06-Jan-2017 10:18 AM

Lion Group 2016 fleet analysis: slower growth following 737 cancellations & increased focus on FSCs

Analysis

Lion Group significantly slowed its rate of expansion in 2016 and cancelled 21 Boeing 737 orders. The Indonesia-based airline group took 36 aircraft in 2016 compared to 57 aircraft in 2015, as the rate of 737 deliveries was slashed in half from an average of two per month to one per month.

Most of the growth in 2016 was at Lion Group's two full service airlines, Indonesia's Batik Air and Malaysia's Malindo Air. Malindo expanded its fleet by a staggering 15 aircraft, for a total of 42, making it one of the fastest-growing airlines in the world. Batik expanded its fleet by eight aircraft in 2016, for a total of 41.

The rate of expansion slowed at all three of Lion Group's low cost airlines - Lion Air, Thai Lion Air and the turboprop operator Wings Air. The fleet at the main Lion Air brand only expanded by three aircraft, while Wings added four turboprops. The group's JV in Thailand added six aircraft, which was fewer aircraft than initially planned.

Summary

Lion Group, based in Indonesia, significantly slowed its rate of expansion in 2016 and cancelled 21 Boeing 737 orders.
The group's full-service airlines, Batik Air and Malindo Air, experienced the most growth in 2016, with Batik expanding its fleet by eight aircraft and Malindo expanding by 15 aircraft.
The rate of expansion slowed at all three of Lion Group's low-cost airlines - Lion Air, Thai Lion Air, and Wings Air.
Lion Group now has the largest fleet in Asia Pacific outside of China, with 272 aircraft.
Lion Group reduced its order book for A320ceo aircraft by eight, potentially converting them to A330-300s.
Lion Group's expansion in 2016 was slower than previous years, but it still remains a strong competitor in the aviation industry.

Lion now has the largest fleet in Asia Pacific ex China

The Lion Group ended 2016 with 272 aircraft - making it the largest airline group in Asia Pacific outside China, based on fleet size. Lion Group overtook the AirAsia/AirAsia X Group in 2015, when it added 57 aircraft for a total of 236. Lion Group overtook the Garuda Indonesia and Singapore Airlines groups in terms of fleet size in 2014, when its fleet expanded by 42 aircraft.

In late 2016 Lion Group overtook ANA Holdings, which currently has a fleet of 268 aircraft. It overtook the Japan Airlines Group, which currently has a fleet of 242 aircraft, in early 2016.

While Lion continues to take delivery of aircraft at a rapid rate, the frequency of deliveries slowed significantly in 2016. The group took delivery of 36 aircraft in 2016, according to the CAPA Fleet Database. This represents the slowest rate of fleet expansion for Lion since 2013, when it took delivery of 33 aircraft and expanded its fleet by 22 aircraft (net of aircraft retirements). Lion did not phase out any aircraft in 2016 or in 2015.

Lion Group cuts 737 delivery rate in half as 21 orders are cancelled

The 36 deliveries in 2016 consisted of 14 A320s, 10 737-800s, three 737-900ERs and nine ATR 72-600s. The Airbus and ATR deliveries were broadly in line with Lion Group's initial fleet plan for 2016, whereas Boeing deliveries were significantly less than the original plan.

Lion Group had initially planned to continue taking delivery of at least two 737s per month in 2016. The group ramped up its Boeing delivery rate to at least two aircraft per month in 2013 and maintained this rate in 2014 and 2015. Lion took delivery of 25 737s in 2015 and initially was expected to take a similar number of 737s in 2016.

However, challenging market conditions prompted Lion to pursue a slowdown in deliveries. Lion has taken broadly one 737 per month since the beginning of 2016.

In 2016 Lion was apparently able to negotiate a cancellation of 21 737s that were initially slated to be delivered in 2016 and 2017. As of the beginning of 2016 Lion had 44 737NGs remaining on order (a mix of 737-800s and 737-900s). Boeing currently only lists 10 outstanding 737NG orders for the Lion Group.

