capa yearbook 2013 - southeast asia

5/27/2018 CAPA Yearbook 2013 - Southeast Asia

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WORLD AVIATIONYearbook 2013

SOUTHEAST ASIA


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22 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

SoutheastAsiaOutlook

SOUTHEAST ASIA CONTINUES TO BE A

REGION OF RAPID GROWTH DRIVEN

BY LOWCOST CARRIERS, includingbudget subsidiaries and affiliates of full-

service carriers. For the first time LCCs accountedfor over 50% of seat capacity within Southeast Asiain 2012. Te region has seen a steady rise in LCCpenetration rates since the turn of the century from abase 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 452,7078 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 Airlines

SingaporeAirlines

Vietnam 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


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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%

A3

73

A3

77

AT

Ot

747

CA

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

202 7

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

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%


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4

50%

Based on CAPA data, the regions LCC fleetwill grow by between 25% and 30% in 2013to approximately 530 aircraf.

...Te four largest domestic markets in Southeast Asia Indonesia,Philippines, Malaysia and Tailand all now have LCC penetrationrates exceeding 50%. Te Philippines has the worlds highest domesticLCC penetration rate among medium and large size countries 80% in2012, 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 overallmarket, 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 regions LCC fleet will grow by between 25%and 30% in 2013 to approximately 530 aircraft. Tis includes almost 300aircraft from Asias top two LCC groups AirAsia and Lion - and over100 aircraft from affiliates or subsidiaries of Southeast Asian full-servicecarriers. Singapore Airlines, Tai Airways, Garuda Indonesia, Philippine

Airlines and Vietnam Airlines are all now participating in the budgetend of the market, allowing these groups to pursue growth while demandfor long-haul and premium passenger services remains relatively flat andas demand in the cargo sector continues to be depressed.

Tere are now 25 LCCs operating in Southeast Asia, five of whichhave launched since the end of 2011. More new LCCs will enter themarket in 2013, including Malaysias Malindo, and most of the regionsexisting LCCs continue to expand rapidly.

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

Indonesia, the regions largest market by a wide margin, has emergedas one of the most dynamic and biggest growth markets in the world.Indonesias domestic market grew 20% in 2012 to 72.5 millionpassengers, making it the worlds fifth largest domestic market after US,China, Brazil and Japan. It has been growing at a double-digit clip since2008 and this is expected to continue in 2013 despite the bankruptcy andsuspension of operations in Jan-2013 of Batavia, which accounted forabout 8% of the domestic market. Indonesias four LCCs have quicklyfilled the void left by Batavia and will add approximately 50 aircraft in2013, more than twice the size of the fleet Batavia operated in 2012.

With Batavia exiting, the outlook has improved for market leaderLion, Garuda budget subsidiary Citilink, Indonesia AirAsia and new

iger affiliate Mandala. All four LCCs are growing at rapid clips easilyexceeding 20%. Garuda also continues to expand its domestic andregional full-service operation rapidly while Lion plans to launch in 2013

new full-service subsidiary Batik Air. Smallerdomestic carriers also continue to expand andenter the market. But some will likely fail asthey are stuck in the middle of the market,

wedged between the low-cost and full-servicebusiness models.

Te combination of the worlds fourthlargest population, a rapidly expanding middleclass, a booming economy and an archipelagogeography are driving soaring demand fordomestic air travel. Indonesias much smaller

international market, which consisted of lessthan 10 million passengers in 2012, also hasbig potential. Indonesias international marketis now primarily exploited by Gulf carriers andthe big airline groups of Asia as Indonesiancarriers generally remain domestic-focused.

Tailand will also see more LCC expansionin 2013, led by Tailands two main LCCs,

Tai AirAsia and Nok. Tai AirAsiacompleted an IPO in 2012, giving it thecapital to accelerate domestic and internationalexpansion. 2013 will see IPOs from Nok andfull-service carrier Bangkok Airways. Nok,

which now only operates scheduled servicesin the domestic market, plans to launchinternational services in 3Q2013.

2013 will also see growth for new TaiAirways regional unit Tai Smile, whichlaunched services in Jun-2012 following ahybrid model. Te expansion of Tai Smileand Nok are important components of Tai

Airways new multi-brand strategy as thegroup looks to reduce its reliance on long-haulroutes to Europe, where market conditionsremain challenging. Tai Airways is alsoinvesting in fleet renewals and cabin retrofitsas part of an attempt to improve yields andboost premium traffic. But competing at thetop end of the market with Asias leadingpremium carriers and Gulf carriers, which haveexpanded rapidly in Tailand, is difficult whilefast-growing LCCs led by Tai AirAsia pose athreat at the other end.

2013 will be a landmark year for Malaysia as

PROPORTION OF LCC SEAT

CAPACITY IN SOUTHEAST ASIA


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Indonesia, the regions largest market bya wide margin, has emerged as one o themost dynamic and biggest growth marke

in the world.

the countrys flag carrier attempts to turn thecorner and a new LCC aims to launch services.Malaysia Airlines (MAS), which spent mostof 2012 in restructuring mode, entered theoneworld alliance on 01-Feb-2013. oneworld

membership was a major milestone for MASand a key component of its new strategy, whichfocuses on the premium market.

Like most other Southeast Asian flagcarriers, MAS is focusing capacity growthin 2013 on the regional market within Asiaas conditions on long-haul routes remainchallenging. Of Southeast Asias six main flagcarriers, MAS is now the only one withouta budget subsidiary. Tis puts it in a weakposition as it is unable to participate in thefaster growing bottom end of the market. It

also creates a void in the Malaysian market fora second LCC, which is now being exploitedby Lion.

Malindo, a joint venture between IndonesiasLion and a Malaysian company, aims to launchservices at the end of Mar-2013 and operatea fleet of about 12 737-900ERs by the end ofthe year. Malaysia-based AirAsia in recent

years has been pursuing more ambitiousexpansion in other markets but is re-focusingon Malaysia in 2013 as part of an effort to fendoff Malindo.

