Lion Air’s Batik Air 2015 outlook: rapid expansion as competition with Garuda Indonesia intensifies

Batik resumes fleet expansion with a bang

Batik launched services in May-2013 with an initial fleet of four 180-seat 737-900ERs in two-class configurations. It added two more 737-900ERs in late 2013 for a total of six aircraft but subsequently took a nine-month hiatus from expanding its fleet or network.

Batik fleet expansion resumed in late 3Q2014 as it took its first two 737-800s, which are in 162-seat two-class configuration. It added another four 737-800s in 4Q2014 along with its first six A320s, which are in 156-seat two-class configuration. As a result Batik's fleet tripled in size from six to 18 aircraft in a remarkably short span of only about four months.

Batik has so far used the new A320 and 737-800 fleets to launch four new routes and add frequencies on some of its nine existing routes which were initially launched using the larger 737-900ERs.

Batik launches four new routes and opens Bandung base

In Nov-2014 Batik launched services from Jakarta to Semarang, its first new route since 2013. In Dec-2014 Jakarta-Ternate, Bandung-Bali and Bandung-Palembang were launched.

Semarang and Ternate became Batik's 10th and 11th route from its Jakarta hub. Bandung-Bali and Bandung-Palembang are Batik's first two non-Jakarta routes and are made possible with the opening of a second base in Bandung. Batik currently only serves Bali and Palembang from Bandung although it has previously operated between Bali and Jakarta.

Batik operates alongside its low-cost sister carrier Lion Air on 12 of its 13 routes. The lone exception is Bandung-Palembang, which was not served by any carrier prior to Batik's entrance and could be an experiment to see how Batik performs on thin point to point sectors.

But the selection of Bandung-Palembang seems unusual as the flight is only slightly more than one hour, which would make it more suitable for LCCs or regional operators. Batik's full-service product - which includes seatback IFE screens, meals and drinks in both cabins - can hardly be appreciated on such short sectors.

Batik operates routes of up to six hours but is mostly used on short sectors

Generally the Lion Group strategy is to use Batik on primary domestic routes that are already served by Lion Air's LCC product. The idea is to use Batik to pursue a segment of the market that has typically been loyal to Garuda. While the bottom end of the market is growing rapidly, Indonesia also has a relatively large and growing segment that prefers to fly with (and can afford) full-service carriers.

Batik also is being used on longer sectors to east Indonesia that Lion has typically only served with a one-stop product. Three of Batik's 13 routes - Jakarta to Jayapura, Kupang and Ternate - are only currently served by Lion on a one-stop basis while Batik operates non-stop.

Jakarta-Jayapura is Batik's longest route at over five hours while Jakarta-Ternate is about four hours and Jakarta-Kupang about three hours. Batik only has two other routes of over three hours - Jakarta-Ambon and Jakarta-Manado. Of its other eight routes, six are under two hours and two are slightly over two hours.

Batik Air routes: as of 19-Jan-2015

Route	Block hours	Daily frequency	Competition from Garuda	Lion Air overlap
Bandung-Bali	1:45	1	Yes	Yes
Bandung-Palembang	1:15	1	No	No
Jakarta-Ambon	3:30	2	Yes	Yes*
Jakarta-Balikpapan	2:15	1	Yes	Yes
Jakarta-Jayapura	5:30	1	Yes	Yes
Jakarta-Kupang	3:00	1	No	Yes*
Jakarta-Makassar	2:30	1	Yes	Yes
Jakarta-Manado	3:30	2	Yes	Yes
Jakarta-Pekanbaru	1:45	3	Yes	Yes
Jakarta-Surabaya	1:30	4	Yes	Yes
Jakarta-Ternate	3:50	1	Yes	Yes*
Jakarta-Yogyakarta	1:15	4	Yes	Yes
Jakarta-Semarang	1:10	2	Yes	Yes

Note:*Lion Air only offers a one-stop product in these markets while Batik operates non-stop
Source: CAPA - Centre for Aviation and batikair.com

The fact that about half of Batik's routes are under two hours is surprising given Batik's product and spacious configuration. But most of Indonesia's largest routes are under two hours because a majority of the population is concentrated in the western part of the country. Batik needs to serve these shorter routes to be competitive with Garuda.

Batik competes with Garuda on nearly all of its routes

Garuda currently competes with Batik on 11 of Batik's 13 routes, including five of the six routes that are less than two hours. The only Batik routes that Garuda currently does not operate are Jakarta-Kupang and Bandung-Palembang, neither of which is served non-stop by any other carrier according to OAG data.