Given the 13 deliveries but reduction in 34 orders, this indicates there were 21 cancellations. According to the CAPA Fleet Database, these cancellations were recorded in Sep-2016 and Oct-2016. The CAPA Fleet Database also shows that Lion Group converted 16 737-900ER orders to 737-800s in 2016, continuing a trend over the last few years in which it has opted mainly for the smaller -800 despite initially ordering the -900ER.

Lion Group fleet and order book: as of 01-Jan-2017 vs 01-Jan-2016

Aircraft	Active fleet 01-Jan-2017	Active fleet 01-Jan-2016	On order 01-Jan-2017	On Order 01-Jan-2016
Airbus A320-200	27	13	16	38
Airbus A320-200neo	0	0	118	118
Airbus A321-200neo	0	0	65	65
Airbus A330-300E	3	3	0*	0
ATR 72-500	20	20	0	0
ATR 72-600	48	39	32	41
Boeing 737-800	73	63	2	5
Boeing 737-9	0	0	201	201
Boeing 737-900ER	99	96	8	39
Boeing 747-400	2	2	0	0
TOTAL	272	236	442	507

Cancelling last batch of 737NGs is sensible

Initially, slightly more than half of the 21 cancelled 737s were likely expected to be delivered in 2016, with the remainder initially slated to be delivered in 2017.

Lion Group is expected to take its last batch of 737NGs in 2017 while also starting to take delivery of the new generation 737 MAX. Lion ordered 201 737 MAX 9s in early 2012 and is planning to take its first 737 MAX 9 in 2Q2017.

The decision to take 21 fewer 737NGs than initially planned is not surprising. The original delivery schedule proved to be overambitious, particularly in its home market of Indonesia where the group has been set back the past two years by unexpected regulatory constraints and challenging market conditions.

Deciding to slow fleet growth at this juncture is also logical given that the 737 MAX, which offers improved efficiencies and range, is about to enter service. Lion is better off taking fewer 737s until the MAX arrives.

Lion, it seems, was able to get off the hook on its final 21 737NG commitments without increasing its 737 MAX commitments. Boeing still lists Lion Group with 201 737 MAX 9 orders. There are also no apparent unidentified MAX orders that could have been placed by Lion in compensation for cancelling the 737NG orders. Therefore it appears the 21 aircraft were cancelled outright, rather than converted.

Lion potentially had the right to cancel some of its 737NGs without penalty as part of its last order at Boeing. Lion ordered another 29 737-900ERs as part of the 2012 MAX order.

Lion reduces A320ceo order but will likely take additional A330s in exchange

Lion Group also reduced its A320ceo order book by another eight aircraft in 2016. The group ordered 60 A320ceos in 2013 as part of a blockbuster deal that also included 109 A320neos and 65 A321neos. This was the group's first deal with Airbus.

In 2015 Lion converted nine of its A320ceo orders to A320neos, lifting its A320neo commitments from 109 to 118 aircraft. Lion Group therefore began 2016 with 13 A320ceos and 38 more on order.

Lion Group took 14 A320ceos in 2016 but currently only has commitments for another 16 A320ceos. This indicates that another eight A320ceos have been converted or cancelled.

Airbus still lists Lion Group with 118 A320neo and 65 A321neo orders - an indication the eight A320ceos were not converted to A320neos. However, these eight aircraft were likely converted to A330-300s. Airbus has three unidentified A330-300 orders which were placed in Sep-2016 - the same month Lion reduced its A320ceo order by eight aircraft.

Lion Group took three A330-300s in late 2015. Airbus currently does not list any additional A330 orders for Lion, but Lion is expected to take additional A330s in late 2017. Lion could be using deposits initially placed for A320ceos to expand its A330 fleet.

Accelerated transition to A320neos is sensible

Reducing A320ceo commitments is sensible as it enables the group to transition faster to new-generation A320neos. Lion Group is planning to start taking delivery of A320/A321neo aircraft in mid-2017.