AirAsia Malaysia plans to add 10 A320s in2013 for a total of 74 aircraft. Long-haul sister

AirAsia X also plans to add seven aircraft. Asa result, Malaysias total LCC fleet is expectedto grow by 40% in 2013 to 102 aircraft,outstripping the LCC growth at the other fivemajor ASEAN countries. Te sudden surge inLCC capacity will likely lead to over-capacityon some domestic and regional internationalroutes but there is also still room in Malaysiato stimulate demand through lower fares asMalindo breaks the AirAsia-MAS duopoly.

Singapore will see slower growth in 2013than the 10% increase in passenger trafficrecorded in 2012, as its LCC market is nowapproaching saturation. LCCs now account for30% of capacity at Singapores Changi Airport,

which in 2012 passed the 50 million passengermilestone, an incredible achievement for acountry of only five million people.

Singapores three largest LCCs AirAsia,Jetstar and iger will continue to expand but

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

SIA regional subsidiary SilkAir also plans to pursue rapid expansioin 2013, growing capacity at a clip exceeding 20%. SilkAir and Scootas well as increased involvement in iger, have emerged as importantcomponents in the new SIA Group strategy, which aims to pursue

growth at the budget end of the market and within the region to offseweak market conditions on long-haul routes.Te Philippines will see the launch of at least one and possibly two

long-haul low-cost operations in 2013. Te new long-haul unit fromshort-haul Philippine market leader Cebu Pacific which will launchin mid-2013 with services to Singapore, Seoul and Dubai will opennew chapter in the Philippines dynamic LCC market. LCCs will accfor about 85% of domestic passenger traffic in the Philippines in 2013but there are still huge opportunities for LCCs to make inroads in thinternational market.

Cebu Pacific will become the fourth widebody low-cost operator inSoutheast Asia, joining Jetstar, Scoot and AirAsia X. Philippine Airli(PAL) is planning to fight off its rival by also expanding its LCCsubsidiary, AirPhil Express, into the long-haul market by the end of 2PAL is also planning to expand its own long-haul operation as the catakes delivery of another batch of 777-300ERs.

PAL has struggled in recent years but is investing significantly inupgrading itself, including through fleet renewal, following the sale ofa majority stake in 2012 to Philippine conglomerate San Miguel. 201could see further strategy changes as San Miguel looks to make itsmark at PAL. Long-haul expansion could be unlocked if the Philippiauthorities succeed at getting off the EU blacklist and being upgradedthe US FAA to Category 1 status.

Consolidation in the highly competitive Philippine market is alsolikely, with the Mar-2013 equity tie-up between LCCs Zest and AirAPhilippines a potential first move. Tere are now five LCCs competinin the domestic market, which is clearly too many. Over-capacity andirrational competition already resulted in losses throughout 2012 at al

O Southeast Asias six main flag carriersMAS is now the only one without a budgsubsidiary.


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6

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

as it starts to catch up with the more maturemarkets elsewhere in Southeast Asia. VietJet,

which launched services in Dec-2011, hasalready surpassed Jetstar Pacific as Vietnamslargest LCC. VietJet expanded into the

international market in Feb-2013 withthe launch of a Ho Chi Minh-Bangkokservice and is expected to add at least twomore international routes by the end of the

year. Jetstar Pacific will also likely enter theinternational market in 2013. Te carrier,

which is partly owned by Australias Jetstar, hasnew life after a majority stake was transferredto Vietnam Airlines in early 2012.

Vietnams fast-growing economy andincreasing popularity as a tourism destinationshould also support further rapid growth atVietnam Airlines. Te flag carrier is preparingfor an initial public offering in late 2013, which

would unlock a new phase of growth. Tecarrier already has ambitious plans to expandits fleet by 35 aircraft over the next three yearsand grow its long-haul operation, which is verysmall compared to its Southeast Asian peers.Of Southeast Asias six main flag carriers,Vietnam Airlines is now the only group thatis not publicly traded and remains 100%government-owned.

Among Southeast Asias four smallermarkets, Myanmar is a clear stand out.International seat capacity in Myanmar surgedby over 60% in 2012 as the country opened upfollowing the landmark election of Apr-2012.Capacity will continue to increase at a veryrapid clip in 2013 as carriers from abroad lookto exploit the opportunities in this frontiermarket.

Domestically several local carriers are alsoexpanding 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 operatingdomestic and international routes. Tere is huge potential for LCCs inboth the domestic and international markets as Myanmar continues toopen up.

Cambodia also has seen rapid growth, with total passenger trafficgrowing 18% in 2012, making it quietly one of the fastest growingcountries in Asia. More expansion is expected in 2013 as Cambodia

Angkor Air, one of the smallest flag carriers in the region, expands itsnetwork to greater China.

For Laos, 2013 should also bring more growth albeit on a very smallscale. Laos has seen capacity double since 4Q2011, when Lao Airlinesadded two A320s. Previously there were no jet aircraft operating inthe small country. More capacity will be added in 2013 as Lao Airlinescontinues to expand its A320 fleet and start-up Lao Central Airlines,

which launched services in May-2012, adds 737s and Sukhoi Superjet100s.

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

Overall market conditions in Southeast Asia remain favourable andconducive for growth. Rising discretionary incomes and rapid growth inthe 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 remainchallenging but should see some outbound growth as an increasingportion of the population is able to afford overseas trips.

The Philippines will see the launch o atleast one and possibly two long-haul low-cost operations in 2013.

Vietnam will see significant LCC growth asit starts to catch up with the more maturemarkets elsewhere in Southeast Asia.

Overall market conditions in Southeast Asia remainfavourable and conducive for growth.