Of the 11 competitive routes, four are smaller routes which Garuda only currently serves with one daily frequency. These include Jakarta-Ambon, Jakarta-Jayapura, Jakarta-Tenate and Bandung-Bali. Batik currently has more seat capacity than Garuda in all these markets.

Two are medium size routes which are served by Garuda with three to five frequencies - Jakarta-Manado and Jakarta-Pekanbaru. Lion has roughly a similar number of frequencies on these routes. Batik already has a fairly significant share of capacity in these markets as it currently operates two daily 737-900ER flights on Jakarta-Manado and three daily 737-900ER frequencies on Jakarta-Pekanbaru.

The other five competitive routes are major trunk routes that are served with several daily frequencies (at least eight) from both Garuda and Lion Air. These include Jakarta to Balikpapan (BPN), Makassar (UPG), Semarang (SRG), Surabaya (SUB) and Yogyakarta (JOG). All five are among Garuda's seven largest domestic routes based on current seat capacity.

Garuda Indonesia top 10 domestic routes ranked on capacity (weekly seats): 12-Jan-2015 to 18-Jan-2015

Source: CAPA - Centre for Aviation & OAG

Batik Air to add capacity on domestic trunk routes

While it has almost as much capacity or more capacity than Garuda on its small and medium size routes, Batik has a very small share of capacity on the five trunk routes that it operates. Batik currently only operates one daily flight to Makassar, one to Balikpapan and two to Semarang. Batik now has four daily flights to Surabaya and Yogyakarta, giving it a more competitive schedule in these markets but still a relatively small amount of capacity compared to Garuda.

Capacity has been added on some of these routes as A320s and 737-800s were added to the fleet in late 2014. Batik is planning to add two more daily frequencies to Makassar from mid Feb-2015 and will almost certainly add more frequencies on most of its other trunk routes during 2015.

Batik will also likely resume Jakarta-Bali and launch more trunk routes such as Jakarta to Medan and Palembang. Jakarta-Bali is Garuda's largest domestic route while Jakarta-Palembang is fourth largest and Jakarta-Medan is seventh largest. The other top 10 Garuda domestic routes not yet served by Batik is Jakarta-Padang, which is more a medium size route and has the same amount of capacity as Jakarta-Pekanbaru.

Jakarta to Bali and Palembang are particularly logical as Batik already serves both Bali and Palembang from its new Bandung base. Bandung, the fourth largest city in Indonesia, is only about 150km from Jakarta but is considered its own market. As Medan is Indonesia's third largest city (after Jakarta and Surabaya) it is a destination which Batik will almost certainly serve as it further develops its network.

Batik has not yet launched routes from its initial 2014 network plan

Jakarta-Medan was initially part of Batik's 2014 network plan along with Jakarta-Bali, Jakarta-Palembang and Jakarta-Padang. There were also another 10 smaller domestic routes in the initial network plan for 2H2014 that have still not been launched: Jakarta-Banjarmasin, Jakarta-Batam, Jakarta-Gorontalo, Jakarta-Kendari, Jakarta-Palu, Jakarta-Solo, Jakarta-Tarakan, Jakarta-Timika, Timika-Jayapura and Makassar-Timika.

See related report: Lion Air's Batik Air plans major domestic push followed by ambitious international expansion

Batik Air's initial network plan for 2014

Note: solid red lines show routes that were launched in 2013 and dotted blue lines show routes that were initially planned for 2014
Source: Batik Air

Batik will probably launch most of the routes from its initial 2014 business plan in 2015. Batik has also reportedly applied to serve several new domestic point-to-point routes from Makassar and Medan.

Batik failed to launch any of the 13 new domestic routes identified in its original 2014 plan partially because it re-prioritised. None of the four routes that were launched in late 2014 were part of the initial network plan for 2014. Batik did not have Bandung in its initial 2014 plan at all but ended up making Bandung its second base.

Previously Batik had stated that Batam and Makassar would be its next two bases, with both opening in 2015. Bases at Batam and Makassar could still open in 2015, becoming Batik's third and fourth bases after Jakarta and Bandung. Batik is also now looking at potentially opening bases at Medan and Jakarta's second airport, Halim.

