirAsia is meaningful, pressure will come in 2013 as significant domestic capacity is added in the market, led by AirAsia and Malindo. According to CAPA and Innovata data, MAS Group seat capacity within Southeast Asia (domestic and international) is up by 9% in Mar-2013 compared to Mar-2012 levels. During the same period, the AirAsia Group added capacity by only a slightly faster clip of 12%.

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Malaysia-Southeast Asia capacity by carrier (one-way seats per week): 19-Sep-2011 to 25-Aug-2013

Source: CAPA – Centre for Aviation & Innovata But 2013 will see much faster growth from AirAsia as well as rapid growth from Malindo while MAS capacity will be up only slightly. As a result, MAS will see a significant drop in its share of the domestic and regional markets. MAS to be impacted by expected over-capacity on domestic trunk routes AirAsia Malaysia is planning to use its additional 10 A320s for 2013 to increase frequency on domestic trunk routes, including to East Malaysia and Johor. Malindo plans to launch several domestic and regional international routes within its first year. Malindo reportedly plans to launch with serves from Kuala Lumpur to Kuching and Kota Kinabalu. These are the two largest domestic routes in Malaysia, with AirAsia currently operating 14 daily flights on Kuala Lumpur-Kota Kinabalu and 13 daily flights on Kuala Lumpur-Kuching. MAS currently operates between nine and 10 daily flights on Kuala Lumpur-Kota Kinabalu and seven daily flights between Kuala Lumpur and Kuching. Over-capacity on several major routes including Kuala Lumpur to Kota Kinabalu and Kuching is likely, leading to fare wars and irrational competition. Competing against AirAsia while challenging for MAS has been manageable but adding a second LCC will completely change the dynamics as the AirAsia-MAS duopoly on domestic trunk routes is eliminated. AirAsia

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Malaysia has benefitted from being the only LCC in the market, resulting in relatively high average fares for a LCC and fares that are sometimes higher than MAS, particularly when comparing all-inclusive prices that take into account AirAsia’s charges for checked bags, seat assignments and credit card payments. With the Lion Group entering the market, fares will almost certainly drop across the board. With Malindo a LCC, AirAsia will in theory be its biggest competitor. But Malindo is not following a pure LCC model, allowing it to compete more directly with MAS while also competing with AirAsia. For example Malindo plans to configure its 737-900ERs with two classes and offer seatback in-flight entertainment, matching products provided by MAS and not AirAsia. MAS is cognisant of the threat of Malindo and the prospects of increased competition in the domestic and regional markets. In releasing its 2012 results, MAS warned that: “Whilst Malaysia Airlines is located at the centre of aviation’s future growth hub, the airline remains cautiously optimistic of a challenging operating environment in the future. Although increased demand will be driven by emerging markets, a host of low cost carriers now offer value-for-money travel and increased competition, thereby putting pressure on yields of all airline players. In addition, rising fuel costs, demand shocks and seat over-capacity continue to bring challenges.” MAS’ lack of a LCC subsidiary is being exploited Lion and its Malaysian joint venture partner NADI are exploiting MAS’ failure to follow other Southeast Asian carriers in establishing a LCC affiliate or subsidiary. MAS briefly experimented in 2011 with a LCC operation on domestic trunk routes using the Firefly brand but discontinued the operation after forging a partnership and stock swap with AirAsia. The partnership and stock swap with AirAsia was subsequently undone but MAS has since been adamant about not needing a LCC subsidiary. MAS is confident it can compete against LCCs despite its higher cost structure by focusing on the premium end of the market. Its membership in oneworld is designed to help cement this premium position. MAS also recently increased its check-in baggage allowance by 10kg across all classes and reduced fees for excess baggage in a bid to further differentiate itself from LCCs. But inevitably MAS will have to compete against Lion and Malindo on short-haul routes as the portion of premium or high fare economy passengers on domestic and regional international routes is relatively small. Malindo’s business class product will also likely match MAS’ premium offering at a much cheaper price. As CAPA reported in Dec-2012:

MAS management believes it can selectively compete with LCCs in some lower segments of the market as long as it continues to reduce its costs. Matching AirAsia’s costs are impossible but as long as MAS is successful at attracting a premium from business passengers and high yielding economy passengers, through corporate accounts and travel agents, it will be able to continue matching and even under-cutting some AirAsia fares for select buckets. MAS recognises it will miss out on some lower ends of the market but believes it can offer the right product and services that appeal to all segments it sees as valuable.

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MAS management believes Firefly’s short-lived LCC operation created confusion among customers and its revised strategy of having Firefly and MASWings focus entirely on the full-service regional model, operating very short routes of under two hours with ATR 72s, has proven to be successful. MAS management also believes Firefly’s 737 operation cannibalised MAS own short-haul operation more than AirAsia’s much larger short-haul operation. As a result MAS is currently not considering establishing a new budget brand. But with the right strategy and product position the MAS group should be able to succeed with a multi-brand strategy that includes a LCC brand and minimise cannibalisation. The experiences of the Qantas, Garuda, Thai, PAL and SIA groups have proven the strategy of having a LCC subsidiary has a home in the Asia-Pacific region despite its earlier failures in Europe and North America. Inevitably, MAS will eventually revisit its short-haul strategy.

MAS has reduced its costs but not by enough to compete effectively over the long term While MAS for now is not willing to entertain the concept of a LCC subsidiary to fend off competition from AirAsia and Malindo, it is working to further reduce its cost. MAS will never be able to match the industry leading low costs of the AirAsia and Lion groups but it is imperative for MAS to reduce the gap with its rivals if it is to effectively compete. In its 2012 results announcement, MAS stated that it “expects 2013 to continue to remain challenging” and “that within this environment, Malaysia Airlines continues to accelerate implementation of its Business Plan to increase revenue and yields and reduce costs. Aggressive marketing and promotions, better capacity management, improved cost management and driving productivity for better efficiencies system-wide remains the focus area.” MAS has been working hard over the last year to reduce the costs of its short-haul operation through such initiatives as higher aircraft utilisation and quicker turn times. The renewal of its narrowbody fleet, which will be completed in 2014, has made such initiatives possible while reducing fuel and maintenance costs. The new narrowbody and widebody fleets are critical components of MAS’ turnaround plan from a cost as well as a product standpoint as the new aircraft come with an improved in-flight product, reinforcing the carrier’s premium position. MAS recorded an improvement in costs in 2012 of 13% (or 7% excluding one-off provisions), amounting to MYR2.1 billion (USD680 million). Fuel costs were down 10% due to lower consumption and aircraft handling costs were also reduced, partly driven by the closure of several overseas stations.

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MAS cost expenditure: 2012 vs 2011

Source: Malaysia Airlines MAS will need to continue reducing costs if it is to overcome the current competitive challenges. MAS says it is now working on several initiatives aimed at further reducing costs and improving unit revenues in 2013, including even higher aircraft utilisation, improved fuel efficiency and renegotiation of supplier contracts. But the carrier has a long way to go to achieving a cost base that is needed for sustainable profitability. It will not be an easy task given the company’s history of failing to implement cuts due to union opposition and political interference. MAS CEO Ahmad Jauhari Yahya remains confident, saying the “massive swing” in the carrier’s financial performance from 2H2011 to 2H2012 “shows our business plan is working” and that “we continue to gain traction in multiple initiatives that focus on increasing revenue and managing costs”. Indeed MAS had several noteworthy accomplishments in 2H2012 and early 2013, including improved profitability, introducing A380s and joining oneworld. The carrier claims its investment in its new flagship aircraft has paid off, with its A380s spurring new demand. MAS reported an 88% load factor in the first four months the A380 operated on Kuala Lumpur-London (July to October) and said projected initial loads on Kuala Lumpur-Paris also exceed 85%. The accomplishments of the last several months represent a major change compared to a tumultuous 1H2012 characterised by capacity cuts, major business plan revisions and the unbundling of the AirAsia stock swap.

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But MAS cannot celebrate just yet. The carrier will potentially face more challenges in 2013 than 2012. As MAS has learned with previous failed restructuring attempts, two or three quarters of profitability does not ensure a successful turnaround. With increasing competition in its home market, MAS could be in for a long and difficult 2013. BACKGROUND INFORMATION MAS financial highlights: 4Q2012 vs 4Q2011 and FY2012 vs FY2011


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MAS operating highlights: 4Q2012 and 4Q2011 and FY2012 vs FY2011

Source: Malaysia Airlines MAS key revenue, traffic and yield: FY2011 vs FY2012


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Cebu Pacific Air Key Data Fleet and Orders Cebu Pacific Air Fleet Summary: as at 10-Apr-2013


Cebu Pacific Air projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Cebu Pacific Air international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Cebu Pacific Air top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Cebu Pacific Air schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Cebu Pacific sees bright outlook for 2013 as rationality returns to Philippines market Cebu Pacific is planning more double-digit capacity expansion in 2013 as the Philippine LCC launches widebody services and expands its limited Japanese network. Cebu Pacific expects to expand seat capacity by 11% in 2013 and grow its fleet by 17% to 48 aircraft. The expansion, which includes the launch of its new long-haul operation, should allow the carrier to extend its already leading share of the Philippine market. Cebu Pacific recorded 11% growth in passenger traffic in 2012 and a 7% operating profit margin despite intense competition, particularly in the domestic market. The carrier’s load factor and net profit dropped slightly. But Cebu Pacific’s outlook for 2013 is brighter given the recent rationalisation and consolidation in the Philippine domestic market and the new opportunities for international expansion created as a result of Philippine authorities passing an ICAO safety audit in Feb-2013. Cebu Pacific reported on 15-Mar-2013 a 2% drop in net profit for 2012 to PHP3.57 billion (USD88 million) (see background information). Revenues were up 12% to PHP37.90 billion (USD923 million) but operating costs increased by 15% to PHP35.24 billion (USD867 million). As a result the carrier’s operating profit (EBIT) margin dropped 2.8ppt to a still healthy 7%. Cebu Pacific records higher domestic load factor than all competitors Cebu’s passenger traffic was up 11% to 13.3 million passengers, including an 11% increase in domestic traffic to 10.3 million and a 10% increase in international traffic to three million. But seat capacity was up 16%, resulting in a 3.7ppt drop in load factor to 82.6%. The carrier’s domestic load factor dropped 3.9ppt to 83.6% while its international load factor dropped 2.9ppt to 79.4%. But Cebu Pacific still maintained the highest load factor in the Philippine domestic industry by a wide margin. 2012 was a challenging year for all Philippine carriers as a result of rapid capacity expansion, which resulted in irrational competition and over-capacity in the domestic market. Total passenger traffic in the Philippine domestic market was up 10% to 20.6 million passengers, according to Philippine CAB data. But seat capacity was up 16% to 28.3 million seats. As a result, the average load factor in the Philippine domestic market slipped by over 4ppt to less than 73%. All of the expansion was driven by LCCs as the only full-service carrier serving the Philippine domestic market in 2012, Philippine Airlines (PAL), recorded a 5% drop in domestic traffic to 4.1 million. LCCs accounted for 80% of passenger traffic in the Philippine domestic market in 2012, up from 76% in 2011. Cebu Pacific led the market with a 46% share, up from 45% in 2011 despite the entrance of two new LCCs in the domestic market – AirAsia Philippines and new Tiger Airways affiliate SEAir – and rapid growth at PAL budget carrier affiliate AirPhil Express. A fourth LCC, Zest

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Airways, also serves the Philippine domestic market but recorded a 4% drop in domestic traffic in 2012 despite an 8% increase in seat capacity. Philippine domestic market share (% of passengers transported) by carrier: 2012

Source: Cebu Pacific using Philippine CAB data The lower load factors combined with a reduction in yields that resulted from the intensifying LCC competition created conditions in the domestic market which were unsustainable. The situation peaked in 3Q2012, when new SEAir became the fourth LCC on domestic trunk routes, joining Cebu Pacific, AirPhil Express, Zest Airways and start-up Philippines AirAsia. (Prior to a change in ownership that included the sale of a minority stake to Singapore-based Tiger, SEAir operated domestically following a full-service regional carrier model. Philippines AirAsia launched services in Mar-2012.)

