14-Dec-2012 10:03 PM

AirAsia accelerates fleet expansion as battle with Indonesia's Lion Air moves up a gear

Analysis

The AirAsia Group has followed through on promises to order another 100 A320s, enabling it to accelerate expansion at its fast-growing portfolio of low-cost carriers. The new order, announced on 13-Dec-2012, means the group is now committed to more than 350 A320/A320neo deliveries over the next 14 years. While adding aircraft at an average pace of 25 aircraft per year may seem ambitious, the reality is that even faster expansion is potentially sustainable given the fact that AirAsia now comprises of five A320 airlines in five distinct markets, all of which are rapidly growing. Indeed, the real issue is more about keeping ahead of the field in Asia's booming short-haul low-cost market.

Indonesia's Lion Air Group, which has quietly overtaken AirAsia as the largest LCC group within Southeast Asia (albeit mostly domestic), captured headlines in late 2011 when it one-upped AirAsia’s order for 200 A320neos from mid-2011 by committing to 201 737 MAXs.

AirAsia is taking the threat of increased competition with Lion, which is planning to launch a new affiliate in AirAsia’s home market of Malaysia in 2013, very seriously. It’s no surprise AirAsia is using the latest order in part to accelerate expansion in Malaysia, where it will aim to beat new Lion subsidiary Malindo into oblivion, and in Lion’s home market of Indonesia.

The latest AirAsia order comprises 36 A320s and 64 A320neos. The 36 additional A320s means AirAsia is now expected to take 93 of the current generation aircraft between 2013 and 2016, based on CAPA calculations. The additional 64 A320neos means AirAsia is now committed to take 264 of the re-engined variant, far more than any other A320 customer, with deliveries expected from the end of 2015 or early 2016 through 2026.

Latest AirAsia order is hardly a surprise but significant

AirAsia has been hinting it would need to order more A320s since the day it ordered 200 A320neos at the 2011 Paris air show, pointing out at the time it would need to order another 125 aircraft to reach its goal of a 500-aircraft fleet. The deal for 100 additional A320/A320neos has been talked about all year and has been imminent since Sep-2012, when it was close to being completed for the Berlin air show. AirAsia briefly considered instead ordering 100 Bombardier CSeries CS300, but as CAPA reported in Sep-2012 AirAsia’s stated interest in the CSeries was apparently more a negotiating tactic to wrangle a better price from Airbus for additional 180-seat A320s although the group could later re-look at the 160-seat CS300.

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While AirAsia haggled with Airbus over price for the last three months, more early delivery slots for A320neos became available. AirAsia had a pressing need for more early A320neo delivery slots as well as more current generation A320s before the A320neo enters service in late 2015. As CAPA reported in Sep-2012:

While AirAsia Group has approximately 270 additional A320s on order, including 200 A320neos, it has been concerned over the last year that it cannot adequately bulk up its five Air Operator's Certificates (AOCs) in Indonesia, Japan, Malaysia, the Philippines and Thailand in the medium term, largely before the A320neos are delivered. Additionally, further AOCs are likely to be added before the first A320neo is delivered in 2016. AirAsia has accelerated A320 deliveries three times this year for the 2012 to 2014 time frame, taking back slots it had decided to defer in 2011 and earlier.

The Group on multiple occasions in 2009 to 2011 deferred deliveries that were originally slated for 2009 to 2014 as it was unclear at that point when it would be able to expand its portfolio of affiliates beyond Malaysia, Thailand and Indonesia. The success with launching the two new joint ventures has had a huge impact on the Group's fleet plan as Japan alone could support 50 aircraft by mid-decade while AirAsia Philippines is eyeing a fleet of 16 aircraft within five years. Market conditions in Thailand and Indonesia have also improved over the last two years, allowing AirAsia to regain confidence in re-accelerating deliveries.

Airbus did not disclose any delivery dates in announcing the latest order from AirAsia, which was signed during a 13-Dec-2012 tour of an Airbus wing manufacturing facility in the UK for British Prime Minister David Cameron and AirAsia Group CEO Tony Fernandes.