Delivery delays also contributed to slower than expected expansion in 2014

The original 2014 plan for network expansion also could not be implemented - at least not fully - because of aircraft delivery delays. As CAPA previously outlined, Batik was initially planning to take its first A320 in Jul-2014 but delivery was pushed back almost four months due to delays in certifying the IFE system.

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

Batik still took six A320s in 2014 as originally planned but all six aircraft were delivered in the fourth quarter instead of a more evenly spacing of the aircraft throughout the second half. Batik also still has not placed into service two of its six A320s. Batik told CAPA these two aircraft are now being retrofitted at the Lion Group maintenance facility in Batam.

Batik Air fleet: as of 16-Jan-2015

Aircraft	In Service
Total:	18
Airbus A320-200	6
Boeing 737-800	6
Boeing 737-900ER	6

Source: CAPA Fleet Database

Batik says its other 16 aircraft are in service although one is dedicated as a back-up. As it is positioned as an upmarket carrier and is pursuing business traffic Batik wants to make sure it offers a highly reliable operation.

Batik will expand its network as more aircraft are placed into service

As the last two of the A320s that were delivered in 2014 are placed into service Batik should be able to pursue further expansion. Batik has not yet announced any new route but has Timika listed as a destination on its online reservation system. Batik initially included service to Timika from Makassar in its 2014 network plan.

Batik's booking engine also shows the introduction of two additional flights on the Jakarta-Makassar route from mid-Feb-2015 for a total of three frequencies. The additional capacity on Jakarta-Makassar could be a precursor to the launch of additional routes from Makassar including Timika and the potential opening of a base in Makassar.

There will also be opportunities to expand the network later in 2015 as Batik has stated it plans to add another 20 aircraft by the end of 2015. This should allow Batik to more than double its total capacity as it now only has 16 aircraft in service.

Batik aircraft utilisation rates are low, for now

Batik also should have opportunities to add capacity by increasing utilisation of its current fleet. Based on its current schedule the active fleet of 16 aircraft Batik has an average utilisation rate of less than seven hours per day. While Batik is unlikely to utilise its aircraft as much as an LCC - as the airline needs to operate a schedule that is attractive to business passengers - it will need to boost utilisation over time.

Aircraft utilisation rates have decreased over the last four months as Batik's operation has not grown nearly as fast as its fleet. Based on data from Batik's online booking engine, the carrier currently operates 24 daily return flights across 13 routes. This is up only slightly from 18 return flights across nine routes in Jan-2014, when the airline only operated six aircraft.

Batik should be able to boost utilisation rates as it becomes more familiar with the A320, which is a new type for the entire Lion Group. The airline also likely was unable to add flights as fast as aircraft due to the extremely rapid ramp up of the fleet. Adding 12 aircraft in the span of only four months is unusual, particularly given Batik's small size.

Aircraft utilisation rates should also increase as Batik expands into the international market and launches more medium-haul domestic routes.

Batik plans to expand into international market in 2015

Batik was initially planning to expand into the international market in late 2014 with service from Singapore. But Batik is still in the process of securing traffic rights and slots for the proposed Jakarta-Singapore route. Batik is now aiming to begin serving Singapore in 2015 as well as China, Hong Kong, Malaysia, Taiwan and Thailand.

Singapore, Malaysia, Hong Kong and Thailand are all among the top six international markets from Indonesia based on current seat capacity. Garuda also currently serves all the international markets Batik is considering except Taiwan, which Garuda dropped in 2014.

Indonesia international capacity share (% of seats) by country: 12-Jan-2015 to 18-Jan-2015

Source: CAPA - Centre for Aviation & OAG

Singapore was the only international destination in Batik's initial business plan for 2014. But several international routes have always been in the plan for 2015 including Kuala Lumpur, Hong Kong and Perth. Australia, which is also one of the six largest international markets from Indonesia, is no longer likely to be launched as the Lion Group has delayed the potential launch of a Batik affiliate in Australia until at least 2016.

Batik's medium-term business plan envisions international flights from multiple Indonesian gateways including Jakarta, Batam and Makassar. While Batik will have the capacity to pursue significant international expansion in 2015 it most likely will not launch all of the destinations in its business plan.

New international routes come with much higher start-up costs and risks than new domestic routes. As Batik's brand is unknown in the international market it would be sensible to expand cautiously in the initial phase.

