22-Sep-2014 10:00 AM

Lion Air Group slows expansion. But maintains position with fastest growth and most flexible fleet

Analysis

The Lion Air Group has started to slow its capacity expansion in the intensely competitive Southeast Asian market, joining competitors in adjusting fleet plans in response to overcapacity and challenging market conditions.

The group, which consists of five airlines in three Southeast Asian countries, was initially planning to add at least 32 aircraft in 2H2014. An adjustment of three to six aircraft has been pursued by using its leasing subsidiary to start placing aircraft outside the group. Lion also has fallen behind its 3Q2014 target by several aircraft but at least for now expects to make it up in 4Q2014.

The group will again not end up placing in Southeast Asia all 60 aircraft slated for delivery in 2015 as its leasing subsidiary Transportation Partners further ramps up third party activity. But Lion is still on track to expand its fleet at a much faster rate than rival groups, enabling it to overtake or widen the gap with competitors.

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Lion meets 1H2014 delivery target

The Lion Air Group currently operates a fleet of 159 aircraft, consisting of 118 737NGs, 39 ATR 72s and two 747-400s, according to the CAPA Fleet Database. The group has another 529 aircraft on order, primarily 737 and A320 family aircraft (in both cases a mix of current generation and new generation re-engined variants).

Lion Air Group fleet summary: as of 22-Sep-2014

Aircraft	In Service	On Order
Total:	159	529
Airbus A320-200	0	60
Airbus A320-200neo	0	109
Airbus A321-200neo	0	65
ATR 72-500	20	0
ATR 72-600	19	8
Boeing 737-800	32	16
Boeing 737-9	0	201
Boeing 737-900ER	86	70
Boeing 747-400	2	0

As CAPA previously examined, Lion's fleet plan for 2014 includes 50 to 52 deliveries, with 18 in 1H2014 and 32 to 34 in 2H2014. The more rapid delivery rate in 2H2014 is a result of increasing 737 deliveries from two to three per month and starting A320 deliveries with an initial rate of about one aircraft per month.

Lion Air Group 2014 planned deliveries

Lion met its 1H2014 target as it took 12 737NGs and six ATR 72-600s as planned.

The group's largest subsidiary, Indonesia-based Lion Air, was allocated 10 of the 737 deliveries in 1H2014 (all 737-800s). Thai Lion Air was allocated two 737-900ERs and one ATR 72-600 while Malaysian affiliate Malindo was allocated the other five ATR 72-600s.

Lion to miss 3Q2014 delivery target

Deliveries for 3Q2014 however have been much slower than initially planned. The group has already taken in 3Q2014 three ATR 72-600s as planned, with two allocated to Indonesian regional subsidiary Wings Air and one to Malindo. But so far this quarter the group has taken only five of the initially planned nine 737NGs, including one 737-900ER for Thai Lion, two 737-800s for Indonesian full-service subsidiary Batik Air and two 737-800s which have been leased outside the group to Chinese LCC start-up 9 Air.

The group also has not yet taken either of the two planned A320s.

The A320s have been pushed back to 4Q2014 due to certification delays with the in-flight entertainment (IFE) system. Most of the four remaining 737NG deliveries which were originally expected in 3Q2014 will also likely be pushed to 4Q2014.

Delivery delays are not uncommon with Lion. For example in 2013 the group fell several aircraft behind in ATR deliveries but the shortfall was made up at the end of the year with several ATR 72-600 deliveries within a couple of weeks.

Lion to take delivery of up to 26 aircraft over the next 100 days

But the number of aircraft Lion needs to take over the last 100 days of the year to meet its 2014 target is staggering and significantly more than Lion (or virtually any other airline group) has ever taken in such a short period. To meet the full-year target of 50 to 52 deliveries, Lion will need to take over the next 100 days 13 to 15 737NGs, five ATR 72-600s and six A320s. That works out to an average of one aircraft about every four days.

The ATR and Airbus delivery target is reasonable and will likely be met despite the recent delays with Lion's first batch of A320s.

As CAPA previously outlined, Malindo has been allocated four additional ATR 72-600s and plans to end 2014 with 13 turboprops. The fifth ATR 72-600 most likely will be delivered to Thai Lion, giving the Thai affiliate two of the type, but could also end up at Wings Air.

See related reports:

Batik Air plans to catch up on A320 deliveries by end of 2014

All six of the group's initial A320s have been allocated to Batik Air. Batik CEO Capt Achmad Luthfie told CAPA that the first delivery, which was initially expected in early Jul-2014, has been pushed back to late Oct-2014 as Batik and US-based IFE supplier Lumexis wait for certification of the IFE system.

This is the first time Lumexis' fibre optic IFE system has been installed on the A320. Batik's first two A320s were manufactured on time but could not be delivered in 3Q2014 as initially planned because the system has not been certified yet by the US FAA and Indonesian DGAC. (Batik opted in early 2014 to not equip its A320s with the Panasonic IFE system used on its 737-900ER fleet and was already certified for the A320 as the Lumexis fibre optic system is significantly lighter.)

