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Lion Air full-service subsidiary Batik Air to expand with A320s, 787s and new base at Jakarta Halim

23-Sep-2013

Lion Air Group new full-service subsidiary Batik Air is planning further expansion as it starts to focus on longer routes, including international services.

Two medium-haul domestic routes will be added in Dec-2013 as the carrier takes delivery of a fifth and sixth 737-900ER. More domestic and the start of international expansion is expected in 2014 as Batik takes the first batch of A320s from the landmark 234-aircraft deal signed by Lion and Airbus in Mar-2013. In 2015 Batik intends to start operating 787s, supporting further international expansion.

Batik is also preparing to move its base from Jakarta Soekarno-Hatta to closer-in Halim Airport, which Indonesian authorities are opening up for commercial jet services in a bid to relieve congestion at Soekarno-Hatta. Halim will provide further differentiation and product segmentation for Batik as the main Lion brand will focus on operating aircraft in single-class configuration from Soekarno-Hatta.

Batik’s initial operation includes seven domestic routes

Batik Air launched services on 3-May-2013 with an initial fleet of two 737-900ERs operating four domestic routes from Jakarta-Soekarno Hatta. Three more domestic routes were launched within one month as two more 737-900ERs were added.

See related report: Competition between Indonesian market leaders Lion and Garuda to intensify as Batik Air launches

Batik currently operates 13 domestic return flights on seven routes from Jakarta, providing almost 33,000 weekly seats. According to the carrier’s website, Batik currently operates three daily flights from Jakarta to Manado and Pekanbaru; two daily flights to Bali and Yogyakarta; and one daily flight to Ambon, Balikpapan and Jayapura.

Lion is currently the largest carrier on all seven routes served by Batik. With Batik positioned at the top, a segment traditionally dominated by Garuda, the Lion group has been able to further increase its market share on the seven routes as well in the overall domestic market.

Batik Air and Lion Air capacity share vs competitors (% of seats) on Batik routes: 23-Sep-2013 to 29-Sep-2013

 Route 

Batik 

share 

Lion Air

share 

Garuda

share 

Sriwijaya

share

Citilink

share 

AirAsia

share 

Tigerair

share

Merpati

share 

 Jakarta-Ambon  33% 38%  29%  N/A N/A  N/A  N/A  N/A
 Jakarta-Balikpapan  4% 46%  30%  7% 13%  N/A  N/A  N/A
 Jakarta-Denpasar Bali  4% 34%  33%  4%  9%  13%  2%  2%
 Jakarta-Jayapura*  16% 54%  14%  16%  N/A  N/A N/A  N/A
 Jakarta-Manado  36% 38%  26%  N/A  N/A  N/A  N/A  N/A
 Jakarta-Pekanbaru  14% 39%  25%  3%  10%  N/A  10%  N/A
 Jakarta-Yogyakarta  6% 43%  27%  5%  3%  12%  3%  N/A

The group’s two budget brands, Lion Air and regional subsidiary Wings Air, account for approximately 50% of total domestic capacity in Indonesia. Batik so far has a less than a 2% share of capacity in Indonesia’s domestic market but this will grow rapidly as it expands its fleet. Batik see plenty of room to expand domestically as the carrier is already profitable and has enjoyed average load factors of about 90% in it its first four months of operations, according to Lion Group CEO Rusdi Kirana.  

Batik will also be used to grow the group’s share of Indonesia’s international market, which is currently only about 6%. Lion currently operates just eight international routes, including only three from Jakarta – Singapore, Kuala Lumpur and Jeddah. Batik will be the brand Lion uses to expand in Indonesia’s international market, particularly medium-haul routes such as Jakarta-Hong Kong.

Batik to focus domestic expansion on east Indonesia

For the rest of this year the expansion will be purely domestic. Batik plans to add in Dec-2013 frequencies to some of its seven existing routes and add two new destinations in east Indonesia. It has not yet announced the new routes or started ticket sales for the two new destinations. The expansion is made possible by the delivery of two additional 737-900ERs.

East Indonesia will be the focus of Batik’s domestic network expansion as routes from Jakarta to the eastern part of the country are some of the longest domestic routes in Asia. While Batik will continue to operate short routes, including the one-hour hop within the main island of Java from Jakarta to Yogyakarta, the focus will be on flights of three hours or more.

Lion believes Batik’s product – which includes meals, drinks and seatback in-flight entertainment monitors across both the economy and business cabins, is well suited to match the needs of Indonesian middle class consumers on longer domestic flights. The group’s other two brands in Indonesia, Lion and Wings, are budget brands and will focus primarily on flights of three hours and less.