Batik Air has huge opportunities in Indonesia's domestic market

There are also still huge untapped opportunities in the domestic market. Batik has barely scratched the surface domestically. It currently only accounts for approximately 3% of seats in Indonesia's domestic market, which is the fifth largest domestic market in the world.

Garuda is currently about eight times larger than Batik in terms of weekly domestic seat capacity. Batik and Garuda are the only airlines among the 14 scheduled domestic carriers in Indonesia that are designated as full-service operators. As CAPA outlined on 14-Jan-2015, seven of the other 12 airlines are designated as medium service carriers while five are categorised as no frills.

See related report: Indonesia's price floor for airlines is misguided, a bad precedent and will be counterproductive

Garuda continues to pursue rapid domestic expansion of its full-service brand while also expanding its budget subsidiary Citilink, which is positioned to compete against Lion Air. As CAPA outlined on 15-Jan-2015, Garuda is now pursuing a restructuring of its international network which could provide opportunities to further accelerate domestic capacity expansion.

This expansion can be viewed as a strategic response to the expected rapid expansion of Batik.

See related report: Garuda Indonesia further adjusts its international network with cuts to Australia and Japan

Batik's cost advantage over Garuda will narrow following Garuda 737 reconfiguration

Garuda is also planning to reconfigure its 737-800s in 2015. Garuda plans to remove four of the 12 business class seats while boosting total seat capacity by 15% to 20%. As CAPA outlined in the 14-Jan-2015 report, this will result in Garuda's 737-800s becoming denser than Batik's 737-800s. Currently Garuda has 156 seats on its 737-800s (144 economy plus 12 business) while Batik has 162 seats (150 economy or one additional row compared to Garuda plus 12 business).

The denser configuration will enable Garuda to reduce the cost gap with Batik. While Batik or Lion Group does not publish unit cost or any other financial data, Batik benefits from the Lion Group's overall focus on costs.

Lion is believed to have one of the lowest unit costs in the global airline industry. Batik would obviously have higher CASK than Lion given its less dense configuration. Lion has 27 or 15% more seats than Batik on the 737-800 and 35 or 19% more seats on the 737-900ER. Batik also obviously incurs costs associated with its in-flight service. But for most other cost items Batik and Lion are identical, giving Batik an advantage over other full-service carriers.

Batik is the first example of an LCC group establishing a full-service subsidiary - an intriguing development in the multi-brand model as starting with an LCC should in theory avoid some of the legacy issues that confront flag carriers such as Garuda.

Batik Air has challenges as well as opportunities

Batik also has its share of challenges. While it would have a cost advantage over Garuda - likely a significant advantage - its average fares are below Garuda levels.

Batik has a much simpler fare structure that is more typical of an LCC than FSC. Its normal economy fares, including for last second travel, are relatively reasonable while its promotional economy fares are only slightly more than Lion fares on the same route, implying a need to beware of cannibalisation.

While the privately-owned Lion Group does not report average fare or yield data Batik's economy fares generally seem to be less than 20% above Lion Air fares. However, Batik does have a higher yielding business class, which generally has fares that are between two and three times its economy fares. Lion phased out its business class product, which was only available on a small number of aircraft, shortly after Batik was launched.

Typical fares including taxes (in IDR 000) for Batik Air and Lion Air on three domestic routes

Route	Lion Air economy promo	Lion Air economy regular	Batik Air economy promo	Batik Air economy regular	Batik Air business
Jakarta-Surabaya	478	588	577	623	1,358
Jakarta-Balikpapan	665	841	775	929	2,007
Jakarta-Manado	1,237	1,490	1,391	1,534	3,338

Note: 1USD=IDR12867
Source: Batikair.com

Batik fares could potentially increase over time as the airline is still in its initial phase of development and is keen to entice Garuda passengers to try out the Batik product. But Batik may need to keep its fares low as Garuda will likely compete more aggressively as it reconfigures its 737s and makes other adjustments aimed at reducing its costs. Garuda is also likely to respond strategically to Batik as Batik enters more domestic trunk routes and also starts to compete against the flag carrier on some of its biggest international routes such as Jakarta-Singapore.

Batik, like other Lion Group carriers, is rather unpredictable - or pragmatic - strategically. Batik has changed course multiple times with its fleet plan and network strategy. More adjustments are likely as Lion is a very flexible group and quick to respond to changing market conditions and opportunities.

But clearly Batik will emerge as a significant player in Indonesia's full-service segment. Garuda recognises this and is gearing up for the battle that looms.