Competition in the skies: An increasing number of airlines are competing for market share

With fares slashed and more routes than ever before made available, 2013 was a year of major expansion for the Malaysian air transport sector. Passenger numbers surged, with Malaysia Airports Holdings reporting the fastest growth on record – at 18.4% – to a total of 79.6m arrivals. The number of planes in the air and the number of airlines in the market also expanded, with the arrival of a new domestic player in the shape of Malindo Air.

The year 2014, marked in March by the tragedy of MH370, also looks to be one of continued expansion and fierce competition – with the new Kuala Lumpur International Airport 2 (KLIA2) low-cost carrier terminal (LCCT) opening in May 2014. This competition for market share has had its costs, however, with pressure on airline profitability one result.

The Malaysian airline sector does not exist in isolation either, with Asia – and particularly South-east Asia – already in the stage for heightened competition between LCCs and flag carriers, which are moving to cut their prices too.

Nonetheless, the current market conditions have undoubtedly delivered a major boost to the air travel and tourism industries, as well as delivering more people than ever to the destinations of their choice.

Market Players

Malaysia has a handful of major, domestically registered airlines – on the LCC side, there is AirAsia, and its sister, AirAsia X. Then there is the new, full-service market entrant, Malindo Air. The fourth is the national carrier, Malaysia Airlines (MAS). Singapore-headquartered LCC, Tiger Air, operates domestic services in Malaysia and to the Lion State. Working on the Malaysian Airports and company figures, in terms of share of the passenger market, in 2013 AirAsia had 17.5%; AirAsia X, 4.7%; and MAS, 30.8%. Entering the market in March, Malindo’s share for the year was unavailable, although Chandran Rama Muthy, the CEO of the company, told reporters in December 2013 that passenger numbers had reached approximately 900,000 that month.

MAS also owns MAS Wings, which operates domestic flights in eastern Malaysia, and MAS Kargo, the national cargo carrier. MAS itself is listed on the KL exchange, with a majority shareholding held by Penerbangan Malaysia, a subsidiary of the government investment arm, Khazanah Nasional. MAS is also a member of the OneWorld global airline alliance.

Fleets & Passengers

As of year-end 2013, the MAS fleet consisted of 148 planes, with 21 new aircraft delivered during the year. The fleet consists of A380s, A333s, B738s, ATR72-600s, and Viking DHC6s, with a major fleet renewal programme currently under way. The year 2013 also saw MAS record a 28.5% rise in the number of passengers carried, with the total reaching 17.2m, on the back of a 17% increase in overall passenger capacity, according to company press releases. Seat load also grew, with a historic high of 93.5% achieved on December 20, 2013.

The AirAsia Group, meanwhile, was a pioneer in LCC travel in Asia, and now has affiliates in Thailand, Indonesia and the Philippines, alongside the long-haul AirAsia X. It is also listed on the KL exchange, with Tune Air the largest direct shareholder and group CEO Tony Fernandes and director Kamarudin Bin Meranun holding 23.06% stakes, each indirectly.

As of year-end 2013, the airline – including its affiliates – had 154 aircraft, with the year seeing a 26% growth in capacity. Partly, this was due to the acquisition of the Philippines’ Zest Air, now rebranded AirAsia Zest, which brought 11 planes, while general expansion brought in 28 more. For the full year, passenger numbers grew 25% to 42.6m carried, giving a load factor at the end of 2013 of 79%. For Malaysia AirAsia (MAA), the fleet stands at 72 aircraft, up from 64 at the end of 2012, with 2013 seeing some 21.9m passengers carried and a load factor of 80%. Three new planes were added during the year, along with boosted flights on seven existing routes.

Joint Venture

Malindo Air, meanwhile, is a joint venture between Indonesia’s Lion Air and Malaysia’s National Aerospace and Defence Industries. The carrier began operations in March 2013, flying Malaysian routes, expanding into international flights in 2014. Malindo thus targeted the KL-Mumbai and KL-Delhi routes, previously only operated by MAS, and the KLTiruchirappalli route, competing on that with AirAsia X. Other routes to the sub-continent are also planned, including Bangladesh, as are routes to China.

Expansion Plans

Malindo Air has also been expanding its fleet. In September 2013 it took delivery of two new B737-900ERs, bringing Malindo’s total to six, while it was also operating three ATR72600s. The company plans to continue expanding over the next 10 years, reaching 100 planes by the end of this period. It has also set a target of 3m passengers by the end of 2014, which would give it a 3.7% share of the existing arrivals market.

Both AirAsia Group and MAS also have similar plans for expansion, raising the prospect of an exponential growth in fleet sizes over the next few years. At the same time, MAS joining OneWorld also added many codeshare routes to its network, while seven more foreign carriers also added Malaysian airports to their coverage. This was all good for passengers, but where analysts grew more concerned was with the potential for the market becoming overcrowded – and the major downward pressure on margins.