Domestic market conditions in the Philippines start to improve But domestic market conditions improved in 4Q2012 and 1Q2013, leading to a brighter outlook for Cebu and other Philippine domestic carriers. Rationalisation has come to the market in the form of consolidation and a slowdown in capacity growth. Year-over-year domestic seat growth was 9% in 4Q2012 compared to 18% through the first three quarters of 2012. Capacity at the PAL Group in particular decreased as AirPhil Express exited seven domestic routes as part of a revision to the group’s two-brand strategy. PAL Group’s domestic seat capacity was down 11% in 4Q2012 compared to 4Q2011. AirPhil Express has since been used primarily on thinner regional routes that are not served by PAL mainline, leaving PAL without a budget brand on trunk routes. As CAPA reported in Oct-2012, Cebu Pacific and the country’s other LCCs benefitted from AirPhil’s exit from domestic trunk routes as it left a more sustainable three LCCs rather than four competing on the main routes. In discussing Cebu’s 4Q2012 earnings on 18-Mar-2013, Cebu Pacific CEO advisor Garry Kingshott said the carrier has already noticed a positive impact on yields in the markets that AirPhil exited. AirPhil has since moved further away from LCC competition, adopting more of a hybrid model as part of its rebranding as PAL Express. Under the new PAL Express brand, which was implemented on 15-Mar-2013, the carrier has again begun to offer frills such as drinks and snacks, becoming more like a regional full-service subsidiary than a budget subsidiary. Cebu Pacific to benefit from changes at AirPhil and other Philippine LCCs AirPhil, which is the second largest domestic carrier in the Philippines after Cebu Pacific, had been following the LCC model since 2010. Cebu Pacific and smaller Philippine LCCs clearly

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benefit as AirPhil/PAL Express hybridises and becomes more like a full-service carrier under the revised strategy of new PAL Group owner the San Miguel Group. In Feb-2013, AirPhil also dropped its operation at Manila alternative airport Clark, where it had operated three domestic and two international routes. AirAsia Philippines also has dropped in recent months one domestic and two international routes from Clark. Cebu is based at Manila but also operates four international routes and one domestic route from Clark. AirAsia Philippines is based at Clark and currently has a leading 30% share of capacity at the airport. But the new AirAsia affiliate has struggled in its first year of operation, dropping several routes and postponing fleet growth beyond two aircraft. On 11-Mar-2013 the carrier announced a tie-up with Zest, which also has struggled financially over the last year. AirAsia Philippines is acquiring a 49% stake in Zest, which has a valuable portfolio of slots at Manila International, while Zest is receiving a 15% stake in AirAsia Philippines. The two LCCs plan to pursue a strategic alliance. Few details have so far been provided but the alliance could see the AirAsia brand enter the Manila market, taking over some slots and flights from Zest. Cebu Pacific believes the resulting consolidation is a positive development for the overall industry given the excess capacity and irrational competition that plagued the domestic market in 2012. “While the details are a little hazy we generally welcome this development as the Philippine aviation industry is ripe for consolidation,” Mr Kingshott said. Cebu Pacific well positioned to exploit opportunities in Philippine international market Cebu Pacific executives are also bullish on the international market. The carrier captured 16% of the Philippine international market based on Philippine CAB data from the first three quarters of the year. (Full year data is not yet available for the international market.) Philippine international market share (% of passengers transported) by carrier: 9M2012

Source: Cebu Pacific using Philippine CAB data But Cebu Pacific is only scrapping the surface when it comes to the international market as it currently only operates regional international services and has an all-narrowbody fleet. The carrier is taking the first of at least eight A330s in mid-2013, opening up new opportunities in the long-haul market. Cebu also plans to use its A320 fleet to pursue significant expansion in the Japanese market in 2013.

Cebu Pacific has been blocked in recent years from expanding in Japan beyond its current three weekly flights to Osaka due to a JCAB restriction that prevents all Philippine carriers from adding capacity because Philippine authorities have not been in compliance with ICAO standards. Japan is now analysing the recent ICAO determination that concluded that the

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Philippines is in compliance again and is expected to lift restrictions on Philippine carriers within the next few weeks. Cebu Pacific plans Nagoya service and more capacity to Osaka Cebu Pacific has already applied to add frequencies to its thrice weekly Manila-Osaka service and launch service from Manila to Nagoya. The carrier already has traffic rights for more Osaka services and for Nagoya but has until now been unable to use them due to the JCAB restriction. Cebu Pacific is also interested in serving Tokyo and has requested the Philippine Government to open bilateral talks with Japanese authorities in the hope that a second Philippine carrier will be authorised for the Manila-Tokyo route. Cebu Pacific believes the Japan-Philippines market is under-served as a result of ICAO-related and bilateral restrictions. There are currently about 43,000 weekly return seats between the two countries. PAL, which serves four Japanese cities, currently has a leading 43% share of capacity in the market, according to Innovata data. “We believe a lot of those services are overpriced and we can stimulate that market,” Mr Kingshott said. He added that Cebu Pacific expects to allocate the equivalent of at least two A320s to the Japanese market. But the opening up of the Japanese market will also likely lead to services from other Philippine LCCs. The Philippines is also a potential destination for the new trio of Japanese LCCs which launched in 2012. As a result there is a risk that the now under-served market could quickly swing to an over-capacity situation. Philippines-South Korea market could see over-capacity Over-capacity is a more likely possibility in the larger Philippines-South Korea market. South Korean authorities have blocked new Philippine carriers from launching services to South Korea during the period that the Philippines was not in compliance with ICAO standards. But unlike Japanese authorities, South Korean authorities still allowed Philippine carriers that were already serving South Korea to add capacity. This provided an advantage to the three carriers already in the market – Cebu Pacific, Zest and PAL. With the Philippines passing the recent ICAO audit, the playing field in the Philippines-South Korea market will be levelled, allowing for other carriers including PAL Express and AirAsia Philippines to enter. Over-capacity could result. The South Korea-Philippines market is already suffering from too much capacity, particularly during certain times of the year. The average load factor in the market for 2012 was only 68%, according to Philippine CAB data. Korean Air is the largest carrier in the Philippines-South Korea market, carrying a 23% share of passengers between the two countries in 2012. PAL and Asiana each captured a 21% share, followed by Cebu Pacific with a 17% share and Zest with a 10% share. Three South Korean LCCs also serve Philippines – Air Busan, Jeju Air and Jin Air – but have a limited number of flights in the market. Opening up the Japanese market is key as Cebu Pacific has already expanded significantly in recent years to South Korea, greater China and all major markets within Southeast Asia. The carrier recorded 32% growth in passenger traffic in 2012 to Brunei, 30% growth to Vietnam, 29% growth to China, 22% growth to Taiwan and 21% growth to Malaysia.

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It already had a large operation in the bigger markets of Singapore and Hong Kong. Cebu Pacific captured a 25% share of passenger traffic between the Philippines and Singapore through the first three quarters of 2012, making it the second largest carrier in the market after Singapore Airlines. In the Philippines-Hong Kong market, Cebu Pacific captured a 21% share of the market through the first nine months of 2012. Passing the ICAO audit should also open up opportunities for Philippine carriers to expand in the Europe and the US. Cebu Pacific plans to join a delegation consisting of Philippine authorities and PAL in Brussels in Apr-2013, where they will meet with EU authorities to discuss removing the Philippines from the EU black list. Cebu Pacific believes this should occur by the end of 2013 although there will be no short or medium term benefits to the carrier as it currently has no ambitions of flying to Europe. US FAA Category 1 status could open up Guam for Cebu Pacific Philippine authorities have also requested a new audit from the US FAA, which in theory they should pass on the basis of the recent determination by ICAO auditors. But the process of being audited by the FAA and waiting for a determination will likely take at least several months. Philippine authorities need to pass a US FAA audit and regain its Category 1 status for Philippine carriers to add capacity in the US market. The current Category 2 status has mainly impacted PAL, which has been unable to use its new fleet of 777-300ERs to expand in the US market. But Cebu Pacific also has been unable to launch services to Guam, which it has been considering for several years. Recently it looked at launching Guam using wet-leased aircraft because Category 2 means it cannot launch services into the US with its own aircraft. As wet leases are expensive Cebu Pacific would prefer to serve Guam with its own A320s, something that would become feasible if the Philippines regains Category 1 status. Hawaii could also be an option with Cebu’s new fleet of A330-300s, which do not have the range to operate to the mainland US. But Cebu is focused at least for now on using its initial fleet of A330s on medium-haul flights to the Middle East and Australia rather than the US or Europe. Cebu Pacific expects extension of Philippines-Australia bilateral The carrier’s first batch of two A330s will be used to launch in Oct-2013 daily service to Dubai and up-gauge starting in mid-2013 some existing A320 flights to Singapore and Seoul. Dubai ticket sales are ahead of plan with about 7% of tickets already sold for flights in 4Q2013. Cebu Pacific aims to add service to Kuwait, Saudi Arabia and Australia after it takes delivery of two additional A330s in early 2014. Cebu Pacific already has received traffic rights to operate seven weekly flights to Australia, seven weekly flights to Saudi Arabia and four weekly flights to Kuwait. The carrier is now in the process of securing operating permits from Saudi Arabian authorities and could use its Saudi Arabian rights to serve Jeddah and/or Riyadh. Dammam is also being considered but would not count against its traffic rights as Dammam is an open skies airport.

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As CAPA previously reported in Jan-2013, for Australia Cebu Pacific currently only has the traffic rights to support seven weekly A320 flights. But Philippine and Australian authorities plan to meet in Apr-2013 to discuss extending their bilateral agreement. Mr Kingshott is confident “a substantial amount of traffic rights will become available” and Cebu Pacific will secure enough to support daily A330 services to Australia. The carrier has been considering both Melbourne and Sydney. While Cebu Pacific is seeking to expand its A330 fleet to at least eight aircraft by 2016 so far it has only secured four aircraft. The carrier currently operates 43 aircraft, including 25 A320s, 10 A319s and eight ATR 72s. Cebu Pacific fleet: as of 18-Mar-2013

Source: CAPA – Centre for Aviation & Innovata Cebu Pacific defers A320 deliveries as A319 sale falls through Cebu Pacific has already taken delivery of two A320s this year and plans to take delivery of three additional A320s in 2013 along with its first two A330s. Mr Kingshott said the carrier recently deferred delivery of two A320s from 4Q2013 to 2H2017. But its capacity plan for 2013 was actually adjusted upwards slightly as the earlier version of its 2013 fleet plan included the exit of seven A319s. The A319s are now staying in the Cebu Pacific fleet after a deal to sell the entire 10-aircraft A319 fleet to US low-cost carrier Allegiant Air fell through. Under the proposed sale, which had been forged in Jul-2012 but was dropped in Dec-2012, Cebu Pacific would have removed seven A319s from service in 2013. Mr Kingshott said Cebu Pacific still plans to phase out its A319s by 2017, when it takes the first of 30 A321neo aircraft that it has ordered as the carrier does not want to operate three different gauges of A320 family aircraft at once. But he said the carrier is happy to continue operating its A319s, which have fallen out of favour at most LCCs as they come with higher per seat costs than A320s, for the next few years and had adjusted its fleet plan accordingly. The proposed deal with Allegiant was dropped as the two carriers could not agree on conditions that could make the transaction work financially and operationally. The revised fleet plan for Cebu Pacific has the carrier’s fleet growing to 48 aircraft at the end of 2013, 51 aircraft by the end of 2014, 57 aircraft by the end of 2016 and 60 aircraft by the end of 2017. Cebu Pacific is slated to receive its first three A321neos in late 2017 with the other 27 aircraft to be delivered in 2018 to 2021.

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Cebu Pacific fleet plan: 2012 to 2017

Source: Cebu Pacific The growth of the narrowbody fleet in 2014 for now is only one aircraft as Cebu Pacific has five A320 deliveries but four lease returns. But this could be adjusted depending on market conditions. The current fleet plan also only lists four A330s as the carrier has not yet secured leases on the other four aircraft it plans to acquire. Cebu Pacific outlook is bright as opportunities for expansion beckon The A330s are a key component of Cebu’s medium to long-term strategy as they open up new international markets which are relatively under-served given the size of the Philippine Diaspora. But the carrier is also well positioned to benefit from continued growth in the domestic and regional international markets. Local demand remains strong and the recent rationalisation in the domestic market has led to an easing of the over-capacity situation from 2012. The Philippines also has emerged as a popular tourist destination, a status the government is working to further exploit. This should lead to increasing inbound demand in the international market as well as additional domestic demand as tourists fly around the Philippines to visit the country’s various islands. As the Philippines largest carrier by passengers carried, Cebu Pacific is well positioned to cash in on the anticipated growth in the Philippine market. Competition remains intense but Cebu Pacific has successfully ridden out the eye of the storm and should enjoy improved profitability along with continued double-digit growth over the medium to long-term. This is the first part of a series of articles looking at the outlook of the main carriers serving the Philippine market.

