Thursday, June 13, 2013

Lion Air Readies Challenge to AirAsia: WSJ

 Updated June 13, 2013, 10:54 a.m. ET

The Wall Street Journal 

KUALA LUMPUR, Malaysia—Riding on orders for hundreds of new jets, Indonesian low-cost carrier Lion Air hopes to challenge regional rival AirAsia Bhd. in Malaysia with a startup carrier offering premium amenities at budget prices.

Malindo Air, which began flying in March with a fleet of mainly Boeing Co. 737s, aims to lure customers from AirAsia and Malaysian Airline System Bhd.  with hot meals, roomy seats and touch-screen television sets at rock-bottom fares.

Malaysia-based Malindo Air says it can keep costs low because it is able to procure aircraft cheaply from Lion Air, which holds a 49% stake. National Aerospace & Defence Industries Sdn. Bhd., a Malaysian aircraft-maintenance, -repair and -overhaul company, owns the remaining 51%.

"Given a choice, everyone wants to fly a full-service carrier. The only limitation is price," Malindo Chief Executive Chandran Rama Muthy said in an interview on board the airline's packed inaugural flight from Kuala Lumpur to the eastern tourist town of Sibu, Malaysia, this week.

Therefore, he said, "there is a niche market in between" premium and low-cost carriers, referring to his airline's hybrid operating model. Unlike other low-cost carriers, Malindo also offers business-class cabins on domestic flights.

Malindo's success is crucial to Lion Air's ambitions to establish operations across the region to compete with AirAsia, which dominates the Malaysian market and is the biggest low-cost carrier in Asia. Lion Air, which accounts for 45% of the Indonesia market, is setting up a unit in Thailand and has formed a full-service carrier, known as Batik Air, in its home market.

Lion Air, now Indonesia's largest airline after launching in 2000 with only one plane, has expanded rapidly by sticking to low-cost domestic flights across the island nation. It is now banking on its new affiliates to underpin international growth.

Lion Air was little known internationally until it surprised the industry last year with record-setting orders for 230 Boeing 737s, followed by a separate order for 234 Airbus A320 jets in March, deals likely to help fuel its regional expansion.

AirAsia and Lion Air have together ordered more than 1,000 planes in the past two years as they prepare for a more liberal civil-aviation market in Southeast Asia.

Malindo Air, which has adopted Lion Air's logo on its planes, plans to increase its fleet to 10 aircraft—six Boeing 737-900 jets and four turboprops—by the end of this year from the current four planes, said Mr. Chandran, who added that the carrier's planes on average are 80%-filled.

The airline could take more planes next year as needed from Lion Air, which itself will take delivery of 34 aircraft in 2014, said Mr. Chandran, a former Lion Air executive.

"Our objective is to make Kuala Lumpur a transit hub in the region. We will connect people from Indian cities, Dhaka to Kuala Lumpur," Mr. Chandran said.

Subject to approval from Indian regulators, the airline plans to start flights to New Delhi in August and hopes to launch flights to other Indian cities. It is also planning flights to China.

Despite its lower cost base, Malindo's hybrid business model has yet to prove successful elsewhere. India's Kingfisher Airlines Ltd. tried to lure passengers with premium services at low fares but failed because the airline expanded too rapidly. The airline was finally grounded last year over unpaid bills and high debt.

"Malindo may struggle to generate sufficient yields and revenues to cover its higher unit costs and pay for the frills it provides," consultancy CAPA-Centre for Aviation said in an earlier note.

"Trying to undercut AirAsia may not be a sustainable strategy alone and it has yet to be seen whether added frills will attract travelers who are extremely price-sensitive," CAPA said.

Malindo passengers can currently book tickets on sectors served by Lion Air and Batik, and the airline is also in talks with more carriers in the region to offer connecting flights.

Unlike most budget carriers, Malindo aims to offer baggage transfers to other airlines to connecting customers, Mr. Chandran said.


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