Capt Luthfie said Batik now plans to take its first three A320s at the end of Oct-2014. Two more A320s are slated for delivery in Nov-2014 followed by one aircraft in Dec-2014, enabling Batik to meet the original target of six A320s by the end of 2014.

This is an ambitious schedule for an airline that currently only operates eight aircraft (six 737-900ERs and two 737-800s). But it should be feasible barring any additional delays in the certification of the IFE system.

Transportation Partners to lease out up to six 737s in 2014

The 737 delivery target for the remaining 100 days of 2014 could prove to be more difficult to achieve. But Lion's decision to start using its leasing subsidiary Transportation Partners to place aircraft outside the group makes it easier.

Transportation Partners told CAPA that it will place at most six aircraft outside the group in 2014. This includes three aircraft at 9 Air, one of which has not yet been delivered according to the CAPA Fleet Database, and up to three at other airlines that Transportation Partners has not yet identified.

Assuming a total of six aircraft is placed outside the group that leaves 9 to 11 737NG deliveries over the next 100 days for Lion's own portfolio of airlines. Malindo has been allocated two of these aircraft while Thai Lion has been allocated three aircraft and Batik four aircraft. Batik was originally allocated two 737-800s in 3Q2014 (already delivered) and two 737-800s in 4Q2014 but Capt Lufthie said the carrier now expects to take a total of four 737-800s in 4Q2014, including two in Oct-2014 and two in Nov-2014.

The group's original carrier, Lion Air, may not end up taking any additional aircraft in 2H2014. This likely hinges on Transportation Partner's ability to complete three more third-party placements (in addition to the three 737-800s already placed with 9 Air). It also hinges on Lion taking 30 deliveries for the year rather than the 32 aircraft it provided as a potential upper limit for 2014.

The 32 aircraft figure for the full year seems unlikely at this point. Even the 30 aircraft is an ambitious target given the number of deliveries to date (17) and CAPA's assessment of the current 737 pipeline.

Lion Air Group fleet plan

Carrier	End 2013	End 1H2014	End 2o14
Lion Air	20 737-800s 69 737-900ERs 2 747-400s	30 737-800s 69 737-900ERs 2 747-400s	30 737-800s 69 737-900ERs 2 747-400s
Wings Air	20 ATR 72-500s 7 ATR 72-600s	20 ATR 72-500s 7 ATR 72-600s	20 ATR 72-500s 9 ATR 72-600s
Batik Air	6 737-900ERs	6 737-900ERs	6 737-900ERs 6 737-800s 6 A320s
Malindo Air	6 737-900ERs 3 ATR 72-600s	6 737-900ERs 8 ATR 72-600s	8 737-900ERs 13 ATR 72-600s
Thai Lion Air	2 737-900ERs	4 737-900ERs 1 ATR 72-600	8 737-900ERs 2 ATR 72-600
TOTAL	135 aircraft	153 aircraft	179 aircraft

Slowdown at the Lion Air brand is practical

A hiatus from expansion at the Lion Air subsidiary in 2H2014 would be sensible as Lion Air added 10 aircraft in 1H2014 for a total of 101 aircraft. Even without further expansion in 2H2014 Lion will end up adding more aircraft in 2014 than its two LCC competitors, Citilink and Indonesia AirAsia.

The AirAsia Group decided in early 2014 to defer expanding the fleet at Indonesia AirAsia for all of 2014 and has since also decided to again keep the Indonesia AirAsia fleet flat at 30 A320s for all of 2015.

Meanwhile, Citilink has adjusted its 2014 fleet plan from 12 to eight deliveries and its 2015 fleet plan from 12 to five deliveries. The Garuda Indonesia subsidiary now plans to end 2014 with a fleet of 32 A320s. Much larger Lion Air already has 99 737NGs (30 737-800s and 69 737-900ERs) as well as two 747-400s, which it uses for a niche low frequency long-haul operation to Saudi Arabia.

Both Citilink and Indonesia AirAsia were unprofitable in 1H2014 as market conditions remained challenging. Indonesia's fourth LCC, Tigerair Mandala, responded by shutting down operations in Jul-2014.

Indonesia's domestic market has struggled since 2H2013, driven primarily by the depreciation of the Indonesian rupiah. Demand was also relatively sluggish in the months leading up to Jul-2014 presidential elections.

See related reports:

The rupiah and Indonesia's political environment have stabilised in recent months, leading to an improved outlook. Consolidation as three smaller airlines have exited this year also has helped. But irrational competition and overcapacity remains a concern.

Lion Air maintains a very strong position domestically as the market leader. But as competitors slow down and in some cases exit it may not be necessary to continue expanding at an aggressive clip.

Transportation Partners gives Lion fleet flexibility

Lion Air can be viewed as the default carrier in the group for deliveries as it is the entity which places the orders. Malaysia AirAsia has a similar role in the AirAsia Group - a role which, as AirAsia has learned this year, can become risky if market conditions become unfavourable and affiliates need to slow down expansion.