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BACKGROUND INFORMATION Cebu Pacific financial highlights: 4Q2012 vs 4Q2011 and FY2012 vs FY2011

Source: Cebu Pacific Cebu Pacific operating highlights: Dec-2012 vs Dec-2011 and FY2012 vs FY2011

Source: Cebu Pacific

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Philippine Airlines Key Data Fleet and Orders Philippine Airlines Fleet Summary: as at 10-Apr-2013


Philippine Airlines projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Philippine Airlines international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Philippine Airlines top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Philippine Airlines schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Philippine Airlines group faces challenging future after exiting budget carrier sector The outlook for Philippine Airlines (PAL) remains relatively bleak following a strategy shift which has resulted in the group exiting the budget end of the market. Transitioning low-cost sister carrier AirPhil Express into full-service regional carrier PAL Express may succeed at improving the group’s short-term financials but at the expense of growth and market share. The PAL Group will likely see its share of the Philippines domestic passenger market slip to less than 35% in 2013, compared to 42% in 2012. The shift in strategy, which leaves PAL focusing entirely on the much smaller but less competitive top end of the Philippine market, follows the Apr-2012 ownership change at PAL and AirPhil. The new majority owner of both carriers, the San Miguel Group, has brought new life into the group, providing a badly needed recapitalisation which is being used to pursue fleet renewal and growth of its long-haul network. But in the domestic and short-haul international markets PAL is suffering and the prospects are not bright given some of the decisions made by San Miguel during its first year running the PAL Group. PAL records another loss as passenger traffic falls PAL has struggled to find an appropriate niche since it first faced bankruptcy in the late 1970s. Recent years have seen little improvement and its parent company reported another loss for the quarter and nine months ending 31-Dec-2012. PAL Holdings posted a net loss of PHP2.62 billion (USD64 million) for the quarter, an 80% increase compared to the PHP1.45 billion (USD36 million) for the same three months of 2012. For the nine month period, PAL Holdings reported a 24% reduction in losses from PHP3.6 billion (USD88 million) in 2011 to PHP2.74 billion (USD67 million) in 2012 (see background information). PAL Holdings includes Philippine Airlines and subsidiary companies but does not include AirPhil/PAL Express, which is part of a separate sister holding company. Passenger revenues at PAL were down slightly in the last three months of 2012 and were up for the nine month period by 2% to PHP46.1 billion (USD1.1 billion). PAL saw its domestic passenger traffic decrease by 5% in the calendar year 2012 to 4.1 million while international passenger traffic increased by 1% to just under four million, according to Philippine CAB data. PAL's recent performance and outlook in the international market will be examined in the next part of this series of articles on Philippine carriers. Domestically PAL has struggled to compete against fast-growing LCCs, which are generally better positioned to serve the Philippine market given that most passengers in the country are extremely price conscious. PAL has seen its domestic traffic drop by 32% over the last three years from just over six million passengers in 2009. During this period, PAL has seen its share of the domestic market slip from 41% in 2009 to only 20% in 2012, according to Philippine CAB data. Back in 2006, PAL had a market leading 45%

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share of the Philippine domestic market. Then LCC Cebu Pacific overtook PAL to become the largest domestic carrier in the Philippines back in 2007 and its market share has grown from 36% in 2006 to 46% in 2012. Philippines domestic annual passenger traffic by carrier: 2006 to 2012

Note: *later known as AirPhil Express; now known as PAL Express **formerly known as Asian Spirit Source: Philippines Civil Aeronautics Board PAL’s budget airline strategy had some success over AirPhil's three-year life PAL’s initial response to Cebu’s rapid rise was to transition Air Philippines to an LCC, a model the PAL sister carrier adopted in early 2010 as it was rebranded AirPhil Express. AirPhil expanded rapidly over the subsequent three years, adding 13 A320s while retaining nine Bombardier Dash 8 turboprops for regional routes. The carrier transported nearly 4.5 million passengers in 2012, surpassing for the first time the number of passengers at PAL mainline – testament to the relative strength of the budget end of the market. Back in 2009, the last year it was still known as Air Philippines and followed the FSC model, the carrier had transported only 409,000 domestic passengers. The budget brand strategy seemed to work as it allowed PAL’s owners to mitigate the loss of market share to Cebu Pacific. AirPhil also gave PAL a response as three other LCCs entered the domestic market – Zest in 2008, followed by SEAir and AirAsia Philippines in 2012. (Zest was originally known as Asian Spirit, which followed a full-service regional model until rebranding and adopting the LCC model following an ownership change in 2008. SEAir also operated domestically as a regional full-service carrier until it became an affiliate of Tiger Airways in 2Q2012 and launched an LCC operation on domestic trunk routes while AirAsia Philippines was an entirely new entrant, launching services in Mar-2012). PAL and AirPhil combined accounted for 41.5% of the Philippine domestic passenger market in 2012, compared to 46.1% for market leader Cebu, 10% for Zest, 1.5% for SEAir and 0.8% for AirAsia Philippines. While PAL and Air Philippines combined accounted for 51.8% of the market back in 2008, the loss of market would have been much stiffer if it were not for the decision to enter the budget market with AirPhil. Over the last three years the PAL/AirPhil combination only saw its market share drop slightly from 43.2% in 2010 and 42.7% in 2011. After San Miguel took over one year ago from prominent businessman Lucio Tan as the majority and controlling owner of PAL and AirPhil (Lucio Tan continues to own large minority stakes in both carriers), it seemed the two-brand strategy that was initiated in 2010 would continue. Initially PAL’s new management team, led by San Miguel boss Ramon Ang, was looking at pursuing more rapid expansion of the AirPhil budget brand with more A320s as well as A330s sourced from PAL’s newly increased order book with Airbus.

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The A330s were to be used to launch a new long-haul low-cost operation in competition with Cebu Pacific’s new A330 operation, which is launching in mid-2013. AirPhil even requested and secured traffic rights for the UAE and Saudi Arabia as part of an expected focus on Middle East routes, which is also the focus of Cebu’s new long-haul unit. (PAL has discontinued all of its Middle East routes over the last several years due to stiff competition from Gulf carriers but there is room in the market for a potential LCC given the large number of Filipinos working in the Gulf region.) San Miguel, however, gradually adjusted the group’s two-brand strategy during the second half of 2012. The first phase of this adjustment came at the end of Oct-2012, when AirPhil stopped serving seven domestic trunk routes and took over from PAL services on six smaller domestic routes. The change left only one brand on virtually all domestic routes, with AirPhil being relegated to smaller generally unprofitable markets. PAL currently serves nine domestic destinations while PAL Express serves 30 domestic destinations, according to Innovata data. PAL Express’ largest remaining routes are predominately to major leisure destinations such as Caticlan, Kalibo and Puerto Princesa while PAL is now the only brand linking Manila with other major cities such as Cebu and Davao. Previously PAL and AirPhil operated side by side on major domestic trunk routes, following a typical two-brand FSC/LCC strategy which in theory involves the FSC focusing on connecting and higher-yielding point-to-point passengers while the LCC focuses on price conscious point-to-point passengers. Re-branding of AirPhil completes transformation back to full-service airline The second phase of the change in the two-brand strategy occurred on 15-Mar-2013, when AirPhil was re-branded PAL Express. The network for the carrier was not further adjusted, with PAL Express continuing to operate thinner domestic markets that are not served by PAL along with three regional international routes – Manila to Kuala Lumpur and Singapore and Cebu to Hong Kong. (These are being retained partially because of traffic rights issues because if PAL Express dropped the routes another Philippine carrier could apply for the rights. They cannot simply be transferred to PAL, which operates alongside PAL Express in the Manila to Singapore markets but does not serve Kuala Lumpur or the Cebu-Hong Kong market.) PAL Express network summary: as of 1-Apr-2013


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PAL Express fleet summary: as of 1-Apr-2013

Source: CAPA Fleet Database PAL Express top 10 routes based on capacity (weekly seats): 1-Apr-2013 to 7-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Most significantly, the rebranding came with a shift in the operating model, returning the carrier back to its full-service roots. PAL Express is now offering passengers complimentary snacks, drinks and newspapers as well as frequent flyer miles in the PAL programme. The two carriers are now striving to provide the same service standards at all touch points, providing a seamless product. Following a Cathay/SIA group model? Mr Ang says that while PAL Express is now a full-service carrier it will continue to be an “LCC in terms of managing cost”. Maintaining a lower cost structure than PAL is critical given most of PAL Express’ routes were historically unprofitable when operated by PAL. But with its frills, PAL Express can hardly be still considered an LCC. The carrier is now following more a regional full-service carrier model, similar to the model used by Singapore Airlines (SIA) subsidiary SilkAir and Cathay Pacific subsidiary Dragonair. It is also the model used by Thai Airways unit Thai Smile, which was initially envisioned as a hybrid low-cost regional carrier but has evolved to become more like a full-service regional than an LCC. SilkAir and Dragonair each have significantly lower cost structures than their parents, making them more viable options for thinner regional routes including markets with intense LCC competition. But they offer a full service product in all respects and focus on making sure a

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seamless product is provided to passengers connecting from flights operated by the parent brand. PAL Express has a similar proposition. PAL goes against the grain by deciding against having a budget airline affiliate While having a lower-cost – but not low-cost – regional subsidiary is logical for the thinner routes, PAL now finds itself without a play in the budget market. Ignoring the lower end of the market is risky as it goes against the common multi-brand strategy among Southeast Asian airline groups. SIA, Thai Airways, Garuda Indonesia and Vietnam Airlines all currently have budget airline subsidiaries or affiliates. Among other major Southeast Asian flag carriers, only Malaysia Airlines (MAS) also currently lacks a budget subsidiary, a seemingly flawed strategy that new Lion subsidiary Malindo is now exploiting. MAS did temporarily have an LCC operation under the Firefly brand until late 2011, when it made a similar U-turn to PAL. But the circumstances at MAS were different in that the U-turn was prompted by a partnership and equity swap with AirAsia, which was however later unbundled. There were no such external pressures behind PAL’s U-turn. The new management team, following recommendations from an outside consultancy, concluded that AirPhil was largely cannibalising PAL and taking away PAL passengers rather than effectively competing against Cebu Pacific and other LCCs. But this could have been fixed with changes at AirPhil rather than dropping the concept of a budget brand entirely. While PAL saw its passenger figures drop as AirPhil expanded, the rate of growth of AirPhil more than offset the PAL losses, indicating that AirPhil was also picking up passengers from other LCC and/or stimulating demand on its own. AirPhil’s annual domestic passenger numbers grew by four million from 2008 to 2012 while PAL’s figures dropped by half of that, or two million passengers. PAL Group domestic capacity share slips by 10ppt as capacity is cut While PAL is now picking up some of the passengers previously carried by AirPhil on domestic trunk routes, it has also lost a large chunk of passengers to competitors. PAL has generally increased capacity on the seven domestic trunk routes that AirPhil also used to operate. But the capacity increases have not been enough to completely offset the reductions in capacity from AirPhil. According to CAPA and Innovata data, PAL’s domestic seat capacity is currently down about 36% compared to Apr-2012 while domestic capacity at PAL Express/AirPhil is down about 29% over the same period. As a result the two carriers combined now have only a 33% share of seat capacity in the Philippine domestic market, compared to 43% one year ago.

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Philippines domestic capacity by carrier (weekly seats): 19-Sep-2011 to 22-Sep-2013

Source: CAPA – Centre for Aviation & Innovata Given the current capacity levels, the PAL Group could see its market share drop by as much as 10ppt from the 41.5% share it captured in 2011. Cebu Pacific will be the main beneficiary although smaller LCCs Zest and SEAir will also see their shares increase. AirAsia Philippines is now focused almost entirely on the international market but will benefit indirectly through its new strategic partnership with Zest. Cebu Pacific currently accounts for 50% of capacity in the Philippine domestic market, compared to about 43% a year ago. Zest currently has a 12% share of capacity, up from about 11% a year ago, while SEAir has seen its share increase from less than 1% to almost 5%. Cebu, which was able to capture a 46% share of passengers in 2012 as it had the highest load factor among Philippine carriers, should see its share of the Philippine domestic market exceed 50% for the first time in 2013. Cebu’s domestic load factor in 2012 was 77%, compared to 72% for PAL and 71% for AirPhil.

