Lion Air to expand Batam hub. Can it emerge as an alternative to nearby Singapore Changi?

Lion is already Batam's largest airline with routes across western Indonesia

Lion currently uses Batam as a hub to connect several cities in Java and Sumatra, Indonesia's two most populated islands. Batam is the most populated of the Riau Islands, located near Singapore and well positioned between the much bigger islands of Borneo, Java and Sumatra.

Batam's Hang Nadim Airport has seen rapid growth over the last year, driven primarily by expansion from Lion and Garuda budget subsidiary Citilink. The Lion Group, including regional subsidiary Wings Air, has increased capacity at Batam by about 40% over the past year to almost 60,000 weekly seats, according to CAPA and Innovata data.

Batam Hang Nadim Airport one-way domestic seat capacity by carrier*: 19-Sep-2011 to 16-Mar-2014

Note: *Innovata does not capture the schedules of smaller regional carriers serving Batam including Sky Aviation and Xpress Air
Source: CAPA - Centre for Aviation & Innovata

The Lion Group has added several routes from Batam over the last few months, including Semarang on Java and Bengkulu and Jambi on Sumatra. Jambi and Bengkulu give the group six routes to Sumatra from Batam while Semarang gives Lion five routes from Batam. The two other existing Batam routes are to smaller nearby islands.

A seventh Sumatra route, Bandar Lambung, is planned for late 2013 or early 2014.

Lion Air Group network from Batam

Note: routes in red are existing routes for Lion Air and Wings Air; the route depicted in green shows planned route from Malindo Air
Source: CAPA - Centre for Aviation & Innovata

Lion Air is by far the largest carrier at Batam, accounting for about 52% of seat capacity among major carriers. Citilink, which has nearly doubled its operation at Batam over the last year, is the second largest carrier with about a 24% share. Citilink currently serves five routes from Batam, all of which are also served by Lion.

The Garuda Indonesia Group (including Garuda and Citilink) currently has a 37% share among major carriers while the Lion Group (including Lion Air and Wings Air) has about a 55% share and full-service carrier Sriwijaya has a 7% share. Garuda serves three routes from Batam and Sriwijaya four.

Batam capacity (total weekly seats) by carrier*: 23-Sep-2013 to 29-Sep-2013

Note: *Innovata does not capture the schedules of smaller regional carriers serving Batam including Sky Aviation and Xpress Air
Source: CAPA - Centre for Aviation & Innovata

The above figures exclude smaller regional carriers such as Sky Airlines and Xpress Air. Sky also has made Batam a hub with seven short domestic routes. Malaysia Airlines subsidiary Firefly is the only foreign and international carrier currently serving Batam, operating four weekly ATR 72 flights from its hub at Kuala Lumpur Subang.

Lion to start operating longer domestic flights from Batam

Lion Air Group CEO Rusdi Kirana says more domestic expansion at Batam is planned with new longer routes from cities in central and eastern Indonesia. "We hope by first quarter of next year every city of Indonesia will go to Batam," Mr Kirana says, specifically citing Balikpapan, Denpasar, Makassar and Pontianak.

According to Innovata data, no carrier currently serves any of these destinations non-stop from Batam. But Lion in Aug-2013 began operating a one-way non-stop flight from Denpasar, which is on the resort island of Bali, to Batam. A return flight from Batam to Denpasar is expected to be added within the next few months as part of the next phase of the Batam hub expansion. (Denpasar is not included among the 13 current Batam Lion routes cited earlier.)

Bali is about two and a half hours from Batam. From Batam, Lion currently does not have any flights of over two hours, reflecting its current focus on destinations in nearby Sumatra and Java. This will change as longer domestic flights to central and eastern Indonesia are added followed by international flights.

Batam hub helps relieve pressure on Jakarta Soekarno-Hatta

Balikpapan, Denpasar and Makassar are existing hubs in central Indonesia that currently have larger Lion operations than Batam. These hubs are regional, focusing on traffic to and from nearby islands and in the case of Makassar destinations in the far eastern portion of Indonesia. Currently passengers originating or going through these hubs are routed through Jakarta if they are heading to Sumatra and other islands in west Indonesia.

Mr Kirana explains that by establishing a hub at Batam Lion is able to reduce dependence on Jakarta Soekarno-Hatta. Lion and Wings are network carriers with transit traffic accounting for about 40% of total passengers.

Lion's portion of transit traffic at its largest hub, Jakarta Soekarno-Hatta, will be reduced as Batam grows. This will allow Lion to grow local traffic to and from Jakarta, where demand continues to be robust, without having to secure more slots at Soekarno-Hatta.

Infrastructure constraints at Soekarno-Hatta limit growth opportunities, forcing airlines to consider alternative hubs. For Lion the need to establish and grow alternative hubs is particularly important as only a relatively small fraction of the huge number of aircraft it has on order can be based at Soekarno-Hatta given the congestion at Indonesia's largest airport.

Mr Kirana says 60% of Lion's traffic at Batam is already transit and this portion will become even higher as more routes are launched.