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1 AIRLINE LEADER |FEB-MAR 2013

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8

LION AIR GROUP ............................................................pp.10Indonesias Lion Air Group has the growth opportunities to support the 600 aircraft on orderFirst published on www.centreforaviation on 20th March, 2013

MALINDO AIR .................................................................pp.18

Lions 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.28AirAsias 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


SOUTHEAST ASIA:Selected airlines


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CEBU PACIFIC .................................................................pp.58

Cebu Pacific sees bright outlook for 2013 as rationality returns to Philippines market


PHILIPPINE AIRLINES ....................................................pp.69Philippine 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 PhilippinesFirst published on www.centreforaviation on 25th January, 2013

THAI AIRWAYS ................................................................pp.102

Thai Airways faces challenging 2013 as competition within Asia increases


VIETJET AIR ....................................................................pp.114

VietJet to pursue more rapid expansion in 2013; Jetstar Pacific needs to respond fast



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!"#$ &"' ('#)*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



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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



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Premium/Economyprofile

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


Indonesias Lion Air Group has the growthopportunities to support the 600 aircraft onorder

The Lion Air Group has a massive 600 aircraft on outstanding order following its landmarkorder for 234 A320 family aircraft, which was signed on 18-Mar-2013. The figure at first glanceseems overly ambitious given the intensifying competition in Southeast Asias low-cost carriermarket. 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 aircraftit has committed to acquiring.

Lion also has ambitions of establishing new affiliates and subsidiaries, following the model ofrival LCC group AirAsia. The Lion Air Group is launching Malindo, a joint venture carrier inAirAsias 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 orderwith airlines outside Lion through its new leasing subsidiary. This gives Lion unique flexibilityshould its growing portfolio of airlines not require all 600 aircraft for their own growth andreplacement needs.

Lion to consider new affiliates but focus for now is on Indonesia and Malaysia


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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 outsideIndonesia. AirAsia has a more powerful pan-Asian brand and also has first mover advantage inevery market except Indonesia.

As Indonesia is by far the largest market in Southeast Asia, Lion has been able to quietly surpassAirAsia as a larger airline group based on seat capacity within ASEAN. But Lion ispredominately 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 smallpresence. 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 Groupincludes regional subsidiary Wings Air and within the next few months will include a thirdIndonesian carrier, Batik Air, which will operate on domestic trunk routes as a full-service

carrier.

Indonesias domestic market has nearly doubled in size since 2008, reaching 72.5 millionpassengers 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 CAPAs new fleetdatabase. This includes 123 aircraft in Indonesia 94 at Lion mainline 29 at Wings Air andtwo 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


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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 needapproximately 300 aircraft in Indonesia by 2018 simply to maintain its current share of themarket. As Lion has ambitions to grow its domestic market share and to become a moresignificant player in Indonesias international market, a 400 aircraft fleet by the end of 2018 inIndonesia 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. Lioncurrently only has a 5% share of seat capacity in Indonesias international market, compared toabout 25% for the AirAsia Group and about 16% for Garuda, according to Innovata data. Lionis keen to close the gap with its rivals internationally while maintaining the big gap it now enjoysdomestically over its largest competitors.

The Lion Air Group is slated to take delivery of 247 additional aircraft between now and the endof 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 A320current 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 remainderof this yearSource: 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.Lions existing portfolio should be able to support such growth, with between 250 and 300aircraft 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 aircraftper month over the medium to long term. This would give Malindo a fleet of about 70 aircraft


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by the end of 2018, which is slightly bigger than the current size of AirAsias Malaysia-basedA320 fleet. The Malindo fleet plan could prove to be overly ambitious given the size of theMalaysian 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 giventhat the rate of deliveries from both Airbus and Boeing will increase in the 2017 to 2018timeframe. Lion now plans to take 36 737s per year, or three per month from 2017, compared toits current rate of 24 737s per year, or two per month. Meanwhile, Lions rate of A320 deliverieswill reach 24 per year in 2018.

But even if Lion does not succeed at establishing more affiliates, it has sufficient options for allthe aircraft it has ordered. While taking narrowbody jets at a rate of 60 aircraft per year seemsastronomical, 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 the10% to 15% range.

Lion also has the option of leasing out aircraft to other carriers as the group has established aSingapore-based leasing company, Transportation Partners. Transportation Partners so far hasonly placed aircraft with airlines within the Lion Air Group. But the new lessor recentlyestablished a sales and marketing division and plans to eventually lease aircraft to airlines outsidethe Lion Air Group. Transportation Partners is not expected to place its own orders and insteadhave access to a portion of Lions order book, including some of the just-ordered 234 A320s andthe 230 737s ordered in Nov-2011. But it is not yet decided what portion of Lions order book

may be allocated to Transportation Partners for third-party transactions or when the first batchof aircraft will be made available to other carriers.

Given the in-house requirements for Lion, Batik, Wings and Malindo over the near to mediumterm, it is unlikely a large number of aircraft (if any) will be made available to other carriers untilLions rate of narrowbody deliveries reach the 60 aircraft per year rate in 2018. Even then Lionmay 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 andwhether 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 andlease backs, tell CAPA they do not expect Transportation Partners to emerge as a majorcompetitor and believe airlines will be reluctant to lease aircraft from a Lion Air Groupcompany, particularly airlines in Asia. Leasing to outside companies could be a fall back optionshould Lion end up with more aircraft than they need for their own group of companies, ascenario which is unlikely to occur at least for the next several years.

Lion has over 200 more outstanding orders than AirAsia

Lions 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


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ordered by AirAsia in mid-2011. AirAsia added 100 A320 orders in Dec-2012, lifting its totalA320 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 remainingfor 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 addedregional 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 withLion.

AirAsia in 2013 is growing faster than Lion as AirAsia is keen to regain its status as the largestLCC group within Southeast Asia. The AirAsia Group is adding 32 A320s in 2013, including29 at affiliates in Southeast Asia, for a year-end total of 150. In comparison Lion is onlyexpected 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 andpotentially resulting in over-capacity in some markets such as Malaysia.

Projected fleet growth for LCCs in Southeast Asia by carrier for 2013

Note: Rankbased oncurrent fleetsize.. Listbased onindividualcarrier/AOCrather thangroup

Jetstar Groupfleet plan for2013 still inprocess ofbeing finalized*AirPhilrecently re-branded asPAL ExpressSource: CAPA Centre forAviation fleet

database andcompanyreports


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Lions latest order, and the AirAsia order from Dec-2012, means the LCC fleet in SoutheastAsia will continue to grow at similar rapid clips over the medium to long term. While LCCshave already captured over 50% of passenger traffic within Southeast Asia large growthopportunities remain given the rapid growth in the regions 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 spreadout over shorter periods. But Asia is different. The growth trajectory is unrivalled and thecultures and strategies of the regions largest LCC groups are unique. AirAsia and Lion willlikely prove the sceptics wrong and successfully place into service all the aircraft they havecommitted to acquiring.