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Philippine domestic seat load factors by carrier: 2012

Source: Cebu Pacific using Philippine CAB data The domestic wrong-turn may not be retrievable The domestic market share ceded by the PAL Group is likely irreversible. While the move should improve the group’s profitability in the price sensitive domestic market, where both of its

brands have been in the red for some time, the PAL Group will not be able grow as fast as its competitors without a budget brand. As a result the group’s share of the market will continue to slip, which in the long term could also impact profitability. Without a budget brand, it will be difficult for the PAL Group to capture more than 30% of the Philippine domestic market over the medium to long term. While it does not have any full-service competitors on trunk routes, the overwhelming majority of the Philippine market is remarkably price conscious. The country’s domestic LCC penetration rate in 2012 was 80%. This will slip in 2013 due to the reclassification of AirPhil/PAL Express but it will gradually inch back up as other LCCs pursue more rapid expansion than the PAL Group. Abandoning the LCC model at AirPhil may seem on the surface like a smart move given the losses the carrier incurred since the 2010 re-branding and the irrational competition the domestic Philippine market saw in 2012. But consolidation in the country's overcrowded LCC sector was inevitable and San Miguel had the cash to ride out the storm and not waste the hefty three-year investment made by PAL’s previous majority owner into building up a budget brand. PAL will eventually pay the price as the budget end of the market continues to grow rapidly with its arch-rival Cebu Pacific and pan-Asian LCC groups AirAsia and Tiger enjoying the fruits. BACKGROUND INFORMATION PAL Holdings financial highlights, 3QFY2012 vs 3QFY2011 and 9MFY2012 vs 9MFY2011 Source: PAL Holdings

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Singapore Airlines Key Data Fleet and Orders Singapore Airlines Fleet Summary: as at 10-Apr-2013


Singapore Airlines projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Singapore Airlines international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Singapore Airlines top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Singapore Airlines schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Singapore Airlines looks to ride out the storm as profits continue to slide Singapore Airlines (SIA) has reported another drop in operating profits as the airline group continues to face challenging market conditions in the cargo and long-haul passenger markets. But the group remains in the black and its incredible record of never incurring an annual loss will almost certainly stay intact for at least the foreseeable future. The SIA Group saw its operating profit drop by 17% to SGD131 million (USD162 million) in its third fiscal quarter ending 31-Dec-2012. SIA has now seen its operating profit drop in seven of the last eight quarters. Pressure on profits will continue in 2013 but the group should be able to continue to eke out small profits. Over the medium to long term the outlook is brighter as SIA’s new strategy, which features a more balanced portfolio with an increased focus on the faster-growing budget and regional markets, beds down. The profitability of SIA’s long-haul operation should also get a boost in late 2013 after the carrier eliminates unprofitable non-stop flights to the US. For now it’s about battening down the hatches with a focus on cost containment and patiently waiting until all the recent major strategic changes can be fully implemented. SIA profits have been in steady decline for the last two years SIA’s glory days of consistent industry-leading profits ended in fiscal 2007/08, when the group turned net and operating profits exceeding SGD2 billion (USD2.5 billon). Profits rebounded to above the SGD1 billion (USD1.24 billion) mark in fiscal 2010/11 after two years of smaller annual profits and a few rare quarters of losses due to the global financial crisis (see background information). But over the last two years profits have again been in a steady decline. SIA has reported lower group operating profits for every quarter except one during calendar 2011 and 2012. The only exception was the quarter ending 30-Jun-2012, when the group’s operating profit increased from SGD11 million (USD14 million) to a still modest SGD72 million (USD89 million). SIA Group operating profit/loss for the last 12 quarters (in SGD million)

The group reported a rare quarterly operating loss of SGD5 million (USD6 million) in the three months ending 31-Mar-2012, or 4QFY2011/12. Market conditions have only slightly improved in the new fiscal year, with operating profits through the first nine months of FY2012/13 at SGD273 million (USD339 million), a reduction of 6% compared to the already meagre figures for the first nine months of FY2011/12.

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But SIA has done fairly well given the market conditions it faces and has remained in the black while other airlines, including its biggest rivals in Southeast Asia, have fallen into the red. SIA will almost certainly again post net and operating full-year profits for FY2012/13, and will most likely report an increase – albeit a modest one – compared to the SGD336 million (USD417 million) net profit and SGD286 million (USD355 million) operating profits from FY2011/12. Through the first three quarters of FY2012/13, SIA had a net profit of SGD311 million (USD386 million), including a net profit of SGD143 million (USD177 million) in 3QFY2012/13. The figure for the quarter represents a 6% increase while the figure for the nine months represents a 17% decrease but these include one-time items which resulted in a higher profit for the quarter but a lower profit for the nine month period. SIA Group financial highlights: 3QFY2012/13 vs 3QFY2011/12 and 9MFY2012/13 vs 9MFY2011/12

Source: SIA Group Cargo remains a weak spot for SIA while SilkAir remains strong Group revenues for 3QFY2012/13 were down less than 1% to SGD3.86 billion (USD4.79 billion) while costs were up by less than 1% to SGD3.73 billion (USD4.63 billion). The decline in revenues was primarily due to the poor performance at SIA Cargo, which reported a 10% drop in FTKs and a 4% drop in cargo yields. Group passenger traffic grew by 8% but the yield dropped 6% as SIA engaged in “promotional activities” to keep its aircraft full. SIA Cargo reported an operating loss of SGD29 million (USD36 million) for 3QFY2012/13 while the group’s other four main subsidiaries were profitable – SIA the parent airline with an operating profit of SGD87 million (USD108 million), regional carrier SilkAir with an operating profit of SGD34 million (USD42 million) and SIA Engineering with an operating profit of SGD31 million (USD38 million). Of the four subsidiaries, the results represented an improvement over 3QFY2011/12 except for the parent airline, which highlights the weakness of the passenger markets SIA serves. SilkAir has been more profitable than SIA mainline on a margin basis in recent years as it only operates within the stronger Asia-Pacific market and has a lower cost structure than SIA mainline. The SIA Group has started to pursue rapid growth at SilkAir as part of its new strategy to focus more on the regional and budget markets, thereby reducing its exposure to the weaker cargo and long-haul passenger markets. SilkAir, which operates 22 A320 family aircraft, grew capacity (ASKs) by 19% in 3QFY2012/13. RPKs were up only 14%, resulting in a 3.5ppts decrease in load factor to 75.3%. But with a

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break-even load factor of 67.1%, compared to a break-even load factor of 79.8% at SIA mainline, SilkAir can afford to have lower loads while remaining profitable and providing critical feed to SIA. SilkAir will continue to expand rapidly in 2013, with capacity additions planned for nine of its existing destinations from the end of Mar-2013. This includes the introduction of a fifth daily flight on SilkAir’s biggest two routes, Singapore to Penang and Phuket. SilkAir has been able to steadily grow in both these markets despite intense competition from low-cost carriers, which over the last decade have grown in Singapore from being virtually non-existent to accounting for 30% of the total market and over 50% of the market within Southeast Asia. SilkAir’s continued success in the fast-growing but highly competitive regional market is an important component of the SIA Group’s new medium to long-term strategy. SIA needs Scoot to restore growth although profits are unlikely to come anytime soon The launch of new long-haul low-cost subsidiary Scoot and increased involvement in short-haul low-cost carrier Tiger, which SIA owns a 33% stake in, are also important components of SIA’s new strategy as the group sees a need to participate in the rapid growth in the lower end of the market. Scoot launched services in Jun-2012 and currently operates a fleet of four 777s with a fifth aircraft to be added in 2013. SIA is not yet providing traffic or financial figures for Scoot. But the new carrier is unlikely to make positive contributions to the group until at least 2015, when it transitions to a new fleet of smaller and more efficient 787s. As CAPA reported in Jan-2013:

Scoot’s original business plan envisioned operating a fleet of 14 777-200/200ERs by the end of 2016. But the aircraft was always considered an interim solution and the SIA Group quickly realised Scoot needed to switch to smaller and new-generation widebody aircraft sooner rather than later. The introduction of 787s, combined with a large group of partners, changes the dynamics significantly. Scoot is unlikely to be profitable until both these components are fully in place and the carrier is operating a fleet of several 787s. The real test for Scoot will not come until the fiscal year beginning Apr-2015, when the carrier should have the fleet, network and strategy to start making positive contributions to the SIA Group. Having a likely initial loss-making period of three years is rather long but SIA Group has the financial backing to withstand three years of losses at Scoot and be patient as the new carrier slowly implements its business model.

Outlook in long-haul passenger markets remains bleak While budget carriers have grown rapidly in Singapore, SIA has seen its annual passenger traffic grow by only two million, or about 13%, since the turn of the century, giving it an average growth rate of 1% per annum. As conditions are still not ripe for growth in most of SIA’s long-haul markets, the group needs Scoot and a bigger SilkAir if it is to usher in a new era of growth.

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As SIA acknowledged in releasing its 3QFY2012/13 results on 07-Feb-2013, the outlook for the cargo and European and US passenger markets remains bleak. “The outlook for international air travel demand continues to be challenging and the cargo market remains depressed amid the troubled European economy and the weak recovery in the United States,” SIA stated. “Loads and yields of both passenger and cargo businesses are expected to remain under pressure, while the price of jet fuel continues to be at a historical high. The depreciation of revenue-generating currencies against the Singapore dollar poses yet another challenge.” SIA remains heavily exposed to cargo and the Europe and US markets. SIA currently serves 13 destinations in Europe according to Innovata data, giving it a bigger European network than any other Asian carrier. Europe currently accounts for 27% of SIA’s ASKs while US flights account for another 6%. (For the five one-stop routes to the US operated by SIA, only the ASKs on the second leg are counted.) Singapore Airlines capacity share (% of ASKs) by region: 04-Feb-2013 to 10-Feb-2013

Source: CAPA – Centre for Aviation & Innovata Discontinuation of non-stop US flights to improve profitability of SIA’s long-haul network In a bid to improve the profitability of its European network, SIA dropped service to Athens during 3QFY2012/13. SIA also announced during the quarter plans to drop non-stop flights from Singapore to Los Angeles and Newark. The last non-stop service to Los Angeles will operate on 20-Oct-2013 and the last non-stop service to Newark will operate on 23-Nov-2013 as SIA phases out its fleet of five A340-500s, which are in all-premium configuration with 100 business class seats. The all-premium Los Angeles and Newark flights are high profile and are an important differentiator, particularly for corporate accounts, as no other carrier operates non-stop flights between the US and Southeast Asia. But they are extremely expensive to operate and have required a special sub-fleet of aircraft dedicated for the operation. As other airlines have discovered, the economics of operating flights of over 16 hours are extremely challenging, particularly in an environment of high fuel costs. The flights were the longest non-stop in the world when launched in 2004 and today they are still the longest by a relatively wide margin.

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While load factors on SIA's non-stop flights have been reasonable since the end of the global financial crisis, when frequencies had to be reduced and promotions had to be offered in response to a sudden drop in demand, it is virtually impossible to make money on the routes. Eliminating the flights and phasing out the A340-500s should instantly improve the profitability of SIA’s long-haul operation. Newark has been served daily since Jan-2010, ending a period of about a year in which the service was only operated with five weekly frequencies. The Los Angeles-Singapore service was restored to daily in late 2010 but was cut back to five weekly flights in May-2011 and has since stayed at that level. Both services were initially offered in a two-class configuration with premium economy and business but SIA opted to reconfigure its A340s in 2008 to all-business after discovering it could not make money on such long flights with an economy or premium economy product. Monthly load factor on SIA’s Los Angeles-Singapore service: Jan-2010 to Jul-2012

Source: CAPA – Centre for Aviation and US Bureau of Transportation Statistics

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Monthly load factor on SIA’s Newark-Singapore service: Jan-2010 to Jul-2012

Source: CAPA – Centre for Aviation and US Bureau of Transportation Statistics SIA will end up losing some Los Angeles and New York premium passengers to other carriers as SIA’s one-stop product in these markets is similar to the one-stop product offered by several other Asian and US carriers. But SIA’s use of its flagship A380 in these markets should help mitigate the loss of the non-stop flights. SIA began using the A380 on its daily Singapore-Frankfurt-New York JFK service in Jan-2012 while its daily Singapore-Tokyo-Los Angeles service was upgraded to the A380 in Jul-2011. SIA also now operates the A380 on a daily service to San Francisco via Hong Kong. It also operates a daily 777-300ER service to San Francisco via Seoul and a 777-300ER service to Houston via Moscow which will return to daily between 20-May-2013 and 11-Aug-2013. Houston was served daily from Nov-2010 to Mar-2012, when the service was reduced to five weekly frequencies. It is unlikely SIA, which also previously served Chicago and Las Vegas, will add further capacity to the US given the current economic conditions and intense competition on trans-Pacific routes. But SIA does have the option of switching the type of A380 it uses to New York and Los Angeles should it find it lacks premium seats after the last non-stop flights in these markets operate. SIA currently has two configurations for the A380, one of which features 60 business class seats and the other with 86 business class seats. SIA to focus capacity expansion on Asia-Pacific market Expansion in Europe is also unlikely in the current environment with the exception of Scandinavia, where SIA is looking to exploit the synergies from a new joint venture with fellow Star Alliance member Scandinavian Airlines (SAS). SIA is increasing Singapore-Copenhagen services on 31-Mar-2013 from three to five weekly frequencies and more flights to Copenhagen