AirAsia also has not yet put out a statement providing a revised delivery schedule. But AirAsia’s original order for 200 A320neos were spread out between 2016 and 2026 and the 64 additional aircraft will likely be delivered in the same period, but with an emphasis on the earlier years.

As part of the original A320neo order placed at the Paris air show in Jun-2012, AirAsia was only able to secure four delivery slots in 2H2016 and 14 in 2017, before ramping up to 18 in 2018, 19 in 2019 and at least 20 per year from 2020 to 2025. The A320neo is now slated to enter service in late 2015.

AirAsia original A320neo delivery schedule: 2016 to 2026

The AirAsia Group now has a need for at least 20 A320neos per year. But early A320neo slots have been in very high demand and several A320 operators beat AirAsia in signing up for the new re-engined variant. Like other A320 operators, AirAsia is keen to transition to the A320neo as it expects the new type will bring fuel savings of about 16%.

Virgin America deferral opens up more early A320neo delivery slots for AirAsia

AirAsia was probably able to secure additional A320neo slots in 2016 and 2017 (and perhaps even a slot or two in the very first batch of A320neos which Airbus plans to deliver in late 2015) as a result of Virgin America’s recent deferral. Virgin America was the very first airline to order the A320neo, with 30 of the type in Jan-2011. But the US carrier, which has been struggling financially, announced in Nov-2012 that it had decided to defer deliveries of all 30 of its A320neos back to 2020-2022, handing back Airbus precious delivery slots. Airbus almost certainly used some of these slots to cement the new order with its largest A320 customer, AirAsia.

While Airbus also has not disclosed delivery dates for the 36 additional A320 current generation aircraft being ordered by AirAsia, these will almost certainly be spread out over the 2013 to 2015 timeframe. AirAsia was already committed to adding 21 A320s in 2013, followed by 24 A320s in 2014 and only nine A320s in 2015. But the group needs more aircraft in the short to medium term as part of a plan to accelerate growth in Malaysia, Indonesia and Thailand and to expand from a low base the new affiliates in Philippines and Japan.

The situation for 2013 has particularly changed as AirAsia is keen to fend off the launch of Malindo in Malaysia and pursue rapid organic growth in Indonesia after it failed to complete the planned acquisition of Indonesian carrier Batavia Air. Originally AirAsia was not planning to pursue rapid growth at AirAsia Malaysia or Indonesia AirAsia and instead focus on building up the new operations in the Philippines and Japan.

Back in 2011, before the joint venture in Japan materialised, AirAsia Group had reduced its 2013 commitments to only 13 A320s. But earlier this year it brought forward eight deliveries from 2015 and 2016 to 2013. It became clear in recent months that the even revised delivery schedule for 2013 of 21 aircraft was still not sufficient.

AirAsia to add 28 A320s at three original affiliates in 2013

In its 3Q2012 results presentation to analysts in Nov-2012, AirAsia disclosed it now plans to add 10 A320s in Malaysia in 2013, nine A320s in Indonesia and nine A320s in Thailand. That means the group has increased its group fleet plan for 2013 to well over 30 additional aircraft after factoring in the Philippines and Japan. The group did not disclose how many additional aircraft are now planned for the Philippines and Japan in 2013, but AirAsia Japan has said it expects to add five to 10 aircraft.

AirAsia Philippines will likely only add a couple of aircraft in 2013 as the carrier has so far struggled, cutting some of its initial routes while launching others. AirAsia Philippines has already delayed plans to expand its fleet from two to four aircraft, which originally was expected to occur in 4Q2012. While it is unlikely the carrier will also continue right through 2013 without adding aircraft, expansion is likely to be limited until its performance improves.