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!"#$%&' )$*Key DataFleet and Orders

Malindo Air Fleet Summary: as at 10-Apr-2013


Malindo Air average fleet age


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



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Source: CAPA Centre for Aviation and Innovata

Lion's Malindo breaks AirAsia-MAS duopolyin Malaysian domestic market. Next stop:Delhi...and Asia

Lion Air Group affiliate Malindo launched services on 22-Mar-2013 with seven daily flightsspread across Malaysias two largest domestic routes Kuala Lumpur to Kota Kinabalu andKuching. With its hybrid business model and low fares, Malindo will impact both AirAsia andMalaysia Airlines (MAS), which were previously the only two carriers on domestic trunk routeswithin Malaysia.

Malindo is planning rapid domestic and international expansion, leveraging Lions huge orderbook for 737s. India is poised to become Malindos first international destination with service toDelhi 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 increaseaircraft utilisation and tap into the lucrative Malaysia-India and Malaysia-China markets. It alsoseeks to tap the fast-growing Indonesia-India and Indonesia-China markets, which Malindo willserve by offering connections to Lion.

From a wider market perspective, Lion's entry into Malaysia almost certainly signals thesprouting 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 toestablish. 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 dailyflights on Kuala Lumpur-Kuching. Kuala Lumpur-Kota Kinabalu is currently the largestdomestic route in Malaysia with about 59,000 weekly seats prior to Malindo's launch, whichmakes it the 12th largest route within Southeast Asia. It is the largest route based on seatcapacity at both the AirAsia Group and MAS.

AirAsias Malaysian subsidiary currently operates 15 daily or 105 weekly flights between KualaLumpur 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 totalof 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 16business and 150 economy class seats. Its 737-400s are equipped with 128 economy and 16business class seats.

Malindo adds 7,560 weekly return seats to the Kuala Lumpur-Kota Kinabalu market as it hasconfigured its 737-900ERs with 168 economy and 12 business class seats. As a result Malindosentry 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 willaccount for an 11% share of capacity between Kuala Lumpur and Kota Kinabalu for the weekcommencing 15-Apr-2013, compared to 54% for AirAsia and 36% for MAS.

Just prior to Malindos launch on 22-Mar-2013, MAS accounted for a 36% share of capacitywhile AirAsia accounted for 64%. But back in Jan-2013, prior to AirAsia adding one daily flightfor 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 to08-Sep-2013

Note: Malindo capacity not displayedSource: 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 MASwill capture a 33% share and Malindo will account for the remaining 11%. In the much smallerbusiness class market, MAS will capture 84% and Malindo 16%.

Malindo targets both MAS and AirAsia with hybrid productFrom a product standpoint, Malindo is targeting MAS. But its low fare structure is aimed moreat the low end of the market. With its hybrid model and not just low cost marketing slogan thecarrier is trying to woo passengers by offering a low fare while still providing a relatively highlevel of service.

Its economy class seat offers a 32in pitch, which is about 3in better than AirAsia and 2in betterthan MAS. Malindo offers some frills in economy, including seatback in-flight entertainmentand a 15kg luggage allowance, which gives it a clear differentiator over AirAsia. MAS hasseatback 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 retaincustomer loyalty ahead of Malindos entrance. Both MAS and Malindo provide complimentarydrinks and snacks in economy class while AirAsia follows a pure LCC model and charges fordrinks, food and checked bags. A key differentiator for MAS is its strong frequent flyerprogramme and membership in the oneworld alliance.

Malindos business class product features wide leather recliner seats in two-by-two configurationwith 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 nothave any IFE and has a slightly smaller pitch). In Feb-2013 MAS increased its business classchecked 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.

Malindos 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 sixmonths.

MAS one-way all-inclusive economy class fares on the Kuala Lumpur-Kota Kinabalu route startat MYR150 (USD48). MAS one-way all-inclusive business class fares on the route started atMYR983 (USD316) until Malindo's entry, now reduced to MYR856. MAS will want to keepmost of its business class seats available to higher yielding connecting passengers, particularlypremium passengers coming off its long-haul network.

MAS generally has a relatively small bucket of seats available at LCC type fares. It has apremium focus, which was reinforced as part of its new business strategy that included joiningoneworld 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 carrierhas rescheduled flights to maximise connections. MAS is hoping its focus on premium and highyielding economy passengers in both the point-to-point and connecting markets willmitigate any potential impact on yields as Malindo expands. But inevitably yield on some routeswill 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 thatstart 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 forchecked luggage, drinks and food.

While AirAsia generally sets aside larger buckets of low fares than MAS, its average fare hasbeen increasing over the years as it has been able to take advantage of the strong position in theMalaysian 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 exceeding20%. This clearly caught the attention of the Lion Air Group and its Malaysian partner, NADI.

Fireflys 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 inthe MAS Group portfolio. MAS subsidiary Firefly in 2011 briefly had an LCC 737 operation ontrunk 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 partnershipagreement and stock swap between MAS and AirAsia. Firefly returned to its roots as aturboprop operator following a full-service regional carrier model. The MAS-AirAsia stock swapwas subsequently unbundled in May-2012 but MAS has since been adamant that it does notneed to re-establish a budget brand. But with only one LCC and one FSC competing on trunkroutes, the market became ripe for penetration by a new carrier.

Sceptics believe the Malaysian domestic market is too small to support a third carrier. Butdomestic routes in Southeast Asia that are similar in size to Kuala Lumpur-Kota Kinabalu haveseveral 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 ChiMinh-Danang in Vietnam is served by three carriers including two LCCs. Both these routes aresimilar in size to Kuala Lumpur-Kuching, which had about 51,500 weekly return seats prior toMalindo's launch, according to CAPA and Innovata data.

Malindo captures a 15% share of Kuala Lumpur-Kuching market as MAS addscapacity

Kuala Lumpur-Kuching is AirAsias second largest route with 14 daily frequencies. It is currentlythe third largest route for MAS with seven daily frequencies. But MAS over the next two weeksis adding three daily frequencies for a total of 10, making it the carriers second largest route.