Malindo, Thai Lion and Batik provide options for the group to focus expansion in markets (Malaysia and Thailand) and sectors (full-service) where it is not the leader. But there is a limit to the number of aircraft these airlines (and their markets) can absorb.

The leasing subsidiary provides another option. Lion established Transportation Partners almost three years ago but initially the Singapore-based subsidiary focused on being a vehicle for financing Lion's own fleet. Transportation Partners leases Lion and its affiliates several aircraft and also has helped the group arrange sale and leaseback deals with other leasing companies.

Transportation Partners has been scouting potential third-part opportunities for the last two years but in recent months has become much more active in talking to airlines in several regions about potential 737 and A320 placements.

Meanwhile Lion has steadily been converting in recent years a large portion of its 737-900ER orders into 737-800s, including seven conversions that were logged by Boeing in its last monthly update. The conversions give the group more flexibility as the 737-800 is by far the most common 737 variant while the 737-900ER is a niche aircraft that only a few airlines will consider leasing. (Lion also has found that it is easier to pursue sale and leasebacks for 737-800s as most leasing companies will not consider 737-900ERs or only do deals for a few 737-900Rs if several 737-800s are also involved because of concerns that the 737-900ERs would be harder to remarket.)

Following its initial foray of three to likely six aircraft in 2H2014, Transportation Partners is expected to place a larger number of aircraft with third party customers in 2015. The leasing company also has been looking at diversifying its portfolio by acquiring used aircraft that are already placed at airlines throughout the world.

Lion will again lease out aircraft in 2015 but still take many more than others

With Transportation Partners now ramping up its third part activities it is hard to predict how many aircraft Lion will place within its own portfolio of airlines in 2015. But clearly the group still keep for its own use a majority of the approximately 60 deliveries which are slated for 2015.

Even if it allocates to its own subsidiaries or affiliates only one half of these aircraft Lion would still add more than twice as many aircraft than the AirAsia Group, which plans to add 13 aircraft in 2015 including only seven in the Southeast Asian market. (This figure excludes long-haul low-cost sister group AirAsia X, which plans to add seven aircraft in 2015 as eight A330-300s are delivered and its only A330-200 is returned.)

AirAsia and AirAsia X combined will have a projected 183 aircraft based in Southeast Asia at the end of 2014, putting it just head of the projected 179 aircraft at the Lion Air Group. If it wasn't for Lion deciding to lease out an expected six aircraft it would have overtaken AirAsia/AirAsia X this year. But Lion will still almost certainly overtake AirAsia/AirAsia X with a larger Southeast Asian-based fleet in 2015.

AirAsia Group fleet plan by carrier

Carrier	End 2013	End 1H2014	End 2o14	End 2015
Malaysia AirAsia	72 A320s	80 A320s	78 A320s	80 A320s
Thai AirAsia	35 A320s	37 A320s	40 A320s	45 A320s
Indonesia AirAsia	30 A320s	30 A320s	30 A320s	30 A320s
Philippines AirAsia*	17 A320s	19 A320s	11 A320s	11 A320s
AirAsia India	N/A	1 A320	6 A320s	9 A320s
AirAsia Japan	N/A	N/A	N/A	3 A320s
TOTAL	154 A320s	167 A320s	165 A320s	178 A320s

AirAsia X Group fleet plan by carrier

Carrier	End 2013	End 1H2014	End 2o14	End 2015
Malaysia AirAsia X*	17 A330s	19 A330s	21 A330s	22 A323s
Thai AirAsia	N/A	2 A330s	2 A330s	5 A330s
Indonesia AirAsia X	N/A	1 A330	1 A330s	4 A330s
TOTAL	17 A330s	22 A330s	24 A330s	31 A330s

Tigerair also has halted all growth in Southeast Asia and has no deliveries planned for 2015. Jetstar has similarly suspended fleet expansion at Jetstar Asia. (The Jetstar Group's other Southeast Asian affiliate, Vietnam-based Jetstar Pacific, is in expansion mode but from a very small base).

Lion can afford to join its competitors in slowing down expansion. The initial lease deal with 9 Air is sensible as it has enabled Lion to reduce the number of aircraft - albeit rather slightly - that it needs to add to the extremely competitive Southeast Asian marketplace. Financially the group also likely stands to benefit from such deals as the prices Lion has been able to secure as part of their mega deals with Airbus and Boeing are believed to be extremely competitive.

Lion's outlook remains bright as fleet flexibility is demonstrated

So far Transportation Partners has been offering very near term delivery slots, providing a different proposition than other leasing companies which typically place their new aircraft years - or at least several months to one year - before delivery. As a result Lion has the flexibility to quickly reaccelerate its own expansion if there are opportunities.

It is hard to fathom Lion placing 500 aircraft over the next decade in the Southeast Asian market, which has a total active fleet of about 1,600 aircraft. But it is a very dynamic market with rapid change and generally fast growth - despite the occasional hiccup or setback. Anything is possible and fleet flexibility could prove to be Lion's biggest strength.