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and potential new flights to Stockholm are under consideration with joint venture partner SAS, which does not operate to Singapore. Otherwise SIA is focused primarily on expanding in the stronger Asia-Pacific market. SIA is adding five weekly frequencies to Japan at the end of Mar-2013 as its increases Fukuoka to daily and Osaka to double daily. SIA at the same time is also adding a fourth daily flight to Melbourne and two additional weekly frequencies to Adelaide for a total of 12. These increases reflect SIA’s strategy of focusing more on the faster-growing Asia-Pacific region with more full-service capacity from SIA and regional SilkAir brands as well as with LCC capacity from its subsidiary Scoot and its affiliate Tiger. SIA, however, remains committed to its long-haul passenger operation and continues to invest in its long-haul premium product. SIA’s fleet of 10 777-200ERs are being outfitted in 2013 with the lie-flat business class seat that has been featured over the last several years on its A380s and 777-300ERs. Once the 777-200ERs are reconfigured, SIA will offer a standard lie-flat business product across all long-haul flights. Meanwhile SIA has already begun working on a new generation premium product, which is slated to debut on a batch of 777-300ERs due to be delivered in late 2013. BMW subsidiary DesignWorks USA and James Park Associates are now designing the new cabins, which will also eventually be outfitted in SIA’s future fleet of A350s. SIA’s all-widebody fleet currently consists of 101 aircraft including 58 777s, 19 A330s, 19 A380s and five A340s. SIA will unveil its fleet and capacity plans for FY2013/14 in May-2013, when it releases its full-year earnings. But CAPA data shows the carrier has four additional 777-300ERs slated for delivery in calendar 2013 as well as four additional A330s. Singapore Airlines projected delivery dates for aircraft on order by type: 2013 to 2020

Source: CAPA – Centre for Aviation SIA always maintains flexibility in its fleet which gives it the option of accelerating retirements to offset the impact of new deliveries should it decide against pursuing capacity growth. While SIA will likely look to continue to grow capacity modestly, with a focus on medium-haul routes

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within Asia-Pacific, much faster growth will be pursued at SilkAir and eventually Scoot once the LCC starts receiving 787s. Scoot has 20 787s on order for delivery starting in late 2014. SIA looks to reduce costs as it waits out the current storm SIA, meanwhile, is working to reduce costs as it waits for better conditions in the cargo and long-haul passenger markets. In late Jan-2013, SIA announced it is releasing over the next six months 76 or 4% of its pilots, or all pilots who are on fixed-term contracts. While SIA is still planning to grow mainline ASKs by 4% in FY2012/13, it has been carrying a surplus of pilots for the last few years due to the capacity reductions implemented during the global financial crisis and the fact its academy has continued to turn out new pilots. SIA as part of its 3QFY2012/13 earnings announcement also said SIA and SilkAir will be implementing temporary capacity reductions in weak markets during 4QFY2012/13. SIA says a total of 138 mainline flights will be cut to 14 destinations: Bangkok, Beijing, Brisbane, Brunei, Guangzhou, Hong Kong, Kuala Lumpur, Male, Mumbai, Newark, Perth, Seoul, Sydney and Tokyo Haneda. The traditionally well-managed and conservative airline group is positioned well to ride out the current storm. While not nearly as profitable as it was in earlier generations, SIA remains in the black and has one of the highest market caps and cash positions in the global airline industry. Comments that SIA is on a one-way street down are overblown. As it was at the top of the industry for so long, both from a product and profit standpoint, it was inevitable SIA would eventually face choppier waters. The jury is still out on whether the major strategic changes unveiled over the last two years will be effective. But SIA needed to respond and it now has to patiently wait for a year or two for market conditions to improve and for its new long-term strategy to bed down. Currency conversion used: USD1=SGD1.24 BACKGROUND INFORMATION: SIA, SilkAir and SIA Cargo operating highlights: 3QFY2012/13 vs 3QFY2011/12 and 9MFY2012/13 vs 9MFY2011/12

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Source: SIA Group SIA Group annual operating profit: FY2007/08 to FY2011/12

Source: SIA

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Tiger Airways Key Data Fleet and Orders Tiger Airways Fleet Summary: as at 10-Apr-2013


Tiger Airways projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Tiger Airways international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Tiger Airways top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Tiger Airways schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Tiger returns to profitability but still faces challenges in Australia, Indonesia & the Philippines Tiger Airways enters 2013 more upbeat after ending a string of seven consecutive quarters of losses and returning to profitability in the last three months of 2012. But the Singapore-based low-cost carrier group still faces a challenging 2013 as it tries to reverse the losses at its subsidiaries or affiliates in Australia, Indonesia and the Philippines. Tiger’s original Singapore operation has recorded an encouraging improvement to its bottom line after going through a rough patch in late 2011 and early 2012, when over-capacity led to a decline in yields and load factors. The outlook for Tiger Singapore remains relatively bright, particularly as the carrier starts to see benefits from its new connection product. But LCC competition in Singapore is intense, making it challenging for Tiger and rival Jetstar Asia to post high profit margins. Market conditions in Tiger’s other three home markets are even more challenging, with profits in the short-term unlikely although the group remains optimistic about its long-term prospects in Australia, Indonesia and the Philippines. Tiger Airways Holdings reported a net profit of SGD2 million (USD2.5 million) in the three months ending 31-Dec-2012, which is the group’s fiscal third quarter (3QFY2013). While modest, the profit was the first time Tiger was in the black at the group level since 3QFY2011, when the group turned a net profit of SGD30 million (USD37 million). The group’s loss in 3QFY2012 was SGD17 million (USD21 million). Tiger Airways group financial highlights: 3QFY2013 vs 3QFY2012 and 9MFY2013 vs 9MFY2012

Source: Tiger Airways Holdings Tiger Singapore reports third consecutive profit Tiger Singapore turned a SGD27 million (USD33 million) operating profit for 3QFY2013, marking its third consecutive quarter of profits. The Singapore operation, which has generally

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been profitable since Tiger had its initial public offering in early 2010, incurred an operating loss of SGD5 million (USD6 million) in 3QFY2012. Tiger Singapore was also in the red in 2QFY2012 and 4QFY2012 before returning to the black in 1QFY2013. The nine months in the red, from Jul-2011 to Mar-2012, came as Tiger flooded the Singapore market with capacity increases that for a few months exceeded 50%. The huge capacity increase, which came during a period in which rival LCC groups Jetstar and AirAsia also rapidly expanded their operations in Singapore, could not be absorbed, leading to a drop in Tiger Singapore’s load factors and yields. Singapore-based Jetstar Asia was similarly impacted, recording an 81% drop in profits for the 12 months ending Jun-2012 to only SGD4 million (USD5 million). The Singapore market has now fully recovered with the capacity that was added in calendar 2H2011 and 1Q2012 finally being absorbed. The recovery is reflected in the year-over-year improvement in Tiger Singapore’s 3QFY2013 figures, including a 7.9ppt improvement in the carrier’s load factor to 85.6%. Capacity, as measured by ASKs, in the quarter was up by 16% while RPKs were up 28% and revenues increased 35% to SGD173 million (USD213 million). Tiger Singapore financial and operating highlights: 3QFY2013 vs 3QFY2012, 9MFY2013 vs 9MFY2012

Source: Tiger Airways Holdings Tiger sees room for more growth in Singapore Tiger Airways CEO Koay Peng Yen acknowledged that the capacity increases pursued in Singapore in FY2012 “was too sudden” and explained they were triggered by special circumstances following the grounding of Tiger Australia. While Tiger is now focusing more on growing its new affiliates in Indonesia and the Philippines, it still sees more room for profitable growth in Singapore even with the country’s LCC penetration rate having recently exceeded 30%, compared to essentially zero a decade ago. “We still think we will be growing in Singapore,” Mr Koay said during a media call to discuss Tiger’s 3QFY2013 results. “We think there’s still scope for Tiger (Singapore) to expand.” One driver of further growth at Tiger Singapore will be transit traffic following Tiger’s recent launch of a connection product which allows its passengers to transit in Singapore without having to clear immigration and re-check their bags. Mr Koay said it is too early to provide figures on passengers using the new tigerconnect product and connecting to flights operated by

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new long-haul low-cost carrier Scoot. But he said “we’ve seen very good movement in bookings” and Tiger will look to add capacity on routes which attract a large number of transit passengers. Transit passengers now account for roughly 15% of Singapore traffic at Jetstar but until now Tiger has never targeted this sector of the market. With a connection product, Tiger Singapore should be able to tap a new area of growth, boosting its traffic and yields even if growth in the local point-to-point short-haul LCC market ends up slowing as many expect. The transit product also boosts the prospects of Tiger’s new affiliates in Indonesia and the Philippines as both these carriers are expanding their operations to Singapore and will gain from being able to connect with Tiger Singapore. Tiger’s efficiency improves as aircraft are moved to new affiliates The improvement in Tiger Singapore’s bottom line over the last year was also partly driven by efficiency improvements, particularly an increase in aircraft utilisation. In FY2012 the post-grounding regulator-enforced capacity limits in Australia and the delays in launching new affiliates in Asia forced Tiger to put more aircraft into the Singapore market, leading to higher capacity in Singapore as well as lower utilisation. Utilisation has now returned to more normal LCC levels as since the beginning of FY2013 Tiger has launched its new affiliates in Indonesia and the Philippines while Tiger Australia has returned to pre-grounding capacity levels. This in turn has allowed Tiger to shift A320s out of Singapore and bring utilisation levels in Singapore back to normal. The expansion in Australia, Indonesia and the Philippines also has allowed Tiger Singapore to allocate most of its FY2013 deliveries to these three markets, leaving it with a smaller and more efficient fleet in Singapore. Tiger reported average aircraft utilisation of its fleet in Australia and Singapore of 11.8 hours in 3QFY2013, a 37% improvement over 3QFY2012. Tiger Australia is now back to an 11-aircraft fleet while Tiger Singapore ended 3QFY2013 with 19 A320s. Tiger Singapore will add one more A320 in 4QFY2013, giving it a fleet of 20 aircraft. This is still below the level Tiger Singapore was at during FY2012 when it found itself with too many aircraft as a result of the problems in Australia and the delays in establishing the new joint ventures in Indonesia and the Philippines. Tiger’s new Indonesian affiliate Mandala, which launched services in Apr-2012, will take its seventh A320 in Feb-2013. Tiger’s Philippine affiliate SEAir now operates five aircraft, including three A320s which were added during FY2013 and two A319s which the carrier began leasing from Tiger in Dec-2010. SEAir originally operated these two aircraft as part of a partnership programme with Tiger and became an affiliate in Jun-2012 after Tiger acquired a 30% stake in the Philippine carrier. Tiger Philippine affiliate SEAir faces challenging road to profitability SEAir and Mandala have both struggled during their start-up phases. Tiger recorded a SGD8 million (USD10 million) loss in 3QFY2013 related to its stake in SEAir, which indicates the Philippine carrier incurred a SGD28 million (USD34 million) loss in the quarter ending 31-Dec-2012.

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SEAir faces intense competition as it is the fifth LCC in the crowded Philippine market, which includes market leader Cebu Pacific, Philippine Airlines' (PAL) budget subsidiary AirPhil Express, Zest Airways and AirAsia Philippines. The Philippine market was plagued by over-capacity and irrational competition for much of 2012 and the short-term prospects remain relatively bleak unless there is consolidation. SEAir originally was a full-service regional carrier but has adopted Tiger’s LCC model and will adopt the Tiger brand in 2013, contingent on regulatory approval. In 2QFY2013 SEAir launched seven domestic trunk routes from Manila International that are also served by Cebu Pacific, PAL and Zest. SEAir currently only has a 5% share of capacity in the Philippine domestic market, leaving the carrier in a potentially vulnerable position. Philippines domestic capacity share (% of seats) by carrier: 21-Jan-2013 to 27-Jan-2013

Source: CAPA – Centre for Aviation & Innovata SEAir also has an operation at Manila alternative airport Clark, where it now operates one domestic and four international routes. SEAir competes on all but one of these routes with AirAsia Philippines, which is based at Clark and launched services in Apr-2012. AirAsia Philippines currently accounts for a 25% share of seat capacity at Clark while SEAir accounts for a 23% share. Clark International Airport system-wide capacity (seats) by carrier: 21-Jan-2013 to 27-Jan-2013


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Like the SEAir/Tiger joint venture, AirAsia Philippines has struggled in its start-up phase, an indication of the challenges smaller and newer LCCs face in gaining a foothold in the overcrowded Philippine market. Tiger affiliate Mandala also faces challenges Tiger recorded a SGD5 million (USD6 million) loss in 3QFY2013 related to its stake in Mandala, which indicates the Indonesian carrier incurred a SGD15 million (USD18 million) loss in the quarter ending 31-Dec-2012. Tiger currently owns a 33% stake in Mandala, which was a full-service carrier operating in Indonesia’s domestic market before it suspended operations and filed for bankruptcy in Jan-2011. After 15 months of tedious negotiations between Tiger and new Indonesian investors, Mandala re-launched in Apr-2012 following Tiger’s low-cost model and currently operates seven international and four domestic routes. As one of the largest and fastest growing markets in Asia, Indonesia has tremendous opportunities. But competition is intense and Tiger enters as the fourth LCC, joining market leader Lion Air, Garuda budget subsidiary Citilink and Indonesia AirAsia. On its domestic routes Mandala is competing against as many as seven Indonesian carriers. As CAPA reported in Dec-2012:

As the losses that have been incurred during 2012 would be expected with a start-up operation, the true test for the new Mandala will come in 1H2013 as the carrier expands its fleet and network. The biggest challenges will likely come in the domestic market given the intense and often irrational competition on Indonesia’s trunk routes. Entering a market as the seventh or eighth carrier is never an easy task. Mandala does have the advantage of having market awareness from its pre-Tiger era but back then it was a full-service carrier with a much different product proposition. The international market should be easier to penetrate and Mandala’s reliance on the Singapore market should particularly help mitigate risks. Given its ties to Tiger it is not surprising Singapore has so far been the carrier’s second largest destination after Jakarta. The Indonesia-Singapore market is large and growing fast but with bilateral limitations restricting further expansion, particularly on the Singapore side. With Mandala, the Tiger Airways Group can access Indonesian traffic rights and launch services it otherwise would be unable to operate with Singapore-registered aircraft.