Batam has huge international potential

Batam is currently Lion Air's ninth largest airport based on current seat capacity, according to CAPA and Innovata data. Lion's operations at Balikpapan and Makassar are more than double the size of its Batam operation while Denpasar is slightly larger. But Lion has no intentions of opening international flights from Balikpapan, Denpasar or Makassar. Instead the group's strategy envisions turning Batam into its international hub.

Mr Kirana explains that Batam is better geographically positioned for international flights than other hubs. While the group has ambitions to expand its now very limited international operation from Jakarta, using its full-service subsidiary Batik Air, it sees Batam as evolving as the main hub for domestic to international connections.

This again is a strategy driven partially by a desire to focus more on the local market at Jakarta Soekarno-Hatta and Surabaya Juanda Airport, which are Lion's two largest hubs. Jakarta and Surabaya are also Indonesia's two largest cities and have rapidly growing local demand.

As additional slots at Jakarta Soekarno-Hatta and Juanda become harder to secure, Lion wants to focus its operations at these airports on the domestic market, which continues to grow rapidly. In Jakarta, Lion plans to focus most future international growth at Halim Airport, where Batik is expected to move its base by the end of 2013.

Mr Kirana says the group intends to begin international operations at Batam by the end of 2014, at which point the domestic network will be complete, providing the necessary feed to support international services. He envisions Batam being initially linked with Bangkok, Guangzhou, Hong Kong and Jeddah. Future phases in 2015 and beyond could see several more international destinations including cities in India.

Lion currently has a limited international network consisting of only five cities - Singapore, Kuala Lumpur and Penang in Malaysia, Ho Chi Minh in Vietnam and Jeddah in Saudi Arabia. Only 5% of the carrier's current seat capacity is allocated to the international market.

Bangkok, Guangzhou and Hong Kong are not currently served at all by the Lion Group, but proposed affiliate Thai Lion is planning to launch services from Bangkok to Jakarta Soekarno-Hatta as one of its three initial routes. Batik is also looking at launching services to Hong Kong from Jakarta Halim.

See the first two reports in this series:

• Lion Air full-service subsidiary Batik Air to expand with A320s, 787s and new base at Jakarta Halim
• Lion Air new Thailand affiliate plans late 2013 launch, providing new competition for AirAsia & Nok

Batik likely to operate from Batam as Lion focuses low-cost brands on short routes

Mr Kirana says the anticipated international routes from Batam would likely also be operated by Batik. This is in line with the group's overall strategy to offer a full service on flights over three hours. The Lion Group believes passengers expect a better product on longer flights and that the low-cost model is not a profitable strategy for medium and long-haul flights, particularly in the Indonesian market.

"For flying two or three hours you can be low cost. It's considered fine with the passenger. But if you are flying more than three hours you need something for the passenger," Mr Kirana says. "The idea for us is we will make Batik fly international (as Batik) is longer pitch and you have the full service ... I don't think with low cost flying over four hours can be successful."

Batik offers a full service, with meals and drinks in both the economy and business class cabins. It also offers seatback in-flight entertainment monitors and 32in pitch in economy.

Lion's Malaysian affiliate Malindo Air offers the same product as Batik. Malindo commenced domestic services in Mar-2013 but has just started a major international expansion which involves several routes to South Asia and Indonesia.

See related report: Malindo emerges as Lion Group's main international carrier with nine new routes from Kuala Lumpur

Malindo to also serve Batam

Malindo's first South Asian route, Kuala Lumpur to Dhaka in Bangladesh, was launched in late Aug-2013, while the first two Indonesian routes, Kuala Lumpur to Bali and Jakarta, were launched earlier this week. Malindo is planning to launch two more Indonesian routes by the end of 2013 - Kuala Lumpur to Medan and Batam.

Malindo's Batam service will provide connection opportunities to several destinations in Sumatra and Java which are not served non-stop from Kuala Lumpur. It would be the first of several international routes at Batam from the Lion Group if the group's strategy for Batam is fully implemented.

While Lion envisions transit passengers continuing to account for a majority of its Batam passengers, it believes there is also strong local demand on Batam, which has a population of about one million. Batam is also connected to Singapore by a frequent 45 minute ferry service that ends up at HarbourFront, which is closer to central Singapore than Changi Airport.

With dedicated ferry, Lion to market Batam as alternative to Singapore Changi

Mr Kirana reveals that Lion is planning to buy a ferry in Batam and will start offering combination tickets which include flights to Hang Nadim airport, a bus to the Batam ferry terminal and the Lion-owned ferry to Singapore. Lion believes there is demand for Indonesians to travel to Singapore via Batam, stimulated by the cheaper price of Lion's combined flight-bus-ferry ticket compared to direct flights to Changi.

While LCCs now link Singapore with several Indonesian cities and often offer low base fares, taxes are much higher on international flights from Indonesia than domestic flights. Changi is also a much more expensive airport to operate than Hang Nadim and these costs are inevitably passed onto the passenger.

