Wars in Southeast Asia's Sky

Wars in Southeast Asia's Sky
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Singapore’s biannual Airshow in February was the backdrop for a blockbuster order for Boeing’s next-generation 737 jets, a staple of short-haul air travel. Boeing says the 737 Max, due to launch in 2017, raises fuel efficiency by 10% or more. That’s music to the ears of airline bosses like Rusdi Kirana, cofounder of Lion Air, a budget Indonesian carrier on the buy side of Boeing’s largest-ever civil aircraft sale.

Virtually unknown outside its home base, Lion Air has committed to 230 Boeing 737s over several years, a deal with a catalog price of $22.4 billion. Since taking to the skies in 2000 with a single leased plane, Lion Air has grabbed 51% of Indonesia’s domestic air travel. Its 71-plane fleet, plus smaller turboprop planes operated by a subsidiary, Wings Air, will allow it to add new routes and services to a domestic market that soared by 18% last year to 51.5 million passengers, a figure that analysts say could double within five years.

Yet 49-year-old Rusdi and his elder brother, Kusnan, co-owners of Lion Air, remain something of an enigma, even in the airline industry. They’ve shunned outside investors, relying instead on aircraft financing and retained earnings. Their blockbuster order for new aircraft may soon tip their hand, if they can’t raise enough debt. Rusdi, president director, told a small pack of reporters at the Singapore Airshow that Lion could list in the next two years after shelving plans for an equity offering this year.

The tycoon rarely talks to the press and didn’t respond to interview requests from FORBES ASIA, which through 2010 had the brothers on the Indonesia rich list at an estimated $580 million. Lion Air’s finances—and its operating profits—are a closely guarded secret, as the elusive Rusdi acknowledged to reporters in Singapore. “We don’t like to show people a lot; we just want to work,” he told them. “You can call my bankers. They won’t finance a company that isn’t very good.”

Also keeping a close eye: AirAsia, the Malaysian carrier that pioneered low-cost air travel in Southeast Asia. Until now Lion Air’s primary focus has been domestic. Only 6% of its capacity is on intra-Asian routes, and it has backtracked on plans for adding flights to Australia. But its expansion over the next decade is partly aimed at regional routes from Indonesia. That puts it squarely in the path of AirAsia, which carried 30 million passengers in 2011.

For now, Tony Fernandes, founder and CEO of AirAsia, says he isn’t losing sleep over Lion Air as a competitor. He argues there is room in Southeast Asia’s expanding air-travel market for both to grow and prosper, just as Europe accommodates Ryanair and Easyjet, as well as dozens of smaller low-cost and boutique airlines. “This is not a one-airline show,” he says.

According to Boeing’s current forecast, Southeast Asia will need 2,750 jet aircraft between 2011–30, at a combined list price of $410 billion. Most will be single-aisle planes like the Boeing 737 that are the workhorses of budget carriers like Lion Air. (It ordered 29 more of what it has.)

Crucially for manufacturers, says Ralph Boyce, president of Boeing Southeast Asia, most airlines in Asia will be adding aircraft, not just upgrading an existing fleet. “We think that in Asia the percentage of new planes will be 80%,” he says. The rapid growth of air travel in countries like Indonesia is swelling passenger numbers, while deregulation spurs more competition among carriers.

While Lion Air’s latest order drew global plaudits (Barack Obama attended a presigning ceremony held in Bali last November), the airline already has a backlog of orders for Boeing aircraft. “Planes are arriving practically every month,” says Boyce, an ex-U.S. envoy to Jakarta.

So where is the money coming from? While the Export-Import Bank of the United States provides credit for such Boeing customers, Lion Air will still need to tap commercial lenders for the bulk of the purchase price (typically a hefty discount to the list price). Boyce says he’s got no doubt that its owners will be able to finance their fleet expansion. “Rusdi Kirana has proven that he can run an airline efficiently. He’s making profits. People like to lend money to that kind of operator,” he tells us.