Mr Koay acknowledges the challenges Tiger faces in the Philippines and Indonesia, explaining “we still have start-up issues we are resolving.” But he adds Tiger remains confident in the long-term potential and the group is committed to increase its share of these important Asian markets. Tiger focuses for now on fixing Mandala and SEAir rather than establishing third Asian JV Mr Koay said while Tiger is always looking at potential new joint venture opportunities in Asia, the group is now focusing on improving the profitability of its two newest affiliates. Tiger is believed to be looking at establishing new affiliates in several potential Asian markets including South Korea, China and Myanmar. The group issued a statement in early Jan-2013 announcing that SGD9 million (USD11 million) of proceeds from its 2010 IPO have been utilised “for the

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investment in a new joint venture airline” but Tiger management explained during the 3QFY2013 results call that this refers to its investment in Mandala or SEAir rather than a potential third Asian affiliate. Mandala and SEAir will both continue to expand in FY2014 as most of the 10 additional A320s the Tiger group will take in its next fiscal year will be allocated to Indonesia and the Philippines. Tiger is also committed to expanding Tiger Australia if its proposed joint venture with Virgin Australia is approved. In late Oct-2012 Tiger announced the sale of a 60% stake in its fully owned subsidiary Tiger Australia to Virgin Australia. The proposed deal is now being reviewed by Australian competition authorities and will be voted on by Tiger’s shareholders at a meeting on 31-Jan-2013. As part of the joint venture agreement, Tiger and Virgin Australia are committed to growing Tiger Australia from 11 to at least 23 A320s. Mr Koay said at least eight and potentially all 12 of these aircraft will come from Tiger’s order book. Tiger has orders for 27 additional A320s for delivery by the end of 2015, including the 10 aircraft slated to be delivered in FY2014. Tiger has not yet decided on an allocation for any of these orders but Indonesia, the Philippines and to a lesser extent Singapore should be able to absorb the 15 to 19 aircraft which do not end up in Australia. In fact if Tiger ends up succeeding at turning around Mandala, SEAir and Tiger Australia, the group could end up with a shortage of aircraft – the opposite of the situation it faced only one year ago. But the long-term future of any of these three carriers is hardly assured given the challenges they face in their home markets. Tiger Australia sees increased losses despite return to normal capacity levels Australia also has become a challenging and intensely competitive market. Rapid expansion at Tiger Australia would lead to even more capacity flooding Australia’s domestic market, potentially leading to further reduction in yields. Tiger was hoping for an improvement in profitability at Tiger Australia during 3QFY2013 as the carrier finally returned to pre-grounding capacity levels. But instead the carrier saw a further drop in profitability. Tiger Australia recorded a SGD13 million (USD16 million) operating loss in 3QFY2013, compared to a SGD9 million (USD11 million) loss in 3QFY2012. Passenger traffic increased 123% to 714,000 but revenues only increased 80% to SGD73 million (USD90 million). Tiger Airways Group CFO Chin Sak Hin said “competition has kept load factors and yields depressed” in Australia as multiple carriers added capacity.

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Tiger Australia financial and operating highlights: 3QFY2013 vs 3QFY2012, 9MFY2013 vs 9MFY2012

Source: Tiger Airways Holdings Tiger’s group outlook may be improved but is still far from bright With Tiger Airways Australia planning to further accelerate expansion following the proposed change of ownership, the prospects of rationale capacity in the Australian market appear dim. Tiger Australia, which has struggled financially since launching in 2007, will likely continue to incur losses. As a group Tiger also expects lower profits in 4QFY2013 compared to 3QFY2013, pointing out that the quarter ending December is typically its strongest. For the full fiscal year Tiger also expects to report another loss given the SGD30 million (USD37 million) in losses already incurred through the first three quarters. While Tiger’s group outlook has improved significantly as new Asian affiliates have finally launched and Tiger Australia has returned to pre-grounding capacity, it remains relatively gloomy. Profits in Australia, Indonesia and the Philippines are unlikely in the near to medium term while the Singapore LCC market continues to be competitive and relatively mature, resulting in thin profit margins. Tiger continues to look for new Asian markets to enter but there are fewer golden opportunities now that LCCs have been successfully established in most of Asia’s major markets. Tiger’s larger peers are expanding just as fast and in some cases even faster. Tiger faces more challenges in 2013 but if it makes the right moves could eventually find itself in a strong position in three of Southeast Asia’s most important markets and with a bigger and stronger portfolio of low-cost carriers.

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Exchange rate used: SGD1=USD1.23 BACKGROUND INFORMATION Tiger Airways group quarterly passenger traffic and RPKs: 2QFY2012 to 3QFY201

Source: Tiger Airways Holdings Note: Includes Tiger Airways Singapore and Tiger Airways Australia. Traffic from affiliate carriers excluded

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Thai Airways Key Data Fleet and Orders Thai Airways Fleet Summary: as at 10-Apr-2013


Thai Airways projected delivery dates for aircraft on order: as at 8-Apr-2013


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Route area pie chart Thai Airways international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Thai Airways top ten international routes by seats: as at 8-Apr-2013


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Premium/Economy profile Thai Airways schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013



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Thai Airways faces challenging 2013 as competition within Asia increases Thai Airways has returned to the black, posting a small profit for 2012 despite challenging conditions on its long-haul routes. The airline group plans to again focus growth in 2013 on short and medium-haul routes within Asia, where market conditions are generally more favourable. The group now includes three brands, including LCC affiliate Nok and regional hybrid unit Thai Smile – both of which are entirely focused on the fast-expanding Asian market. But Thai Airways is also now facing challenges on routes within Asia as competition intensifies. Thai AirAsia is pursuing rapid expansion, putting pressure on Thai. Rapid growth at Nok and Thai Smile will help the Thai Airways Group compete against LCCs but Thai Airways will need to reduce costs and make adjustments in order to achieve sustainable profits. Thai Airway posts 2012 profit as load factor increases by over 6 percentage points The Thai Airways Group reported on 28-Feb-2013 a net profit of THB6.51 billion (USD219 million) for 2012, reversing a loss of THB10.16 billion (USD342 million) in 2011. Group revenues were up 10% to THB213.53 billion (USD7.18 billion) but this figure is a bit misleading as Nok’s revenues were included in 2012 but not in 2011. Thai itself reported a 5% increase in revenues to THB204.26 billion (USD6.87 billion) and a net profit of THB4.43 billion (USD149 million). Passenger revenues for Thai were up 7% to THB165.49 billion (USD5.56 billion) while cargo revenues were down 5% to THB26.75 billion (USD900 million). These figures include Thai Smile as Thai Smile is a unit flying under the Thai Airways operators’ certificate and TG code, although there are plans to convert it into a fully-owned subsidiary. Thai also has three other business units covering cargo, grounding services and catering. Thai Airways Group financial highlights: 2012 vs 2011 Source: Thai Airways

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Thai Airways Group revenue highlights: 2012 vs 2011

Source: Thai Airways The 7% increase in passenger revenues at Thai/Thai Smile was driven by a 10% increase in RPKs and a 12% increase in passenger numbers to 20.6 million. ASKs were up only 1%, resulting in a significant 6.2ppt improvement in load factors to 76.2%. Thai Airways operational highlights: 2012 vs 2011

Note: includes figures for Thai Airways International PLC, which includes Thai Airways and Thai Smile, but excludes subsidiary companies Source: Thai Airways In releasing its 2012 results, Thai pointed out the 76.2% load factor marks its highest load factor in five years. But the higher loads came at the expense of yields.

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Passenger yields (including fuel surcharges) were down compared to 2011 levels for nine out of the 12 months in 2012. However, they were up on 2009 and 2010 levels, when Thai reported profits. Asia leads the way for Thai in 2012 and will again be the focus in 2013 Thai’s focus on regional markets helped drive the improvement in load factors and profitability compared to its disappointing performance in 2011. International passenger revenues within the Asia region increased by 13% in 2012 to THB65.74 billion (USD2.21 billion) while revenues in intercontinental markets (includes Australia and New Zealand) dropped by 4% to THB53.88 billion (USD1.18 billion). Domestic revenues were up 6% to THB14.69 billion (USD494 million). Thai Airways passenger revenue by type of market: 2012 vs 2011

Source: Thai Airways Thai Airways mainline reported a 5.5ppt improvement in load factors on regional international routes to 75.7% on a 17% increase in RPKs. Thai Smile reported an 82.3% load factor on its only international route, Bangkok-Macau. Thai Airways mainline also saw a 4.5ppt improvement in load factor on domestic routes to 76.7% as RPKs increased by 4% while Thai Smile recorded an 81.6% domestic load factor in its first year of operation. Australia also performed well, with Thai’s load factor surging 10.5ppt to 77.7% on a 13% increase in RPKs. Thai will likely expand further in Australia, where it serves four destinations with 39 weekly return flights, as part of its increased focus on the Asia-Pacific region. Thai is well positioned to take advantage of rapid growth in the Australia-Asia market but this is also a market being aggressively targeted by Qantas and the new Singapore Airlines-Virgin Australia combination. Both Qantas and its partner Emirates, which is by far the largest non-Asian carrier at Bangkok, serve Bangkok from Sydney.

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Thai impacted by economic downturn in Europe On European routes Thai managed to improve its load factor by 5.6ppt to 77.4%. But RPKs were up only 2% and Thai had to rely heavily on promotions to keep its flights to Europe full. Thai has warned that it expects continued weak travel demand to and from Europe. In a Jan-2013 presentation, Thai said yields on European flights were below target in 2012 and it continues to offer promotions for travel over the next three to six months. Thai relies heavily on inbound traffic, making it more exposed to the economic downturn in Europe than other Asian carries. The weak economic conditions in Europe were bad timing for Thai in that the carrier took delivery in 2012 of its first batch of three A380s. After initially operating the A380 on regional routes, Thai began operating its new flagship aircraft on Bangkok-Frankfurt in Dec-2012 after taking delivery of its second and third aircraft. Thai Airways will take delivery of its last three A380s in 2013, with one aircraft slated to come in Mar-2013, one in Oct-2013 and one in Nov-2013. Thai plans to use the fourth aircraft to begin A380 operations on the Bangkok-Paris route from 30-Mar-2013. It will continue to use the A380 to Hong Kong and Tokyo, illustrating the importance of regional routes. A380 investment caps fleet and product renewal initiative The new A380, which Thai operates in three-class configuration with 507 seats, supports the carrier’s increased focus on the premium end of the market. Thai has invested heavily in fleet renewal as well as cabin retrofits as part of an initiative to attract more premium passengers and increase yields. The A380s are replacing ageing 747-400s on some long-haul routes. Thai currently operates 16 747-400 passenger aircraft but is phasing out four of the type this year. All of the 747s remaining in the fleet will be retrofitted with new seats and in-flight entertainment systems across all cabins by May-2013. Thai is also taking delivery of six 777-300ERs in 2013, which will replace five 777-300ERs which are being returned to India’s Jet Airways as sub-leases expire. Thai is committed to taking another six 777-300ERs in 2014 and 2015, which will give it a fleet of 14 777-300ERs compared to only seven currently. Its older fleet of eight 777-200s are now being retrofitted under a programme which is slated to complete in Jun-2013. Thai also operates six 777-200ERs and six 777-300s. Its total passenger fleet currently consists of 97 aircraft including 27 777s (all types), 16 747-400s, three A380s, nine A300-600s, six A340-600s, 26 A330-300s, five A320s (operated by the Thai Smile unit) and five 737-400s. This includes one additional A330 and one additional A320 which were delivered from leasing companies in Jan-2013. Thai also operates two 747-400BCFs which were converted from its passenger fleet in 2012 and were used to replace more expensive wet-leased 777Fs.