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By mid Apr-2013, MAS will have a 33% share of capacity in the Kuala Lumpur-Kuchingmarket compared to 52% for AirAsia and 15% for Malindo. Just prior to Malindos 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


Kuala Lumpur to Kota Kuching capacity by carrier (one-way seats per week): 19-Sep-2011 to08-Sep-2013

Note: Malindo capacity not displayed; Transmile is a cargo carrierSource: CAPA Centre for Aviation & Innovata

Lion is currently offering one-way all inclusive fares between Kuala Lumpur and Kuching of onlyMYR38 (USD12) for economy class and MYR338 (USD109) for business class. MAS allinclusive one-way fares on the route currently start at MYR150 (USD48) for economy andMYR783 (USD252) for business. AirAsia fares start at MYR79 (USD25) including taxes.


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For most dates, Malindos economy fare is MYR78 (USD25) compared to MYR79 (USD25) forAirAsia 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. Theadditional two flights have been added since the beginning of 2013.

AirAsia is expected to continue adding capacity on domestic routes ahead of Malindos entrance.AirAsias Malaysian subsidiary is taking delivery of 10 A320s in 2013, two of which it hasalready 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 moreto Indonesia and Thailand to prepare the groups second and third affiliates for IPOs.Passenger traffic at AirAsia Malaysia only grew by 9% in 2012 to 19.7 million whileThai 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 inMalaysia. The 10 A320s being added to AirAsia Malaysias fleet in 2013 will be used todominate domestic trunk routes as frequencies are increased. The carrier says capacitywill 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 improveinternational connectivity. But the focus will be on maintaining AirAsias leadingposition in Malaysias 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 onits website that services from Kuala Lumpur to Miri, Sandakan, Bintulu and Sibu will startsoon. Miri, Bintulu and Sibu will reportedly be launched in Jun-2013, when Malindo expects toreceive 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 peninsularMalaysia Kuala Lumpur to Penang, Langkawi and Kota Bahru are among the five largestdomestic routes in Malaysia, according to Innovata data.

Kuala Lumpur-Miri is the fifth largest domestic route in Malaysia and is served four times dailyby AirAsia and three times daily by MAS. Innovata schedules show MAS adding a fourth dailyflight on the route in Apr-2013 and a fifth daily flight in Jul-2013. MAS is likely ramping upcapacity at Miri, which is an important business destination as it has a vibrant oil and gasindustry, in a bid to fend off Malindo prior to Malindos entry into the market.

Kuala Lumpur-Sibu is the ninth largest domestic route and is served with five daily AirAsiaflights but only one MAS flight. Kuala Lumpur-Sandkan is served with three daily AirAsiaflights 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 forSibu, Sandakan or Bintulu although changes are likely once Malindo firms up plans to launchthese routes.

Malindo plans to launch Kuala Lumpur-Delhi in June-2013

Malindo also plans to enter Malaysias international market in the coming months. The carrierhas said it is considering international destinations within Southeast Asia as well as China andIndia. During CAPAs Aviation Finance Asia Summit 2013 in Singapore on 20-Mar-2013 theCOO of Lion Air Group subsidiary Transportation Partners, John Duffy, stated that Malindo isplanning to launch services from Kuala Lumpur to Delhi in Jun-2013. The Kuala Lumpur-Delhiflight will be operated during overnight ("back of the clock") hours, allowing Malindo to increaseutilisation of its initial fleet of four 737-900ERs.

AirAsia X dropped service between Kuala Lumpur and Delhi in Mar-2012, leaving MAS as theonly 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



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While AirAsia currently serves four cities in southern India and Kolkata in eastern India from itsKuala Lumpur hub, the Malaysian carrier is not interested in central, western or northern Indiaas it tries to keep the duration of its flights to four hours or less. AirAsia is however in theprocess of establishing an Indian-based JV airline, which will, if approved, change the LCC'soperating dynamics. Malindo has a different perspective as it operates narrowbody aircraft indual-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 idealas 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 withinits 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 byany carrier.

Lion currently serves Kuala Lumpur from Jakarta with three daily flights. Lion and Malindo areexpected to launch services over the next year on several routes connecting Kuala Lumpur withsecondary cities in Indonesia.

Malaysia-Indonesia is a big local market now dominated by the AirAsia Group, which accountsfor 59% of seat capacity between the two countries, according to CAPA and Innovata data. TheLion Group (including regional carrier Wings Air) now accounts for only 7% of capacity in theMalaysia-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 internationalmarkets by differentiating itself from the two incumbents and by using an aggressive pricingprogramme. Malindos product and strategy will allow the carrier to open up new routes that arenot currently served by any LCCs while competing on a majority of its routes with both AirAsiaand MAS.

Prior to Malindos launch AirAsia and MAS (including regional subsidiaries Firefly andMASWings) accounted for over 98% of domestic seat capacity in Malaysia. The AirAsia andMAS groups (including AirAsia sister carrier AirAsia X) accounted for about two-thirds ofinternational 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 itexpects to break even or be slightly in the black by the end of 2013. But even if it is able to meetits target of 90% load factors, it will be hard to be profitable given Malindos combination ofoffering frills and very low fares.

Inevitably Malindo will need to raise fares if it is to cover its costs. Malindos 737-900ERs have33 fewer seats than the same aircraft operated in Indonesia by Lion. Malindo may struggle togenerate 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 beseen whether added frills will attract travellers who are extremely price sensitive. Where it doeshave a potential advantage is in attracting higher yielding business travellers and here suchfeatures 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 sufferfrom added capacity and fare wars but the LCC has the benefit of high brand recognition andloyalty, 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 seeanother major new low priced operator, with expansive ambitions. The Malaysian entry withMalindo is in that respect little more than a toe in the water for this looming giant.