Batam is the only major airport in Indonesia that is not owned and operated by government-owned Angkasa Pura I or Angkasa Pura II. Hang Nadim is owned by the local Batam government and is in a free trade zone. Lion will not disclose its rates at Hang Nadim or say if it has received any incentives from the local government to establish and grow its Batam hub. But the airport is clearly much cheaper than Changi and is likely cheaper than other hub airports in Indonesia.

Mr Kirana also points out that operating at Batam is much more efficient than Changi as there is no congestion at Batam. Flights at Batam do not wait to take off and have short taxi times, allowing for quick turnarounds, an important component of the LCC model.

LCCs at Changi have had to increase turnaround times in recent years as congestion at the airport has intensified. Singapore is now moving forward with a major expansion project which includes two new terminals and a third runway. But the third runway is not expected to open until 2020 and until then Changi will remain relatively congested, particularly at peak hour, and carriers will not be able to secure additional peak hour slots.

See related report: Singapore Changi ensures its future as leading ASEAN hub with third runway and fifth terminal

Changi has proven before that alternative airports do not pose serious threats

However, it is highly questionable whether congestion at Changi can lead to higher demand at alternative airports. Senai Airport in the southern Malaysian state of Johor for several years tried to position itself as an alternative hub to Singapore. But these efforts were predominately unsuccessful and Senai, which is the largest Malaysian airport that is not run by Malaysia Airports Holdings, now caters almost entirely to local traffic.

Senai has been unable to attract a hub carrier as, unlike Batam, it is relatively close to the largest hub airport in its country. Kuala Lumpur International is only about 300km by fast highway from Senai and it does not face the same infrastructure constraints as Jakarta Soekarno-Hatta.

The journey from Singapore to Senai takes about 90 minutes, depending on traffic conditions. The unpredictability of traffic and the processing time at the two bridges linking Singapore with Malaysia makes it even harder to attract Singapore passengers. For Batam the total travel time from Singapore to Hang Nadim is also about 90 minutes but there is more predictability as it is a ferry running on a schedule rather than a bus. Ferry terminals generally also have shorter queues at immigration than land crossings.

Lion could have success at attracting Indonesian travellers heading to Singapore, particularly those originating at points that don't have non-stop services to Changi. Of the 13 destinations Lion and Wings now serve from Batam, six currently do not have non-stop services to Singapore. But it is unlikely to attract a significant number of Singaporeans or passengers from other foreign countries, such as China, that are looking to holiday in Singapore. Changi is much more convenient and the strong presence of LCCs, which currently account for over 30% of capacity in Singapore, should keep fares competitive.

Lion's Batam strategy is sound even without attracting Singapore passengers

Lion's Batam strategy, however, does not need to rely on Batam becoming an alternative to Changi. The ferry can be easily filled with local Batam-Singapore passengers and is also being acquired to move aircraft parts rather than passengers. Lion is currently constructing a major maintenance facility at Hang Nadim Airport, which will become its main maintenance hub, servicing the group's rapidly growing fleet as well as potential third-party customers.

Lion's Batam Aero Technic plans to open an initial two hangars by the end of 2013, with two more hangars and an engine centre to be added in 2014. Each hangar can accommodate one widebody or three narrowbody aircraft.

The selection of Batam as Lion Technic's future maintenance hub was not driven by the growth in its operation at Hang Nadim but by the ample space available at the airport. There is not sufficient space to build a similar facility at Soekarno-Hatta or other major Indonesian airports such as Surabaya Juanda, where Lion has its current maintenance facility using land owned by the Indonesian navy.

Another driver was the proximity of Batam to Singapore, which is an aerospace hub with some of the largest aircraft part warehouses and logistical centres in Asia. Lion intends to use the ferry to provide quick and efficient transfer of parts from Singapore to its new maintenance centre at Hang Nadim.

Hang Nadim could evolve into a relatively large airport, with the new Lion maintenance centre and an expanded terminal. The airport is already equipped to handle all aircraft types, with a 4000m runway.

There is a plan to expand the current 31,000m2 terminal to 88,000m2, which would increase the airport's capacity from 3.3 million to 8.3 million passengers per annum. There is also plenty of space for additional terminals if required. Any expansion projects at Batam could be more easily implemented than other Indonesian airports given the airport is not part of the normal bureaucracy of the federal government.

Batam Hang Nadim Airport specifications

Source: Batam government

Lion's new Batam hub is well positioned as demand for air travel throughout Indonesia continues to grow rapidly and as a majority of the country's major airports continue to operate well above design capacity. A country the size and shape of Indonesia needs efficient hubs to facilitate east-west transfers.

There is a large and growing number of passengers travelling between the east and west or internationally that are not originating or heading to Jakarta. These passengers can be more efficiently handled via Batam. As the largest airline group in Indonesia with about 50% of the domestic market, Lion has the scale to make a large Batam hub work even with a relatively limited amount of local traffic.

The hub will not have to rely on shortcomings in Singapore for its success. Any spill over traffic from Changi will simply be icing on the cake.

This is the third part in a series of analysis reports on the Lion group strategy. The first two parts in this series looked at the strategy of new full-service subsidiary Batik Air and the strategy of planned low-cost subsidiary Thai Lion.