On short domestic trunk routes, including Jakarta to Medan and Surabaya, Lion is planning to further increase frequencies to support half hourly departures and introduce a flexible but affordable fare that allows passengers to show up at the airport whenever they get through Jakarta’s notoriously bad traffic and hop on the next flight. Business passengers are not always requiring a full-service product on these types of short trunk routes but seek flexibility and a high frequency schedule.

The flight between Jakarta and Surabaya, Indonesia's two largest cities, takes about one hour while Jakarta-Medan is about two hours. These are Lion’s two biggest routes, served more than 20 times per day, and are also among the largest 20 routes in the world. But Batik does not yet serve either route.

Four of Batik’s routes are currently less than three hours – Yogyakarta on Java is just over one hour; Pekanbaru on the western island of Sumatra and Denpasar on Bali is just under two hours; and Balikpapan on Borneo is just over two hours.

Batik Air network: as of 22-Sep-2013

Manado, Ambon and particularly Jayapura are more representative of the Batik network strategy. Manado and Ambon are just over three hours while Jayapura, located in the far eastern portion of the country, is about six hours.

Batik Air flight times by frequencies: 16-Sep-2013 to 22-Sep-2013

Jakarta-Jayapura is representative of future Batik routes

The Jayapura service began in early Jun-2013, the last of Batik’s seven current routes to be launched. Jakarta-Jayapura is the longest route, domestic or international, in the Lion Group network with the exception of Jakarta to Jeddah in Saudi Arabia, which is operated with Lion’s niche fleet of two 747-400s.

Lion’s only current narrowbody flight over four hours is Jakarta-Jayapura but this flight is only operated once per day on a one-way basis. Lion is expected to stick to flights under four hours and nearly entirely to flights of less than three hours.

Lion Air flight times by frequencies: 16-Sep-2013 to 22-Sep-2013

Jayapura and other cities in eastern Indonesia have not traditionally been served non-stop from Jakarta. For example, Garuda and Indonesia’s other main-full service carrier, Sriwijaya Air, route passengers heading form Jakarta to Jayapura via Makassar. Most Indonesian carriers have hubs in Makassar, ideally located in the middle of the country and used as a bridge to the east.

Lion currently offers three flights from Jakarta to Jayapura but on the outbound two of the three flights stop in Makassar while on the slightly longer return sector all three stop in Makassar. By offering a non-stop in both directions, Batik is able to offer an exclusive product in a strong business market that is growing.

Jayapura is the capital of Papua province, which has a booming resources sector. Other airports in Papua and neighbouring West Papua province are currently generally linked with Jayapura and Makassar. The larger of these airports, essentially those already served by jets, could also potentially support non-stop service to Jakarta particularly as the economy in eastern Indonesia continues to grow rapidly.

This includes Manokwari, Merauke, Sorong and Tembagapura. None of these destinations currently have non-stop services to Jakarta by any carrier, according to Innovata data. Biak, located on a smaller island off the north coast of Papua, could also be a potential route from Jakarta.

The longest non-stop domestic flights from Jakarta for Garuda are currently Ambon and Ternate, both which are about three and a half hours in duration and only slightly further than Manado and Makassar. Garuda and Sriwijaya are currently the only carriers operating non-stops on the Jakarta-Ternate route while Garuda, Lion and Batik already serve Jakarta-Ambon. Ternate and the much better served Makassar would be logical additions for Batik given its focus on routes over three hours.

Halim to further separate Lion from Batik

On longer domestic routes Lion will continue to offer a one-stop product, providing segmentation between the two brands. Differentiation will also be achieved as Batik moves its base to Jakarta Halim Airport.

Angkasa Pura II, the government-owned airport operator which also manages Soekarno-Hatta, recently decided to open up Halim to scheduled commercial jet services and Haj charters. Currently the airport, located about 10km from central Jakarta, only handles scheduled passenger services operated by small turboprops under air taxi regulations. It is also used by general aviation including business jets, cargo and the military.

Mr Kirana advised recently that Batik aims to move its operation to Jakarta Halim by the end of 2013. Batik will not be alone at Halim as several carriers, including Garuda and its budget subsidiary Citilink, also have reportedly applied for permission to operate at Halim.

While the Halim terminal is basic and only has parking stands rather than air bridges, Lion believes the facilities are adequate and the convenience of the airport will make it attractive to business passengers. Angkasa-Pura II also has begun work renovating the Halim passenger terminal although at least for now this does not constitute a major upgrade or expansion.