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!"#!$"%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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AirAsia international capacity seats by region: as at 8-Apr-2013


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


Share price 2012/2013

Source: CAPA - Centre for Aviation and Yahoo! Financial


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AirAsias 2013 outlook marred by intensifyingcompetition and continued losses at newaffiliates

AirAsia faces a potentially challenging 2013 as it accelerates expansion in its three core marketsas part of an attempt to fight off intensifying competition within Southeast Asia. Meanwhile, thegroup will continue to incur losses at the two affiliates it launched during 2012, in thePhilippines 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 ofwhich are now at least seven years old, will take a record 25 aircraft in 2013 for a total of 138A320s, representing 22% fleet growth.

AirAsia Philippines, AirAsia Japan and AirAsia India are only expected to take about sevenA320s in 2013, a surprisingly small figure for the Philippine and Japanese affiliates given theyhave not yet reached initial economies of scale. The group is waiting for AirAsia Philippines andAirAsia Japan to move into the black, which could take a few years, before pursuing moreambitious 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 becomethe 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 biggerpresence in the crowded but promising Indonesian domestic market, which is dominated by rivalLion. Thai AirAsia will take seven A320s in 2013 for a total of 34, with the additional aircraftbeing used primarily to increase domestic capacity as competition intensifies with Thai Airwaysand its LCC affiliate Nok Air.

The result will be a significant increase in capacity for AirAsia within Southeast Asia, a marketwhich 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 Lionboth control about 30% of LCC capacity within ASEAN. But there is a risk of over-capacityand irrational competition on several routes.

In Japan, which has a LCC penetration rate below 15%, AirAsia will grow its fleet in 2013 fromthree A320s to a still modest seven aircraft. Assuming the group takes a total of 32 A320s fromAirbus during 2013, the last three aircraft will be left for AirAsia India. The new carrier, a jointventure between the AirAsia Group and the Tata Group, has said it aims to launch in 4Q2013with an initial fleet of three or four aircraft.


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AirAsia Group fleet by affiliate

Note: *projectedSource: CAPA Centre for Aviation and company reports

AirAsia Group projected delivery dates for aircraft on order*

Note: *only includes aircraft being purchased directly from manufacturersSource: CAPA Centre for Aviation

Any of the AirAsia affiliates could end up with more A320s than currently planned by going tothe 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 fromleasing companies, and has another 360 A320s on outstanding order. The 360 figure includes 30A320s for delivery over the last 10 months of 2013. AirAsia has already taken two aircraft thisyear (one each for AirAsia Malaysia and Thai AirAsia) and is slated take two more aircraftbefore the end of 1Q2013 (one for Japan and one more for Malaysia).

AirAsia Malaysia leads the way in profits

Once again AirAsias original business in Malaysia was the stellar performer in 2012, with thecarriers 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, alsohad a respectable operating profit margin of 11%. Indonesia AirAsia, which became profitable in2010 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 alisting 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 ThaiAirAsia.

AirAsias Malaysian operation, which is a fully-owned subsidiary of the AirAsia Group, saw itsnet profit increase by 238% in 2012 to MYR1.88 billion (USD610 million), driven by one-timeitems (see background information). The carriers operating profit was unchanged at RM1.16billion (USD370 million) while revenues were up 11% to MRY5.00 billion (USD1.6 billion). Asa result its operating profit (EBIT) margin slipped slightly from the 26% recorded in 2011 to23%.

Thai AirAsia recorded a 10% decrease in net profit to THB1.81 billion (USD61 million) and a2% 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 netprofits 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 (USD449million).

The AirAsia Group was able to recognise its share of the Thai AirAsia profit as Thai AirAsia iscumulatively in the black. But the group will not be able to recognise any profits from IndonesiaAirAsia 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 yearsbefore the AirAsia Group is finally able to start booking profits from more than two its six airlineaffiliates or subsidiaries.

AirAsia Philippines and AirAsia Japan are still in the red and are unlikely to become profitablein the near term. AirAsia Philippines recorded a net loss of MYR93 million (USD30 million) for2012, including MYR23 million (USD7 million) for 4Q2012. AirAsia Japan recorded a net lossof MYR97 (USD31 million) million for 2012, including MYR40 million (USD13 million) for4Q2012. The AirAsia Group owns 40% of AirAsia Philippines and 49% of AirAsia Japan.

AirAsia Philippines off to rough startThe continued losses in the Philippines are particularly concerning as the carrier has now beenoperating almost one year. The carrier still only operates two A320s and has not yet beenallocated a single additional aircraft from AirAsia Groups 2013 deliveries. AirAsia Philippinescould still add aircraft in 2013 by taking aircraft directly from leasing companies but the AirAsiaGroup is clearly taking a very conservative approach to expansion in the competitive Philippinemarket.

The Philippine domestic market is particularly challenging with five LCCs competing, leadingto over-capacity and irrational competition. The LCC penetration rate in the Philippinesdomestic market is currently 85% with AirAsia Philippines accounting for only 1% of domesticcapacity 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 baseat Manila alternative airport Clark, to Hong Kong, Kuala Lumpur, Singapore and Taipei. Itsdomestic network has been reduced to just 11 weekly flights and two destinations Davao andKalibo.

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 inDec-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 isunlikely 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 thecarrier at a competitive disadvantage. The AirAsia Group noted within its results announcementfor 2012 that Clarks 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 takea bus through Manilas notoriously bad traffic when there are generally low fare flights availablefrom Manila International.

AirAsia Philippines has quickly discovered it is difficult to serve the domestic market fromClark. International services can potentially work with the right low fare stimulation. But thereare not many potential international markets to serve given the tensions with mainland Chinaand 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 Asiancountries, making the new Philippine operation unnecessary except in the Philippines-Singaporemarket. But the Philippines-Singapore market is already served by several LCCs, making ittough for AirAsia to carve out a profitable niche.

In hindsight, establishing a Philippine affiliate was probably not the smartest move. But thedecision was made before an opportunity to join with All Nippon Airways in Japan surfaced andlong before Indias airline sector opened up to foreign investment.