The AirAsia Group is now expected to end 2012 with a fleet of 120 A320s, including two aircraft which were acquired via operating lease rather than directly from Airbus. This includes 64 A320s at AirAsia Malaysia, 27 at Thai AirAsia, 23 at Indonesia AirAsia, four at AirAsia Japan and only two at AirAsia Philippines. Based on CAPA calculations, the Malaysian fleet is now expected to reach 74 A320s by the end of 2013 while the fleets in Thailand and Indonesia should reach 36 and 32, respectively.

AirAsia Group fleet by national carrier: 2013 vs 2012

Carrier	Launch year	A320s as of 30-Jun-2012	A320s as of 30-Sep-2012	A320s as of 31-Dec-2012*	A320s as of 31-Dec-2013
AirAsia Malaysia	2001	58	59	64	74
Thai AirAsia	2004	24	25	27	36
Indonesia AirAsia	2005	19	20	23	32
AirAsia Japan	2012	2	3	4	N/A^
AirAsia Philippines	2012	2	2	2	N/A^

Thai AirAsia to expand fleet by 33% in 2013 at Don Mueang's 'goldmine'

In Thailand the planned expansion means Thai AirAsia will grow its fleet by 33% in 2013. The AirAsia Group recently stated that Thai AirAsia’s outlook improved significantly by the carrier’s shift in Oct-2012 from Suvarabhumi to Don Mueang Airport. The Group calls Don Mueang “a goldmine” and says the move “has significantly strengthened Thai AirAsia’s foothold in the domestic market as it is more convenient to commute to and from the city”.

AirAsia says 90% of the capacity being added in Thailand during 2013 will be used to expand existing routes while 10% will be used to launch new services. AirAsia’s strategy in Thailand is to “dominate the domestic market” as well as the Thailand-Southeast Asia and Thailand-China international markets.

AirAsia’s decision to accelerate expansion in Thailand comes as its biggest local competitor, Thai Airways LCC affiliate Nok Air, is also pursuing ambitious expansion. Nok already has a larger domestic network than Thai AirAsia and is planning to launch international services in 2013.

AirAsia accelerates expansion in Malaysia ahead of Lion/Malindo launch

The accelerated rate of expansion in Malaysia is perhaps most surprising. The AirAsia Group had earlier indicated that capacity growth would slow at AirAsia Malaysia as the Malaysian LCC market is relatively mature. AirAsia Malaysia, also known as AirAsia Berhad, launched services in 2001 and in its 10th anniversary year, 2011, accounted for a leading 58% of passengers in Malaysia’s domestic market and 38% of the country’s international market. Malaysia is generally considered the most saturated LCC market in Asia with the possible exception of Singapore because Malaysia has a high number of LCC seats (about 700,000 per week) given its relatively small population (about 29 million).

But Lion Air’s announcement in Sep-2012 of plans to launch a new joint venture LCC in Malaysia with Malaysia’s National Aerospace and Defence Industries (NADI) has significantly changed AirAsia’s plans for its original home market. AirAsia Malaysia is now slated to receive five additional A320s in 4Q2012, more than any other AirAsia affiliate, and another 10 A320s in 2013. As a result, the size of the carrier’s fleet will expand by 20% in only 15 months – rapid growth for a market which is relatively mature.

AirAsia states that the 10 additional aircraft being added in Malaysia during 2013 will be used primarily to expand capacity on existing routes. Specifically, the carrier plans to deploy 89% of the additional capacity driven by the fleet expansion on existing routes while 11% will be used to launch new routes. AirAsia says there will be expansion in the Malaysian domestic market as well as to Indonesia and China.

It is no coincidence that Lion’s new Malaysian LCC, Malindo, also plans to target the domestic and Malaysia-Indonesia market. Malindo is aiming to launch services in May-2013 and have a fleet of 12 737-900ERs within its first year. Lion has said it expects Malindo will operate a fleet of 100 aircraft within 10 years.

Lion/Malindo faces challenges in Malaysia as AirAsia fights back

The Malaysian market could possibly benefit from some new competition, as AirAsia now accounts for about 90% of total LCC capacity. The market is also attractive given AirAsia Malaysia has consistently recorded some of the highest profit margins in the global industry, including a 20% EBIT margin in 3Q2012. But while Lion has the aircraft on order to support a large Malaysian affiliate, the Malaysian market is probably not big enough to support two large LCCs.