Mr Kirana says Batik is also in talks to open a lounge at Halim. If it is unable to secure space for its own lounge, the carrier may use an existing VIP lounge that is currently used by business jet passengers.

The opportunity to fly from Halim is appealing for all major Indonesian carriers because additional slots at Soekarno-Hatta are limited, particularly during peak hours. By transferring Batik operations to Halim, slots at Soekarno-Hatta could be freed up for more Lion-branded services, including more frequencies on the short trunk routes.

Lion Air will phase out business class as Batik Air emerges

The Lion group is providing further segmentation between the Lion and Batik brands by phasing out business class under the Lion brand. Mr Kiran says Lion still has nine 737s in two-class configuration but these aircraft will be reconfigured by the end of 2013. He says the additional economy seats have already been acquired and a ready to be installed.

According to Lion’s booking engine, the carrier currently offers a business class product on select flights on all Batik routes except Bali. Business class is currently offered on two of Lion’s 12 daily frequencies from Jakarta to Yogyakarta frequencies, three of nine frequencies to Balikpapan, one of seven frequencies to Pekanbaru, five of six frequencies to Manado and one of three flights to Jayapura. (Some Lion flights to Manado and Jayapura operate as a one-stop same-plane service.)

The current Lion business class product is a step below the Batik product but it is logical for Lion to focus purely on economy given that it now has Batik, particularly as Lion has business class on such a small fraction of its fleet. Lion’s business class seat pitch is only 38in compared to 45in on Batik. There is also no IFE on Lion while Batik offers seatback monitors in both classes. Seat width is similar as both Lion and Batik offer business class in 2X2 configuration. Both carriers offer meals and drinks in business class.

Garuda’s business class is similar to the Batik business class with IFE monitors at every seat and similar pitch and width. Sriwijaya also introduced a business class in 2012 and now offers the product on select flights. Sriwijaya’s business class is more similar to the Lion business product but the carrier has been looking to move further upmarket and compete more directly with Batik and Garuda by using its proposed new subsidiary Nam Air.

A Sriwijaya source advised recently that Nam is aiming to launch in Jan-2014 or Feb-2014 using 737s. Nam could potentially operate at Halim which would enable Sriwijaya to launch the new subsidiary without reallocating some of its valuable slots at Soekarno-Hatta. While Garuda has also applied to serve Halim this could pose some challenges given Garuda’s hub is at Soekarno-Hatta and moving some flights to Halim would compromise transit traffic.

Batik Air fares are targeted to provide good value for passengers seeking full service at lower price point

Lion economy fares are generally 10% to 25% less than Batik economy fares, depending on the route. Currently Lion business class fares are approximately 25% less than Batik business class fares. Batik fares are significantly less than Garuda in both classes.

Batik one-way economy fares start at about IDR500,000 (USD44) to IDR1 million (USD88) depending on the route. The Lion Group sees Batik fares as targeting passengers, particularly Indonesia’s growing middle class, who do not want to fly budget but do not want to pay Garuda fares

Batik economy offers slightly more legroom with 32in pitch as well as drinks, meals and IFE. Lion and Batik both offer complimentary checked bags for all passengers, which make it easier for passengers as they can connect between the two carriers without having to worry about bag fees.

While it has become a common strategy for Asian full-service airline groups to establish budget subsidiaries, with local Garuda and Citilink being one of several examples, Batik Air is the first example of an LCC group establishing a full-service subsidiary. The potential benefits of such a strategy include the opportunity to have a full-service carrier at a lower cost base than legacy competitors.

Often LCC subsidiaries are not independent enough from their parent to avoid being saddled with some legacy costs. Lion for examples is believed to have a much lower cost base than Citilink. As it is able to leverage the same lower cost base, Batik's costs would be significantly lower than Garuda although higher on a per seat basis than Lion.

Batik has 15% fewer seats than Lion on the 737-900ERs but yields should be sufficient to offset these higher costs, as well as the cost of catering (which is relatively inexpensive in Indonesia), given the higher fares. The key is trip costs for Batik and Lion would be almost the same and significantly lower than Garuda.

Batik Air to take A320s

Batik’s 737-900ERs are configured with 168 economy and 12 business class seats and are identical to the 737-900ERs operated by Malaysian hybrid subsidiary Malindo Air. Mr Kirana says Batik’s A320s, to be delivered from 2H2014, will be configured with 12 business class and 148 economy seats. That would give Batik 11% fewer seats than the typical all-economy LCC A320.