Aircraft manufacturers and leasing firms probably have a better idea of what’s under the hood at Lion Air than the rest of the industry, says Brendan Sobie, an analyst in Singapore for Sydney aviation consultancy Centre for Asia Pacific Aviation (CAPA). As a private company Lion Air isn’t required to disclose financial and operational data that would reveal how efficiently it runs its fleet, such as costs per available seat kilometer. “We don’t have any real idea of how much the profits are,” says Sobie. “We only know what [Rusdi] says.”

Lion Air’s secretive boss is a far cry from Fernandes, the ubiquitous AirAsia tycoon who is his own brand (and a past FORBES ASIA Businessman of the Year). Rarely seen without his red baseball cap, Fernandes is a fixture in the Malaysian press and on Twitter, where he has 170,000 ­followers. Two days after AirAsia Bhd, the parent company, reported a 47% drop in full-year net profit to $187 million. Fernandes returned our call while in transit.

Like all carriers, AirAsia was hit by high fuel prices last year. But overall group revenues grew to $1.5 billion, while its nonfuel costs fell 13% year-on-year. Strip out deferred tax and foreign exchange impairments to profits and it was “a stellar year,” insists Fernandes.

A major drag on earnings was Indonesia, where operating profit fell sharply to $16.5 million, compared with

$65 million at AirAsia Thailand. Both airlines are joint ventures, a model that AirAsia has used successfully to get around restrictions on foreign ownership. In its earnings report the company said it would list AirAsia Thailand and Indonesia this year (a similar claim was made last year).

Fernandes blames the poor performance in Indonesia on aging, fuel-guzzling planes, which he has phased out in order to cut costs in a market where he sees huge potential. “We now have an all-new Airbus fleet. I see Indonesia as the jewel in our crown,” he avers.

That puts AirAsia in good company. Aside from Lion Air, national airline Garuda is adding capacity on flights operated by its budget Citilink unit. Garuda also notched 40% growth last year in passengers on its full-service routes, according to CAPA. Meanwhile, Lion Air plans to launch its own full-service carrier, Space Jet, next year, joining startup Pacific Royale, which will target affluent passengers with point-to-point routes that bypass Jakarta.

Old brands are also being revived. Mandala Airlines, which suspended operations in early 2011, is due to relaunch in April using Airbus A320s provided by Singapore-based Tiger Airways, its new shareholder. Under a debt restructuring, the main principal is now Saratoga Group, an investment firm founded by rich listers Sandiaga Uno and Edwin Soeryadjaya.

“Indonesia is a very fragmented market because of its geography. But just a few carriers have most of the market share,” says CAPA analyst Sobie, who puts the number of jet operators at 16. Some have dubious safety records and regulators have struggled to keep up with the industry’s expansion. Lion Air has faced criticism over its supervision of pilots after three were busted recently for drug use.

Asked about the challenge from Lion Air, Fernandes seems all smiles. “They’re a good airline, and they operate well. I see them as a good competitor.” he says. When their Boeing deal was trumpeted in Singapore, he tweeted: “Congrats to Lion Air for their huge aircraft order. I have huge respect for entrepreneurs who build airlines from nothing … Well done, Rusdi.” This from a guy who loves to spar publicly with other airlines and poke fun at his critics.

But the gloves may soon come off, says Shukor Yusof, an aviation analyst at Standard & Poor’s in Singapore. He describes Rusdi, who divides his time between Singapore and Jakarta, as “obsessed” with eclipsing Fernandes and his airline. “That really drives him. He wants to be bigger than AirAsia in terms of profits, fleet and routes. That’s the single motivating factor,” he says.

That explains why Lion Air signed up for 201 of Boeing’s 737 Max. In 2011 ­AirAsia was the toast of the Paris Air Show with its record-breaking order for 200 Airbus A320 Neos. Rusdi wanted to go one better. The dogfight is on.

Look Who’s Cheapest

Costs on selected Southeast Asian budget airlines, in cents per available seat kilometer (ASK), most recent available

Cost per ASK            CASK excl fuel      Load Factor  AirAsia                              4.14                           1.98                         80% Citilink                              6.44                          3.29                          74% Indonesia AirAsia             4.54                          2.35                          77% Tiger Airways                   6.00                          3.53                         85.8% Jetstar Asia                      5.8                            n/a                           75%









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