The AirAsia Group did not necessarily need a fourth affiliate in Southeast Asia, particularly insuch a highly competitive and challenging market as the Philippines. AirAsia will try to ride outthe storm, hoping consolidation will occur, leading to an improvement in market conditions. Inthe meantime, the group will retain a very small presence in the market in a bid to minimiselosses 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 Japans load factors dropped below 60% inOct-2012 and Nov-2012 and to around 10ppt below rival Jetstar Japan despite the two carriershaving similar networks. AirAsia Japan also has reportedly suffered from poor on-timeperformance rates. In Dec-2012, the carriers initial CEO, Kazuyuki Iwakata, resigned.


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But the problems in Japan can be more easily resolved than the Philippines. The larger Japanesemarket is now only being penetrated by LCCs for the first time while in the Philippines CebuPacific 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. Thegroup 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 itsfourth aircraft in Mar-2013. The group has stated that the opening of the Nagoya hub will boostaverage aircraft utilisation rates and reduce costs as the Nagoya airport, unlike AirAsia JapansTokyo 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 factorsin 1Q2013. It claims AirAsia Japan is already performing well in the international market, whereit dominates Japan-Korea routes, and says more international routes will be launched in 2013as the fleet is expanded.

However, the group is proceeding relatively cautiously in Japan. Growth of four aircraft in aLCCs second year of operation is modest, particularly given the size of the Japanese market.

AirAsia Group CEO Tony Fernandes stated in the groups 26-Feb earnings announcement:The main focus for the next few years will still be the core markets Malaysia, Thailand andIndonesia. 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 toIndonesia and Thailand to prepare the groups second and third affiliates for IPOs. Passengertraffic 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 backgroundinformation).

With the upcoming launch of Malindo, now is the time to again pursue growth in Malaysia. The10 A320s being added to AirAsia Malaysias fleet in 2013 will be used to dominate domestic

trunk routes as frequencies are increased. The carrier says capacity will in particular be added ondomestic routes to East Malaysia and Johor Bahru.

Some new international routes will also be added in a bid to further improve internationalconnectivity. But the focus will be on maintaining AirAsias leading position in Malaysiasdomestic 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


Given the relative small size of the Malaysian market, the extra capacity will likely come at theexpense of yields. AirAsia Malaysia is confident it can grow its load factor to 85%, compared to80% in 2012.

Higher loads and a renewed focus on ancillaries, which dropped by 11% in 2012 on a perpassenger basis, could potentially help offset a reduction in yields brought on by a fare war. Butwith Lion breaking the cosy AirAsia-Malaysia Airlines duopoly in Malaysias domestic market itwill 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 IndonesiaAirAsia is the largest carrier in Indonesias international market, it currently has less than a 5%share of domestic capacity. Most of the eight A320s being added by Indonesia AirAsia in 2013will be allocated to the domestic market.

The 2013 push for Indonesia AirAsia (IAA) began on 01-Mar-2013 with the opening of a newhub at Makassar, where the carrier has launched five new domestic routes. Makassar is thefurthest 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 in2013 as it looks to develop a more meaningful network, which currently only consists of 12domestic destinations.

In an attempt to reach a larger demographic, Indonesia AirAsia (IAA) recently strengthened itsdistribution channels. The carrier now has a network of 3,500 agents, enabling it to access moreof Indonesias massive population. A large agent network is Lions key strength and is necessaryto compete in Indonesias LCC sector as most of the population does not yet buy tickets on theinternet or have credit cards.

Prior attempts by AirAsia to compete against Lion in Indonesias domestic market failed asAirAsia did not recognise the importance of offline distribution. AirAsia still faces an uphillbattle domestically in Indonesia but is willing to invest heavily in trying to secure a large slice of


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Indonesias domestic market. The recent bankruptcy of Batavia, a full-service carrier AirAsialooked 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 highincrease in revenue and profit and with the recent change in strategy to focus more on domesticgrowth, 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 earningsannouncement. IAA will be going for listing in the second half of 2013. Capacity is being putinto 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 astrategy to dominate the domestic market as well as the Thailand-Southeast Asia andThailand-China markets. Thai AirAsia also expects to expand its operation in India, where itwill be used as a feeder for AirAsias new domestic Indian joint venture.

The AirAsia Group is particularly confident in Thai AirAsias position in the market followingthe carriers move in Oct-2012 from congested Suvarnabhumi Airport to Bangkoks old airport,Don Muang. The move to Don Muang has lowered Thai AirAsias cost base and given thecarrier 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 Thailands domestic marketand a 7% share of capacity in the international market, which is second to Thai Airways. ButNok has also been expanding rapidly over the last year in the domestic market and plans tolaunch international services in mid-2013.

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


Thai AirAsia also faces a new competitor in hybrid carrier Thai Smile, which the Thai AirwaysGroup launched in mid-2012 and is being used along with Nok to try to fend off Thai AirAsia.

Thai Smile selected Thai AirAsias second international largest route, Bangkok-Macau, as itslaunch route and is now competing against Thai AirAsia on nearly all of its routes. Noks


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forthcoming initial international route, Bangkok-Yangon, is Thai AirAsias third largestinternational route.

Lion poses the biggest challenge to AirAsia

While the competition is intensifying in Thailand, the conditions for 2013 are not as challengingin Thailand as they are in Indonesia or Malaysia. In Thailand, AirAsia is already well establishedin both the domestic and international markets and its main competitor, the Thai AirwaysGroup, has traditionally struggled to compete against LCCs. In Indonesia and Malaysia, AirAsiafaces in Lion a LCC with an extremely low cost structure and an ambitious expansion plan thatis supported by an order book that is almost as massive as AirAsias.

Indonesia is a big enough market for AirAsia and Lion as well as other LCCs such as Tigeraffiliate Mandala and Garuda subsidiary Citilink. But these four carriers could be in for aprolonged battle for the fast-growing lower end of Indonesias domestic market, resulting inover-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 affiliateMalindo expands ambitiously.

AirAsia will certainly survive any looming battle and is well positioned to remain the leadingLCC in its extended home market of ASEAN as well as in the broader Asian market. But itfaces a challenging chapter as competition intensifies in Asias dynamic LCC sector.

While there is a risk of hyper competition in Southeast Asia, the group also faces two strongcompetitors in the new Japanese LCC market and will have to compete against severalestablished 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 certainlyface a response from Indias five existing LCCs given the LCC penetration rate in the Indiandomestic market already exceeds 60%.