Mr Kirana says Batik will be the first A320 operator in the Lion Group. The group plans to take the first batch of six A320s in 2H2014. Lion ordered 234 A320s in Mar-2013, supplementing an order for 230 additional 737s completed in early 2012. The group currently operates 95 737NGs – including 86 at Lion, five at Malindo and four at Batik – with 312 more on outstanding order, according to the CAPA Fleet Database.

Lion Air Group fleet: as of 23-Sep-2013

Aircraft In Service In Storage On Order
Total: 128 19 587
Airbus A320-200 0 0 60
Airbus A320-200NEO 0 0 109
Airbus A321-200NEO 0 0 65
ATR 72-212A(72-500) 20 0 0
ATR 72-212A(72-600) 7 0 36
Boeing 737-300 1 1 0
Boeing 737-400 3 5 0
Boeing 737-800 19 0 11
Boeing 737-9 0 0 201
Boeing 737-900ER 76 0 100
Boeing 747-400 2 0 0
Boeing 787-8 0 0 5
Boeing/McDonnell Douglas MD-82 0 9 0
Boeing/McDonnell Douglas MD-83 0 1 0
Boeing/McDonnell Douglas MD-90-30 0 1 0
Bombardier DHC-8-301 0 2 0

See related reports:

The group has been taking delivery of additional 737s at a rate of two per month. The group has not yet decided on an aircraft allocation for 2014 but Batik could potentially take more 737-900ERs in 1H2014 before shifting to A320s in 2H2014.

Batik eyes international expansion with 737s and 787s

Mr Kirana says Batik will continue to have two narrowbody types in its fleet after it starts taking A320s. He says the thinking is also for Batik to operate the five 787s that the group has on order for delivery from 2015, in line with the overall strategy to have all longer flights under the full-service brand. The only exception will be the Jeddah flights, which Lion will continue to operate with the 747-400s. The 787s would allow Batik to launch routes of over seven hours, opening up more potential destinations in North Asia and Australia along with the Middle East and possibly Europe.

Mr Kirana envisions Batik using A320s on shorter domestic routes, freeing up some of its 737-900ERs to launch international services. Mr Kirana is confident Halim will be able to handle scheduled international flights as immigrations and customs is already on site, used currently to process business jet passengers.

Batik will be used to operate primarily medium-haul international routes such as Jakarta-Hong Kong. Lion will likely continue to serve its existing short-haul international routes such as Jakarta-Singapore. Lion currently does not serve any destinations in North Asia.

Moving to Halim will limit connection opportunities as Batik will be used to operate most of the group’s international routes from Indonesia. But Mr Kirana says Batik plans to offer domestic to international connections at Halim and should have a sufficient domestic network at Batik to serve this market. This would suggest that Batik while focusing expansion primarily on longer routes will over time also add some shorter routes to provide feed for the longer domestic routes and international services.

But the focus at Halim will primarily be on the local market. Lion and its subsidiaries are all network carriers and 40% of the group’s traffic is currently transit. But Lion plans to expand its hubs outside Jakarta to handle more of the transit traffic, leaving its operations at Jakarta airports to focus more on the local market. As part of this plan Batik is expected in future to start operating international services from other Indonesian airports. At these airports Lion to Batik connections will be pursued while at Halim Batik will be the only Lion group brand.

Batik Air has growth ambitions and bright outlook

In early 2011, after first revealing plans to start a full-service carrier, Mr Kirana stated that the new airline could eventually operate a fleet of 60 narrowbody aircraft. Mr Kirana would not provide a revised figure based on the initial success of the operation but now says “Batik will be quite big”. He points to the group’s large order book and growing demand for an affordable full-service product among Indonesia’s middle class.

Batik has a bright outlook as there is fast-growing demand at both the ends of the Indonesian market, driven by the country’s rapid economic growth. Competition has traditionally been less intense at the full-service end, providing Batik with an opportunity to take market share from Garuda as well as stimulate passengers to trade up from LCCs as discretionary income levels grow.

The opportunities for Batik are particularly large given the convenience that Halim provides over congested Soekarno-Hatta and the group’s decision to have Batik operate most future international routes. Indonesia’s international market is poised to grow rapidly over the next several years as it is now under-served and as liberalisation filters through. Indonesia has the largest domestic market in Southeast Asia by a very wide margin but its international market is currently significantly smaller than Singapore, Thailand and Malaysia.

Batik may not be able to match Lion’s remarkable domestic success and become Indonesia’s largest international carrier or the country’s largest full-service carrier. But there will be opportunities for rapid growth and to absorb a large part of the massive Lion group order book of over 500 aircraft.

Part 2

This is the first in a series of reports on the Lion group strategy. The next report will look at the strategy of the group’s next affiliate, Thai Lion.


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