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Thai Airways aircraft delivery plan: 2012 to 2017

Source: Thai Airways Thai Airways aircraft phase out plan: 2012 to 2017

Note: *aircraft being returned from Nok Air Source: Thai Airways Thai is improving its domestic and regional international product as it phases out its nine remaining A300-600s over the next two years. These will be replaced partially by A330-300s, which Thai operates within Asia-Pacific, and partially by Thai Smile’s A320s. Thai’s remaining fleet of five 737-400s, which are used on a small number of domestic and short-haul international routes, will also be phased out by the end of 2015 as Thai Smile takes over Thai’s narrowbody routes.

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Thai Smile is improving its premium product in 2013 by taking its additional A320s with a fixed business class. This will help improve Thai’s overall regional product as an increasing number of Thai and Star Alliance passengers, including premium passengers, connect at Bangkok Suvarnabhumi to Thai Smile-operated flights. Thai Smile’s hybrid model and fast-expanding network will be discussed in detail in a separate analysis article to be published later this week. Nok has also been rapidly renewing its fleet, replacing 737-400s with 737-800s. Thai increased its involvement in Nok in late 2011 after upping its stake in the carrier from 39% to 49% and gaining additional seats on Nok’s board. Nok is now being prepared for an IPO and for the resumption of international services, as CAPA reported in an analysis article which was published last week. Nok and Thai Smile are important components of Thai’s new multi-brand strategy, which is aimed at better capturing growth in the intra-Asia market while also fending off increasing competition. Thai mainline’s operation will also continue to expand within Asia-Pacific as the group tries to reduce its reliance on the challenging European market. Europe now accounts for 37% of Thai’s international ASKs. Thai Airways international capacity share (% of ASKs) 04-Mar-2013 to 10-Mar-2013

Note: Thai Smile-operated flights are excluded. Eastern Europe included within the other category. Source: CAPA – Centre for Aviation & Innovata Asia (excludes Australasia) accounts for 46% of Thai’s international ASKs and 74% of its international seats. This will grow as Thai continues to expand within the region. The portion of the group’s capacity which is allocated to the Asian market will also grow as Thai Smile and Nok pursues rapid expansion. Thai’s Asian expansion comes at a time when competitors are also expanding But most of Thai’s competitors are also growing in the intra-Asia market, some at an even faster clip. SIA regional subsidiary SilkAir and Cathay regional subsidiary Dragonair, both of which have models that Thai studied closely before deciding to establish Thai Smile, are growing at high double-digit clips. Malaysia Airlines (MAS) is also focusing heavily on its regional network as it similarly tries to reduce its reliance on long-haul markets.

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But LCCs pose the biggest threat to Thai, particularly Thai AirAsia. Thai AirAsia currently serves 13 domestic destinations and 19 international destinations, according to Innovata data. Its network will grow further in 2013 as it adds seven A320s for a total of 34 aircraft. Funds generated from a 2012 initial public offering are enabling Thai AirAsia to pursue accelerated expansion over the short to medium term. Thai AirAsia already has surpassed Thai Airways as the largest domestic carrier in Thailand. Thai Airways is still a much larger carrier in the international market, offering over four times as many international seats. But AirAsia is now a bigger airline group in several key regional markets including Thailand-Malaysia, Thailand-Cambodia and Thailand-Indonesia. According to Airports of Thailand data for the fiscal year ending 30-Sep-2012, Thai Airways accounted for 36% of passengers at Bangkok Suvarnabhumi while Thai AirAsia accounted for 12% and the overall AirAsia Group (including AirAsia Malaysia and Indonesia AirAsia) accounted for 14%. Suvarnabhumi handled 52.4 million passengers in FY2012, including 19 million for Thai Airways and 6.4 million for Thai AirAsia. Bangkok Suvarnabhumi market share by carrier (% of passengers carried): year ending 30-Sep-2013 Source: Airports of Thailand

Thai and AirAsia talk about cooperation is not likely to amount to much Thai Airways reportedly discussed possible cooperation with AirAsia during high level meetings in Feb-2013 involving Thai Airways' new president Sorajak Kasemsuvan and AirAsia Group CEO Tony Fernandes. But it is hard imagining significant cooperation between these competitors. In 2011 the AirAsia Group forged a partnership and stock swap with its Malaysia full-service rival MAS, but the deal was unbundled in 2012 and the two groups are no longer considering any form of partnership.

While a possible codeshare was reportedly discussed, this seems unlikely given Thai AirAsia on 01-Oct-2012 moved its entire base to Bangkok Don Muang Airport while Thai Airways has remained at Suvarnabhumi. As a result, it becomes very difficult for the two carriers to transfer passengers. AirAsia’s move back to Bangkok’s old airport, which is closer to the city and less congested than Suvarnabhumi, could be seen as giving AirAsia a competitive advantage. But the Thai Airways Group also has a presence at Don Muang through Nok, and the AirAsia move has improved the situation at Suvarnabhumi to the benefit of its main user, Thai Airways. The airport had been operating above its capacity, leading to delays and higher operational costs for Thai Airways. Thai AirAsia and Thai Airways are more likely to cooperate in the areas of aircraft maintenance and pilot training. The two carriers will certainly remain fierce competitors, with the Thai

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Airways Group using its mainline brand along with Thai Smile and an expanding Nok in an attempt to maintain its market share. It will not be an easy battle as Thai AirAsia has a lower cost base than all of Thai’s brands. While Thai Smile has a lower cost structure than Thai mainline as it has adopted some aspects of the LCC model, it is a hybrid carrier with a medium cost base. Nok also is not a pure LCC, offering some frills such as checked bags and snacks, and has a low to medium cost base. AirAsia is a pure LCC with one of the lowest cost bases in the industry. LCCs have doubled passenger traffic in Thailand since 2009 While Thai will never be able to match AirAsia’s costs structure, it needs to close the gap to be competitive. Thai recognises its costs are still too high despite years of reduction efforts. Thai has seen LCCs steadily expand their share of Thailand’s market at the expense of Thai but has still not done nearly enough to try to combat this trend. LCCs have expanded over the last decade from essentially zero to penetrating almost 30% of Thailand’s total market. LCCs in 2012 accounted for 51% of domestic seat capacity in Thailand and 16% of international seat capacity, according to OAG data. LCCs in the year ending 30-Sep-2012 accounted for 28% of passengers at major airports in Thailand, including about 50% of domestic passengers and about 16% of international passengers, according to Airports of Thailand data. LCCs over the last four years have doubled their traffic at Thailand’s main airports to over 20 million passengers, including 13.5 million domestic passengers and 6.9 million international passengers. The rate of LCC growth has been equal in both the domestic and international markets, sandwiching market leader Thai Airways. LCC passenger growth at Thailand’s main airports: FY2009 to FY2012

Note: for fiscal years ending 30-Sep-2009 to 30-Sep-2012. Airports of Thailand airports account for 84% of all traffic in Thailand Source: Airports of Thailand

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Thai Airways is again trying to further reduce its costs but will it be enough? Recognising it needs to narrow the cost gap with LCCs, Thai says it is now deferring unnecessary investments and reducing personnel costs by cutting headcount and overtime expenses. It is also eliminating non-revenue tickets on high demand routes. At the same time Thai is focusing on improving yield management by cutting unprofitable flights, adding frequencies on high demand routes particularly within Asia, adjusting flight timings to maximise demand, revising its fare strategy and driving its online distribution channel. Thai currently only sells about 10% of its tickets on the internet. While Thai Airways has returned to the black, its profit margin for 2012 was only 3% and its outlook for 2013 and beyond is murky given the competitive landscape. The carrier has made the right moves in pursuing a multi-brand strategy and increasing focus on the regional market. But its lack of a true LCC will be exploited as LCC competition within Southeast Asia intensifies. Thai will also struggle to recoup its investments in improving its premium product as it does not have as strong of a product or as strong of a local premium market as SIA or Cathay. Thai could potentially be squeezed at both ends as it faces increasing competition in both its short- and long-haul markets from carriers of all types. Thai has had its share of challenges over the last several years, including political instability, a spate of natural disasters, increasing competition in the Thailand-Europe market from Gulf carriers and increasing competition in the regional market from LCCs. 2013 will be no different and Thai could struggle to maintain its recently restored profitability.

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VietJet Air Key Data Fleet and Orders VietJet Air Fleet Summary: as at 10-Apr-2013


Route area pie chart

VietJet Air international capacity seats by region: as at 8-Apr-2013


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Top routes table VietJet Air top ten international routes by seats: as at 8-Apr-2013


Premium/Economy profile VietJet Air schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013


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VietJet to pursue more rapid expansion in 2013; Jetstar Pacific needs to respond – fast VietJet Air is planning to add three new domestic and three new international routes in the coming months as Vietnam’s leading low-cost carrier continues to pursue rapid expansion. VietJet has already surpassed rival LCC Jetstar Pacific to become Vietnam’s second largest carrier after Vietnam Airlines with approximately a 15% share of the country’s fast-growing domestic market. The privately-owned carrier will see its share of capacity in Vietnam’s domestic market approach 20% by mid-2013 – an impressive achievement given it only launched services in Dec-2011. VietJet now operates 10 routes, including one international route, with a fleet of six A320s. It plans to operate by the end of 2013 a fleet of 10 A320s on 16 routes – 12 domestic and four international. VietJet vice president of business development Dinh Viet Phuong stated at the CAPA Finance Asia Summit in Singapore on 20-Mar-2013 that the carrier has selected Ho Chi Minh-Singapore as its second international route. The carrier’s tentative network plan for 2013 also includes Ho Chi Minh-Taipei and Bangkok-Hanoi. The latter is poised to become VietJet’s first international route from the capital Hanoi and supplement its Ho Chi Minh-Bangkok service, which launched on 10-Feb-2013 with one daily flight. VietJet to become fourth LCC in highly competitive but large HCM-Singapore market Mr Dinh told CAPA that VietJet aims to launch service to Singapore in Jun-2013. VietJet will become the fourth LCC to serve Ho Chi-Minh- Singapore, which is the largest international route from Vietnam with over 30,000 weekly return seats. The route is currently served by Singapore-based LCCs Jetstar Asia and Tiger Airways along with Indonesian LCC Lion Air, Singapore Airlines (SIA) and Vietnam Airlines. Jetstar Asia now serves the market with three daily A320 flights while Tiger operates 17 weekly A320 frequencies, which will expand to 21 frequencies in May-2013. SIA and Vietnam Airlines each serve the route with two daily flights each, with SIA using 777s and Vietnam Airlines using A321s. Lion offers one daily 737-900ER frequency as part of a Jakarta-Singapore-Ho Chi Minh routing.

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Ho Chi Minh to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 15-Sep-2013

Note: VietJet capacity not yet displayed as carrier has not yet formally announced route and begun ticket sales Source: CAPA – Centre for Aviation & Innovata Tiger at one point in 2011 and early 2012 operated four daily frequencies to Ho Chi Minh while Jetstar also operated a fourth flight during some days of the week. But both carriers reduced capacity to Ho Chi Minh in early 2012, resulting in about a 15% drop in total capacity and returning the market to more rationale levels. With VietJet entering, there is a risk the market could return to an over-capacity situation along with unprofitability as the four LCCs serving the market engage in fare wars. VietJet to rely heavily on Vietnam’s local point of sales for Ho Chi Minh-Singapore Entering such an intensely competitive market could be challenging given the large amount of capacity from the incumbents. But Mr Dinh is confident VietJet can leverage its strength in the local Vietnamese market, where it has quickly built up a strong brand. Ho Chi Minh-Singapore is primarily a Vietnamese outbound market consisting of a mix of business and leisure travellers as well as migrant workers. While Tiger and Jetstar Asia have the advantage of operating the route for several years, VietJet has a stronger local distribution network. Tiger in particular lacks local distribution options in Vietnam while Jetstar also relies heavily on online sales although can leverage the presence of sister carrier Jetstar Pacific in selling in Vietnam.