2012 was a milestone year for AirAsia as it added two new carriers to its portfolio, ending ahiatus of seven years without launching a new affiliate. But adding two new affiliates at almostthe same time created challenges and is a drain on resources, both financial and intellectual. Thelaunch of yet another new affiliate in 2013 will add to the short-term headache. Exacerbating thesituation, 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 MrFernandes hopes, all three new affiliates will be profitable. If all the ventures are ultimatelysuccessful, AirAsia will be one of the top three LCC groups in the world and the fleet of 475aircraft that the group has committed to will easily be absorbed. But for now the pain ofexpansion, and in the case of Malaysia the pain of being so wildly successful to spur newcompetitors, is being felt. AirAsia clearly has the cash to withstand the storm of challenges that2013 brings and the groups strong position in its core Southeast Asian markets should allow itto 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



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p

Indonesia AirAsia operational highlights: 2012 vs 2011


AirAsia Malaysia financial highlights: 2012 vs 2011


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Thai AirAsia financial highlights: 2012 vs 2011


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Indonesia AirAsia financial highlights: 2012 vs 2011



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!"#"$%&" (&)#&*+%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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Malaysia Airlines international capacity seats by region: as at 8-Apr-2013


Top routes tableMalaysia 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


Share price 2012/2013

Source: CAPA - Centre for Aviation and Yahoo! Financial


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Malaysia Airlines 2013 outlook clouded byincreasing competition and launch of MalindoMalaysia 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 postedprofits for 3Q2012 and 4Q2012. But MAS remained in the red for the full year and will struggleto 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 ofits routes. Competition will intensify after new Lion Air Group affiliate Malindo launchesservices in late Mar-2013, becoming the second LCC in the Malaysian market. Meanwhilechallenges remain on long-haul routes, where MAS one year ago reduced capacity significantlyas part of a new business plan, due to rising fuel prices and unfavourable global economicconditions.

MAS was back in the black in 2H2012

MAS reported on 28-Feb-2013 a small profit for 4Q2012, marking its second consecutiveprofitable quarter following a string of six consecutive quarters of losses. The group turned a netprofit 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 groups operating profit for 4Q2012 was MYR44 million (USD1.18 million), compared to aMYR1.321 billion (USD426 million) operating loss in 4Q2011, as revenues increased by 5% toMYR3.66 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 factorfigures were the highest in eight quarters, but passenger yield was still down slightly compared to4Q2011 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 ofMYR2.521 billion (USD813 million) and operating loss MYR2.296 billion (USD741 million)in 2011 (see background information). MAS embarked on a major restructuring programme inlate 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 toachieve sustainable profitability. The carrier has a dismal track record of several failedrestructurings in recent years which typically show a relatively brief period of profitabilityfollowed by a return to losses.

MAS is hopeful the changes implemented this time including a smaller long-haul network, animproved premium product, an increased focus on regional flying and membership in oneworld improve the carriers 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 tofocus on further reducing costs and fully implementing the latest version of its businessplan. The carriers restructuring is still a work in progress and by no means is MAS out ofthe 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 newshort-haul premium carrier. But the core component, a focus on premium services, remainsthe same. MAS is still investing significantly in fleet renewal as well as a productenhancements 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 inearly 2012 slashed nearly half of its long-haul network, dropping service to Buenos Aires, CapeTown, 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 andParis by introducing A380 services, MAS has reduced its overall exposure to long-haul marketsand cut costs by eliminating several stations.

The changes to the long-haul network has helped MAS improve profitability as it has reducedits exposure to the European market, which has been impacted by the economic downturn andintensifying competition from Gulf carriers. Middle East carriers currently offer approximately25,000 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 thanits two main Southeast Asian rivals, Singapore Airlines and Thai Airways, putting it at acompetitive disadvantage as it tries to focus more on corporate accounts and premium passengersas part of its new business plan.

But the increased focus on short and medium-haul flights within the Asia-Pacific region islogical given the growth in the intra-Asia market and MAS position in oneworld. MAS is thefirst member from Southeast Asia and significantly boosts the alliances position in severalregional markets. For MAS, oneworld membership allows the carrier to virtually offer acomprehensive global network, a key component in winning back corporate customers, withouthaving a large long-haul operation. (MAS, however, has not yet been able to fully exploit thebenefits that oneworld can bring to its long-haul offering as it has not yet forged a codeshare dealwith any of oneworlds members from Europe or the Americas with the exception of nichecarrier 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 carriersfrom 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 clipapproaching 20% while new Thai Airways unit Thai Smile is rapidly expanding its internationalnetwork. 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 similarlyfocused on the Asia-Pacific region, having dropped European services in 2012. AirAsia alreadyhas a leading 52% share of capacity in Malaysias domestic market, compared to 47% for theMAS group (includes turboprop subsidiary Firefly).

Malaysia domestic capacity share (% of seats): 04-Mar-2013 to 10 Mar-2013


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 Malaysias international market compared to only 27% for MAS.

Malaysia international capacity share (% of seats): 04-Mar-2013 to 10 Mar-2013


In the Malaysia-Southeast Asia market (includes both domestic and international flights), theAirAsia Group currently has a 50% share of seat capacity compared to about 39% for the MASgroup. While there is rapid growth in this market, driven by the regions rapidly growingeconomies 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 atotal of 74. Sister long-haul carrier AirAsia X is planning to add seven A330s, giving it a fleet of16 A330s. Meanwhile Malindo plans to launch services in late Mar-2013 with an initial fleet oftwo 737-900ERs and operate a fleet of at least 12 aircraft by the end of the year.

As a result, the total size of Malaysias 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 (excludesregional aircraft operated by Firefly and MASWings), is not expected to expand the total size ofits fleet in 2013. But there will be some modest capacity growth for MAS as 737-800s continueto replace smaller 737-400s and as two additional A380s lead to the phase out of its remaining747s.

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 ninein 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 oneadditional A330 in early 2014 as part of its widebody fleet renewal programme. The other part ofthat programme involves the A380; MAS took its

capa yearbook 2013 - southeast asia

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