With huge aircraft orders in hand, upstart Lion Air of Indonesia serves notice to AirAsia that its dominance of the regional budget market is no longer assured.
Rusdi Kirana, the co-founder and CEO of the Indonesian carrier, not the sort of airline executive who is seen regularly at major aviation events. But he was present in person to confirm the single largest order in the history of Airbus Industrie in France.He was not the only executive in a buying mood, but others in the airline industry agree that the market in Asia is likely to see growth at levels not seen in decades. Aviation has been on the rise in the region for the past decade despite setbacks such as the Sars outbreak, bird flu, and years of economic weakness in the traditional markets for many Asian airlines, Europe and United States. Mr Rusdi late in February had his picture taken with French President Francois Hollande by his side and plastered across global newspapers and on the web. Hollande witnessed the deal under which Lion Air Group agreed to acquire 234 new Airbus A320-family aircraft worth US$24 billion. For someone who likes to keep a low profile, it was the second big photo opportunity. His first came when he stood next to US President Barack Obama as he announced Lion Air’s order for 230 Boeing 737-900ER and B787 aircraft from the US plane maker. The Boeing deal was the one that caused the investment community and aviation industry to take notice of Rusdi, who co-owns Lion Air Group with his brother, Kusnan. They had earlier plans to float the company but have since shelved the thought. From selling typewriters and earning US$10 monthly, the brothers’ move into the aviation world has been an amazing journey. The airline, which started with only one aircraft in 2000, now operates more than 100 modern planes and holds a 45% share of Indonesia’s domestic market. Last year it carried more than 32 million passengers. Lion Air has become one of Asia’s fastest-growing airlines and experts believe it will be AirAsia’s biggest competitor in Asia. While AirAsia began venturing beyond its Malaysian home base years ago, Lion Air has just started the expansion engine. Lion Air now operates an extensive network covering more than 70 destinations in Indonesia and Southeast Asia. The group’s first joint venture is in Malaysia, where 49%-owned Malindo Air, set up to rival AirAsia on its domestic turf, took off on its inaugural flight to Kota Kinabalu in West Malaysia. By year-end Rusdi wants to launch Batik Air either for long-haul flights out of Jakarta or turn it into another Indonesian domestic carrier. Malindo will be its mid- to long-haul arm and the hub at KLIA will be Lion Air group’s gateway to the world, since it is still banned from operating in the European Union until safety and maintenance standards are improved. Like AirAsia and Lion Air, there are more than a dozen budget airlines that started operations in Asia-Pacific in the past 15 years as economic growth in China, India and Southeast Asia enables more people to fly for the first time. Asia’s air passenger traffic volumes are rising with growing middle class in markets such as Indonesia, India, China and Indo China. The low-fare market has grown by seven percent annually during the past 10 years, expanding from just over 100 routes in 2002 to nearly 800 today. Low-cost carriers are increasing their fleets as air travel is expected to grow more than 6.4% annually through 2031, but no other orders on the scale of those by Lion Air and AirAsia have been placed thus far. Many of Asia’s carriers in this segment also rely on Airbus A320 planes to succeed in the highly competitive marketplace. They include AirAsia, Air Busan, GoAir, IndiGo, the Jetstar Group, Juneyao Airlines, Peach, Skymark Airlines, Thai Smile, Tiger Airways and Zest Airways. But the latest order by Rusdi has also stoked concerns about overcapacity in Asia. This is his second order in less than two years and Lion Air will have 700 planes once all the deliveries by Airbus and Boeing are completed. But Rusdi is not ready to stop: he aims to have 1,000 planes on order or under delivery within two to three years. Lion and AirAsia between them have 1,200 aircraft orders on the books and these are amazingly big numbers despite the general bullishness most people have about Asian’s growth. Tony Fernandes dismisses any talk of overcapacity. “There are 3 billion people in Asia, there are 300 million people in America. America has about three times more planes right now than Asia,” the AirAsia founder was quoted as saying recently. “Asia can take the planes they (Lion Air group) have and we have.” The flamboyant Fernandes is the face of budget travel in Asia, and getting his picture taken with world leaders is routine for him. British Prime Minister James Cameron was by his side in December when AirAsia confirmed an order for 100 planes, which helped safeguard hundreds of jobs at an Airbus plant in Britain. Fernandes is confident the growing population in Asia will help fill his planes and those of others for years to come. AirAsia, which he help start 11 years ago with two aircraft, flew 200,000 passengers then. He projects the airline will carry 43 million passengers this year, and now he’s in the midst of setting up AirAsia India. It is reality that Asian travellers prefer discounted fares and that is why discount carriers have secured about a quarter of the region’s air travel market. The International Air Transport Association says that the region will account for 33% of global passengers in 2016. But a lot of questions persist about how these companies will finance their large aircraft acquisitions. Industry insiders say that most of these orders are placed over a span of nearly a decade or more, and as deliveries are made the airlines secure their financing: they sell the new aircraft to a leasing firm and then lease them back for a fixed period. This way the airlines are able to have enough funds to buy the new aircraft that are delivered according to the contracts. “Because these firms buy the aircraft in bulk their price is very low, and then they can turn around to sell to the leasing firm which then leases them back to the airline,” said an executive of a mainstream airline, asking not to be identified. But problems could arise, the executive said, if the market goes into a tailspin and the airlines are unable to sell the aircraft to leasing firms, or the leasing firms don’t want to buy because they are worried about economic factors. The current aircraft purchases position Lion Air to potentially move ahead of AirAsia. Which of the two will have supremacy in Asia’s skies remains to be seen as the big boys’ battle is just about to begin. https://www.bangkokpost.com
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