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Competing with Singapore Airlines and Vietnam Airlines is not as much of a factor for VietJet as the carrier will significantly undercut their fares and appeal to the price-conscious traveller. But conversely the two full-service carriers could be impacted as a fourth LCC enters the market. SIA, which has already seen the performance of its Ho Chi Minh route degrade in recent years as a result of significant increases in LCC capacity, may ultimately have to hand one or both of its flights to regional subsidiary SilkAir. SIA for now has a leading 27% share of capacity in the market. VietJet has no fear of taking on more established foreign LCCs as it already competes with AirAsia in the Ho Chi Minh-Bangkok market. Bangkok is the second largest international destination from Ho Chi Minh. In addition to Thai AirAsia, the Ho Chi Minh-Bangkok market is served by Thai Airways, Vietnam Airlines, Turkish Airlines and Lufthansa. VietJet plans Hanoi-Bangkok and Ho Chi Minh-Taipei services The Hanoi-Bangkok route is currently served by Thai Airways, Vietnam Airlines, Thai AirAsia and Qatar Airways. Bangkok is the largest destination from Hanoi with almost 21,000 weekly return seats (includes both Bangkok airports). Hanoi to Bangkok* capacity by carrier (one-way seats per week): 19-Sep-2011 to 15-Sep-2013

Note: includes both Bangkok airports. VietJet capacity not yet displayed as carrier has not yet formally announced route and begun ticket sales Source: CAPA – Centre for Aviation & Innovata

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Ho Chi Minh-Taipei is a logical route for VietJet as it is the largest international market from Vietnam that is not yet served by an LCC. The route is now served by China Airlines (CAL), EVA Air and Vietnam Airlines. Vietnam Airlines has only one daily flight in the market, compared to typically two daily flights for CAL and 10 weekly flights for EVA. Ho Chi Minh to Taipei capacity by carrier (one-way seats per week): 19-Sep-2011 to 15-Sep-2013

Note: VietJet capacity not yet displayed as carrier has not yet formally announced route and begun ticket sales Source: CAPA – Centre for Aviation & Innovata Taiwan is the largest market in Asia without a local low-cost carrier. VietJet should help stimulate demand by introducing low fares, duplicating the impact seen in other international markets from Taiwan as foreign LCCs have entered. But Ho Chi Minh-Taipei is more an inbound market than VietJet’s other initial international routes, which could pose a challenge for VietJet given its brand has little to no recognition outside Vietnam. While VietJet has not yet set launch dates for Ho Chi Minh to Singapore and Taipei or Hanoi to Bangkok, it has said it plans to have four international routes by the end of 2013 and has identified these routes in its network map. VietJet also has said it plans to have 12 domestic routes by the end of 2013.

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VietJet already operates nine domestic routes and has identified two more in its network map – Ho Chi Minh-Buon Ma Thuot and Hanoi-Nha Trang. These two routes were announced on 25-Mar-2013 and tickets sales have already begun for flights starting 20-May-2013 and 01-Jun-2013, respectively. VietJet’s booking engines shows Ho Chi Minh-Buon Ma Thuot will be operated with one daily flight operating year-round while Hanoi-Nha Trang will be operated with two daily seasonal flights from 01-Jun-2013 to 02-Sep-2013. VietJet has not yet identified its 14th and final domestic route for 2013. But it most likely will be a route linking two existing destinations such as Hanoi to Buon Ma Thuot, Dalat or Phu Quoc. These destinations for now are only served by VietJet from Ho Chi Minh. For the peak summer 2013 season, VietJet will have six domestic routes from its Ho Chi Minh base and four from Hanoi. A seventh domestic route from Ho Chi Minh has to be suspended due to repairs at the Hue airport. VietJet network: end 2013

Note: Ho Chi Minh-Hue route currently suspended due to airport repairs at Hue Source: VietJet presentation at CAPA’s Aviation Finance Aviation Summit 2013

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VietJet number of routes: end 2011, end 2012 and end 2013 Note: Ho Chi Minh-Hue included among 16 routes but is suspended until Nov-2013 due to airport repairs Source: VietJet presentation at CAPA’s Aviation Finance Aviation

VietJet and Jetstar to both launch service to Vietnam’s coffee capital The selection of Buon Ma Thuot as VietJet’s 10th domestic destination comes less than two weeks after Jetstar Pacific announced Buon Ma Thuot as its seventh domestic destination. The dual announcements highlight the intensifying competition between the two carriers. Jetstar Pacific on 14-March announced

plans to launch service to Buon Ma Thuot from 26-Mar-2013. Jetstar’s booking engine shows the carrier is initially operating five weekly flights to Buon Ma Thuot from Ho Chi Minh and three weekly flights to Buon Ma Thuot from Vinh. VietJet will have slightly more capacity on Ho Chi Minh-Buon Ma Thuot, with one daily flight when it launches the route on 20-May-2013, but is not planning to operate Vinh-Buon Ma Thuot. Vietnam Airlines currently serves Buon Ma Thuot from Ho Chi Minh with five daily flights, three using ATR 72s and two using A321s, according to Innovata data. Vietnam Airlines also operates one daily A321 flight to Buon Ma Thuot from Hanoi and one daily ATR 72 flight from Da Nang. Air Mekong also operated the Ho Chi Minh-Buon Ma Thuot route until the Vietnamese regional carrier suspended operations on 28-Feb-2013. Air Mekong had served Ho Chi Minh-Buon Ma Thuot with between seven and 14 weekly Bombardier CRJ900 frequencies depending on the time of year, according to Innovata data. The carrier’s exit left an opening for an LCC. Prior to Jetstar Pacific’s entry, Ho Chi Minh-Buon Ma Thuot was the 12th largest domestic market in Vietnam based on seat capacity. It is no surprise Ho Chi Minh-Buon Ma Thuot has become a target for both Jetstar Pacific and VietJet as it is the second largest route in Vietnam not yet penetrated by LCCs. Only Hanoi-Can Tho was slightly larger (smaller once factoring in Jetstar Pacific’s new flights in the Ho Chi Minh-Buon Ma Thuot market). Buon Ma Thuot is located in Vietnam’s central highlands and is known as the coffee capital of Vietnam. Buon Ma Thuot is the ninth largest airport in Vietnam, based on current capacity, which makes it the largest destination not already served by VietJet. Buon Ma Thuot along with the mountain town of Dalat are popular retreats for Vietnamese looking to escape the heat of Ho Chi Minh City.

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VietJet and Jetstar to also clash with seasonal Hanoi-Nha Trang services Jetstar’s booking engine also shows that Jetstar Pacific plans to resume seasonal service from Hanoi to Nha Trang, a popular beach town in south central Vietnam, on 01-Jun-2013. Jetstar Pacific will operate one daily flight on the route through 31-August. VietJet’s booking engine indicates that Hanoi-Nha Trang will be served with two daily flights from 01-Jun-2013 to 02-Sep-2013. Vietnam Airlines currently serves the route with three daily flights and plans to add a fourth daily frequency for the peak summer season, according to Innovata data. Nha Trang is a highly seasonal destination, drawing large numbers of Vietnamese tourists during the summer months. But VietJet has served Nha Trang year round from Ho Chi Minh since it entered the market in May-2012, operating between one and two daily flights depending on the time of year. Within its 25-Mar-2013 announcement, VietJet said it will again double capacity between Ho Chi Minh and Nha Trang for the 2013 peak summer season, with a second daily frequency operating from 20-May-2013 to 31-Aug-2013. VietJet also said it plans to operate a second daily season frequency from Ho Chi Minh to Haiphong, Phu Quoc and Vinh from 20-May-2013 to 31-Aug-2013. The carrier says it will also add a third daily flight on the Hanoi-Danang route and have additional capacity from Ho Chi Minh to Dalat as well as to Bangkok. (VietJet has not indicated the number of extra flights for the Dalat and Bangkok markets and its booking engine for now still shows only one daily flight through the summer season on each route.) VietJet domestic routes: current and peak summer 2013 weekly frequency versus competitors

Note: route is in order of launch. ^Some extra flights from VietJet to Dalat are expected during peak summer season but number has not been specified. *Ho Chi Minh-Hue is a year-round route for VietJet and Vietnam Airlines but has been suspended until Nov-2013 as the airport was closed on 20-Mar-2013 for repairs Source: CAPA – Centre for Aviation, Vietjetair.com, Jetstar.com & Innovata VietJet’s share of domestic market nears 20% in summer 2013 The upcoming new domestic routes and capacity increases will give VietJet 27 domestic flights on 10 routes for the peak summer season, compared to 19 and eight respectively for Jetstar Pacific. VietJet currently accounts for about 15% of seat capacity in Vietnam’s domestic market, compared to 14% for Jetstar Pacific and 71% for Vietnam Airlines, according CAPA estimates. VietJet’s share of domestic capacity will increase to an estimated 19% during the peak summer season month of Jul-2013, compared to 67% for Vietnam Airlines and 14% for Jetstar Pacific.

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Jetstar Pacific currently operates a fleet of five A320s compared to six A320s for VietJet. While VietJet is committed to adding at least four leased aircraft during the remainder of 2013, Jetstar Pacific has not yet committed to acquiring additional aircraft. Jetstar Pacific has said it plans to have a fleet of 15 A320s within “the next few years” but has not yet secured leases on any additional aircraft. The Jetstar Group recognises it needs to accelerate expansion in Vietnam to keep up and potentially close the gap with its bigger faster-growing rival. As a result, Jetstar Pacific is now looking at leasing additional A320s for delivery in 2013 (it is not looking at sourcing aircraft from the Jetstar Group’s existing orders). But it is unlikely it will add more than a couple of aircraft, meaning it will likely end the year about 5ppt behind VietJet in market share. Jetstar Pacific needs to respond Jetstar Pacific’s fleet and network has not expanded in recent years as the carrier has instead been focused on replacing 737-400s with A320s and improving profitability. Jetstar Pacific retired its last 737-400 in Jan-2013. After a tumultuous initial five years, Jetstar Pacific began a new chapter in early 2012 when a majority 70% stake was transferred within the Vietnamese Government to Vietnam Airlines. The Jetstar Group, which is part of Australia's Qantas, owns the remaining 30%. VietJet’s rapid ascent over the last year has alarm bells ringing at the Jetstar Group as well as at Vietnam Airlines. There will almost certainly be a strong response although it has been slow so far to materialise – likely because expansion at Jetstar Pacific needs to go through several layers of government approvals as it remains majority government-owned. Jetstar Pacific should finally announce fleet and further network expansion over the next several months. But Jetstar Pacific will struggle to catch up with VietJet. The carrier, which has been operating under the Jetstar Pacific brand and following the LCC model since dropping its prior Pacific Airlines brand in 2007, has lost its first mover advantage and nearly five-year head start over VietJet. Mr Dinh says VietJet plans to lease a fleet of up to 20 A320s in 180-seat single class configuration by the end of 2015. It is committed to adding at least four aircraft in 2013, three in 2014 and three in 2015. But expansion could be accelerated to include five to six additional A320s per year. VietJet has already carried over one million passengers and operated over 5,000 flights. Its average load factor to date has been nearly 90%, highlighting the appetite for low fares in Vietnam’s domestic market. Assuming it maintains load factors of nearly 90%, Vietjet will carry over 2.8 million passengers in 2013. The carrier is planning 3.2 million seats in 2013, an increase of 327% over the 976,000 seats it offered in 2012. VietJet annual seat capacity: 2010 to 2012

Source: VietJet presentation at CAPA’s Aviation Finance Aviation Summit 2013

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Vietnam market has huge opportunities but also challenges As Vietnam’s only surviving private carrier, VietJet has an advantage in that it can move quickly to exploit opportunities in the fast-growing Vietnamese market. Regional carrier Air Mekong was the second private carrier in Vietnam to shut down in just over three years. Another private carrier, Indochina Airlines, suspended operations in late 2009. Their failures show the challenges start-ups face in Vietnam, including an unfavourable regulatory environment with restrictions such as fare caps and an unlevel playing field in having to compete against a powerful government-owned entity. But Air Mekong and Indochina were both full-service carriers. Vietnam’s market continues to have huge untapped potential, particularly for low-cost carriers which can stimulate demand and tap into the country’s growing middle class. But for the short and medium term, market conditions, particularly in the domestic market, could become ugly. Routes such as Ho Chi Minh-Buon Ma Thuot may struggle to sustain two LCCs. Competition will further intensify as VietJet continues to expand rapidly and Jetstar Pacific finally starts to pursue expansion after a long hiatus. The few markets where VietJet only competes with Vietnam Airlines, such as Dalat, Hue and Phu Quoc, will inevitably see Jetstar Pacific entering. With a limited number of viable domestic routes, there is a risk of over-capacity. Ho Chi Minh-Hanoi is the only large trunk route in Vietnam and is already served by eight daily flights from both Jetstar Pacific and VietJet. The Ho Chi Minh-Hanoi market currently accounts for 38% of total seat capacity at VietJet and about 45% at Jetstar Pacific. VietJet already serves the 10 largest destinations in Vietnam (includes Hue, where services are currently temporarily suspended due to runway repairs). Most of the country’s other markets are too small to support frequent service with 180-seat aircraft, even with low fare penetration. VietJet and Jetstar Pacific will both need to turn to the international market but competition there will also be intense – between Vietnamese carriers and with foreign airlines, particularly larger and stronger LCCs. VietJet has grown impressively in its first year, illustrating the potential of Vietnam’s LCC market. It also has proven that affiliation with a large LCC group is not necessary to be successful. But charting out a patch for sustained profitability and outlasting an extended period of increased competition with Jetstar Pacific and Jetstar Pacific majority owner Vietnam Airlines will not be easy.

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Documents

CAPA Yearbook 2013 - Southeast Asia