Lion does however apparently see room in the Malaysian market for a second local LCC, filling the void left by Firefly, which dropped its 737 LCC operation in late 2011. Firefly, a subsidiary of Malaysia Airlines, has returned to its roots and now only operates ATR 72 turboprops, following a hybrid regional carrier model.

In its investor presentation of the group’s 3Q2012 results AirAsia touted its success in dealing with competitors in Malaysia and how it “dealt with Firefly”. The group is clearly confident Malindo will also not succeed. It has good reason to be sceptical of Malindo's chances given NADI’s track record and lack of experience in the airline industry. IN 2011, Lion also failed to launch a joint venture carrier with its original Malaysian partner, Berjaya Air.

NADI’s existing subsidiaries manufacture aircraft components and provide maintenance on military aircraft. One of its subsidiaries previously attempted to expand, without success, into the commercial aircraft maintenance sector with AirAsia as its anchor customer. NADI, which has close ties to the government as it was previously government owned, has a 51% stake in Malindo.

AirAsia will not be reluctant to add capacity and drop fares on any route Malindo enters. How long Lion and NADI would be willing to cover losses under a likely scenario of irrational competition is unclear. AirAsia is prepared to weather the storm and could end up moving some of the aircraft added in 2013 to other markets should Malindo not end up posing a major threat.

AirAsia aims to become more formidable competitor to Lion in Indonesia

In Indonesia, a vastly bigger market than Malaysia, the situation is the opposite as Lion is the market leader while AirAsia is for now a relatively small player. Market conditions are also dramatically different in Indonesia compared to Malaysia as Indonesia is by far the most populated country in Southeast Asia (240 million) and has one of the world’s fastest growing economies. Competition is more intense, with four local LCCs and several local hybrid carriers which also offer low fares, but there is opportunity for huge growth across multiple business models.

AirAsia is keen to expand in Indonesia’s domestic market and close the gap with market leader Lion, which accounted for 45% of Indonesia’s huge domestic market in 2011 when also including its regional subsidiary Wings Air.

After calling off plans to acquire Batavia in Oct-2012, which would have instantly expanded AirAsia’s share of the domestic market AirAsia from about 2% to 13%, AirAsia unveiled plans to accelerate expansion at Indonesia AirAsia.

Indonesia AirAsia in a 15 month period from Oct-2012 to Dec-2013 is now planning to expand its fleet by 60% from 20 to 32 aircraft. The AirAsia Group has stated the nine aircraft added at Indonesia AirAsia in 2013 will support its new strategy to “refocus on the domestic market and grow organically”.

Indonesia AirAsia expects half of its 2013 capacity growth to be allocated to existing routes and the other half to be used to launch new routes, with a focus on new domestic routes. Indonesia AirAsia currently only serves 11 domestic destinations and allocates over 60% of its seat capacity to the international market.

AirAsia, which is already the largest carrier in Indonesia’s small international market, will still be a small fraction of the size of Lion and Garuda LCC subsidiary Citilink in the domestic market. But the nine aircraft being added in 2013 is a start and represents a significant acceleration compared to the previous 2013 fleet plan for Indonesia AirAsia, which envisioned only five additional aircraft. Perhaps more importantly, it is also another sign of the growing rivalry between AirAsia and Lion.

Lion currently operates about 90 aircraft (excluding Wings Air) and allocates over 95% of its seat capacity to the Indonesian domestic market. Lion plans to expand its mainline fleet to over 200 Boeing 737NGs by the end of 2017, with some of these aircraft earmarked for Malindo and for new Indonesian full-service subsidiary Batik Air. The Lion Group also has orders for 201 737 MAXs which are slated for delivery from 2017 to 2026. Wings, meanwhile, is committed to growing its fleet to 60 ATR 72s by the end of 2016.