Profitability 

Indeed, of the three main domestic airline groups, it is likely that only AirAsia maintained a profit in 2013. According to the group’s figures, fullyear 2013 results showed MAA increasing revenue 5% year-on-year (y-o-y) to RM5.19bn ($1.6bn), while operating profits fell 1%, to RM1.02bn ($318.3m). The company did manage a 1% hike in earnings before interest and taxes (EBIT), though when depreciation and amortisation (EBITDA) were added in, this turned to a 1% loss. The airline also cut costs significantly, by some 4%, y-o-y, achieving a cost available per seat kilometre of $0.416.

AirAsia X, meanwhile, made a pre-tax loss for financial year 2013, of RM212.98m ($66.5m), down from a pre-tax profit of RM38.01m ($11.9m) in the previous year, a switch attributed to higher operating expenses. Revenue, however, rose from RM1.97bn ($614.8m) to RM2.31bn ($721m) over the same period, thanks to higher passenger seat sales, up 16.4%.

MAS, meanwhile, continued to make a loss, with the airline’s plan for a profit turnaround being hit by the new entrant and a general strategy across the industry of cutting ticket prices to capture market share, particularly by Malindo.

However, the airline’s EBITDA improved by some 36% to RM254m ($79.3m) from RM187m ($58.4m) at year-end 2012. Yet, due to higher finance and higher depreciation charges, MAS still made a net loss, of RM1.17bn ($365.2m) on the full 12 months.

That this occurred despite a 28.5% growth in passenger numbers and an 11% growth in revenue is testimony to the level of competition and price cutting that has been ongoing.

Malindo’s financials for 2013 were unavailable as of June 2014. Most analysts interviewed by OBG agreed, however, that given its start up costs and low ticket prices, it has also likely seen growth in revenue and passenger numbers, yet also made a loss.

One result on the ground of boosted plane, passenger and route numbers has also been congestion at KL’s LCCT. However, this was relieved by the opening of KLIA2 in May 2014. KLIA itself has spare capacity still, however, while Subang Airport is growing in usage too, by Tiger and Malindo in particular.

Focus On LCCs

Indeed, Malaysia’s transport sector marked a major milestone in early May 2014 when a new terminal for the rapidly growing budget air-travel business opened at KLIA. The largest purpose-built LCCT in the world, the facility began operations a year behind schedule.

Supporters of the project, however, insist that KLIA2 is nothing short of a game-changer for the country’s ambitions as both regional transport hub and global tourism destination.

KLIA2 has the capacity to handle a total of 45m passengers a year, a significant improvement on its predecessor, which topped out at 10m. Even more importantly, it caters specifically to LCCs, already the fastest-growing category in the Asia Pacific air travel market and widely expected to experience further expansion in the near future. In a market forecast published on its website, Boeing predicts that “[d]uring the next 20 years, nearly half of the world’s air traffic growth will be driven by travel to, from, or within the Asia-Pacific region.”

And the LCCs are leading the charge: according to statistics published by CAPA – Centre for Aviation, an industry information consultancy – LCCs went from operating 2% to 15% of the Asia Pacific region’s total fleet numbers in the 10 years to 2013. They take an even larger share – 20% – of seat capacity, and both figures look set to increase. The region had 47 LCCs (including five new ones) active in 2013, most of which added capacity at double-digit rates, and no fewer than 10 additional entrants are expected to begin operations in 2014.

Perhaps most tellingly, according to CAPA, LCCs account for around 50% of the region’s orders for new aircraft – not counting orders on behalf of budget airlines that are actually subsidiaries of traditional or full-service carriers. The 1500 units on order will more than double the Asia-Pacific LCC fleet to 2500 planes, vastly raising the scope for competition with conventional airlines. In addition, bulk purchases like those of the sector’s two heavyweights, AirAsia and Lion Air, will significantly reduce unit costs, increasing the intensity of that competition.

As with many large and complex airport facilities, however, the launch of KLIA2 has not been entirely smooth. Total costs, for instance, have risen sharply: while the original 2007 budget was around $500m, the project has thus far absorbed some $1.3bn.

Completion and operational readiness were achieved a year late, due in part to tensions between the terminal’s operator, Malaysia Airports Holding, and its largest tenant, AirAsia. Allegations that its taxiways and parking bays are vulnerable to undermining by torrential rains may necessitate millions in repair costs and service delays.

Pressure On Margins 

The continued downwards pressure on margins will likely lead to further postponement in MAS’s plans to restructure and go back into the black. With strong government backing, the airline will likely weather the storm, however, while MAA’s ability and experience in controlling costs continue to make it a profitable outfit.

Malindo will have to fight hard for its seat at the table, but backed by a powerful Indonesian group, it too will likely continue to bite the bullet on profitability in order to take market share.

The current competitive atmosphere looks likely to continue throughout 2014, with Malindo taking on both MAS and AirAsia X on routes to India and perhaps China, while domestic competition, particularly on high-volume routes out of KL and Penang, will also continue to be intense. Indeed, in February 2014 Malindo was making zero-price ticket offers ( passengers just pay the taxes).

The regional aspects of this competition continue to develop. In March 2014, for example, MAS resumed codeshare operations with Indonesia’s Garuda, a rival to Lion Air. The fare war is very much an international one, with one of the largest and potentially most profitable markets in the world – Asia – the prize. There is much to play for then, in the years ahead.