AirAsia and Lion emerge as Asia’s two leading LCC groups. Let the battle begin

With its latest 100-aircraft order, AirAsia inches past Lion in what has become a high profile competition to have the largest order book in Asia. But Lion’s ambitious CEO and owner, Rusdi Kirana, will likely not let Mr Fernandes have the final word. More orders from both groups are likely given their bullishness on the Asian LCC market.

Traditionally Jetstar and Tiger have been seen as the biggest rivals to AirAsia as all three have worked over the last decade (with various degrees of success) in establishing pan-Asian LCC groups. Lion, thanks to its very strong position in the fifth biggest domestic market in the world, has emerged as a larger airline group than Jetstar and Tiger, although predominantly still domestic.

Within ASEAN, which AirAsia now considers its home market after moving its regional headquarters from Kuala Lumpur to Jakarta earlier this year, Lion has already overtaken AirAsia as the largest LCC group. According to CAPA and Innovata data, the Lion Group now accounts for 32% of the LCC seat capacity within Southeast Asia, compared to 30% for the AirAsia Group (See Background information).

In the wider Asia-Pacific market, AirAsia is still larger, but not by much, accounting for 16% of total LCC capacity compared to 15% for Lion, 11% for Jetstar and 4% for much smaller and weaker Tiger.

LCCs overall now account for roughly one quarter of total capacity within Asia-Pacific and about a half of total capacity within Southeast Asia.

Top LCC groups in Asia-Pacific by capacity share (% of LCC seats):

Source: CAPA – Centre for Aviation & Innovata
Note: Based on capacity figures within the Asia-Pacific region. All carriers or groups with capacity shares of 2% or less are included in the other column.
Lion Group includes Lion Air and Wings Air. AirAsia Group includes AirAsia Malaysia, Thai AirAsia, Indonesia AirAsia, AirAsia Philippines and AirAsia Japan. Jetstar includes Jetstar (Australia and New Zealand), Jetstar Asia (Singapore), Valuair (Singapore), Jetstar Pacific (Vietnam) and Jetstar Japan. Tiger includes Tiger Airways Singapore, Tiger Airways Australia, Mandala (Indonesia) and SEAir (Philippines).

Lion can potentially keep up with AirAsia simply by maintaining its market share in Indonesia and fending off AirAsia in its home market. But Lion also has the resources to become a major player beyond Indonesia and has been considering for some time joint ventures in countries other than Malaysia. Lion's CEO has maintained that his preference is to entrench the airline's domestic position and there is logic in that, given the LCC's predominance at home. But there are such potentially rich pickings across the region – Chinese regional cities alone, which are progressively opening up, offer extraordinary upside, as do the north Asian triangle markets – that Lion would be remiss to overlook the opportunities that potentially lie at its feet.

Whether Lion affiliate carriers outside Indonesia will be successful, or even get off the ground, is debatable. But regardless Lion has deservedly captured the attention of AirAsia and the rivalry between the two groups will continue to unfold, making for exciting times in the Southeast Asia’s dynamic marketplace. AirAsia meanwhile has demonstrated that it is clearly able so far to maintain a front-runner position in the region's international markets.

Background information

Leading LCC groups within Southeast Asia based on seat capacity: 10-Dec-2012 to 16-Dec-2012

Airline group	Weekly seats	% share of total LCC market
Lion Air	858,569	32%
AirAsia	807,660	30%
Cebu Pacific	286,680	11%
Tiger Airways	120,384	5%
Jetstar	113,892	4%

Top LCC groups in Asia-Pacific by capacity: 10-Dec-2012 to 16-Dec-2012

Airline group	Weekly seats	% share of total LCC market
AirAsia	945,720	16%
Lion Air	863,569	15%
Jetstar	614,322	11%
Indigo	441.110	8%
SpiceJet	343,098	6%
Cebu Pacific	324,678	6%
Tiger Airways	246,384	4%
Skymark	203,019	4%
Spring	165,474	3%