Lion Group began taking A320s in late 2014, with an initial delivery rate of one aircraft every two months. Approximately a year later, in late 2015, it accelerated its rate of A320 deliveries to broadly one aircraft, or slightly more than one aircraft, per month.

So far Lion Group's Indonesia-based full service airline subsidiary Batik Air has taken all of the group's A320s. Batik is again earmarked to take all of Lion Group's A320 family aircraft deliveries in 2017 - including a mix of ceos and neos. Lion prefers to focus on A320s at Batik while maintaining all-Boeing narrowbody fleets at Lion, Thai Lion and Malindo.

Batik Air fleet expands by eight aircraft

Batik also still operates 14 737s, but it has already reduced its 737 fleet by six aircraft and is expected to remove its remaining 737s by the end of 2018, becoming an all-Airbus operator.

Batik expanded its fleet by eight aircraft in 2016 as the 14 A320 deliveries more than offset the removal of six 737-800s. However, Batik's rate of expansion slowed compared to 2015, when it added an astonishing 15 aircraft. Batik commenced operations in 2013 with an initial fleet of six 737s, and added 12 aircraft in 2014.

Batik Air fleet summary: as of 01-Jan-2017 vs 01-Jan-2016 vs 01-Jan-2015 and 01-Jan-2014

Aircraft	01-Jan-2017	01-Jan-2016	01-Jan-2015	01-Jan-2014
Airbus A320-200	27	13	6	0
Boeing 737-800	8	14	6	0
Boeing 737-900ER	6	6	6	6
TOTAL	41	33	18	6

The slower expansion at Batik was driven by regulatory constraints and tough market conditions in Indonesia, which also impacted growth at Lion's other two Indonesian subsidiaries. Batik is expected to reaccelerate growth in 2017 and start focusing on expanding its international network, which currently includes only one destination (Singapore).

Lion Air added only three aircraft in 2016

Lion Group added 15 aircraft in Indonesia in 2017 - a modest figure given the huge size of Indonesia's domestic market. Along with the eight additional aircraft at Batik, Lion Air expanded its fleet by three aircraft while Wings Air added four aircraft.

Lion Air is the group's original airline and remains by far the largest. However, Lion Air faced regulatory constraints in 2016 which prevented it from launching new routes for several months and registering additional aircraft.

Market conditions in Indonesia were also challenging for most of 2015 and 2016. While Lion added seven aircraft in 2015, its passenger traffic declined slightly. Its passenger traffic was likely up only slightly in 2016, putting it very close to 2014 levels.

Lion Air fleet summary: as of 01-Jan-2017 vs 01-Jan-2016 and 01-Jan-2015

Aircraft	01-Jan-2017	01-Jan-2016	01-Jan-2015
Airbus A330-300E	3	3	0
Boeing 737-800	37	34	30
Boeing 737-900ER	71	71	71
Boeing 747-400	2	2	2
TOTAL	113	110	103

Lion Air is expected to resume expansion in 2017, since the regulatory environment has improved following the appointment of a new transport minister in Oct-2016. Lion strategically needs to regain market share at the budget end of the Indonesian market, which has been ceded over the past two years to the fast-growing Garuda Indonesia LCC subsidiary Citilink. While Lion Air will likely take delivery of more aircraft than it did in 2016, there is also an opportunity to boost capacity by improving utilisation levels which were reduced back in 2015 as market conditions became more challenging.

Wings Air growth also slows significantly in 2017

Wings Air may also accelerate expansion in 2017 following a unusually slow 2016. Wings added 16 turboprops in 2015, but only four turboprops in 2016.

Wings Air fleet summary: as of 01-Jan-2017 vs 01-Jan-2016 vs 01-Jan-2015 and 01-Jan-2014

Aircraft	01-Jan-2017	01-Jan-2016	01-Jan-2015	01-Jan-2014
ATR 72-500	20	20	20	20
ATR 72-600	32*	28	11	7
TOTAL	52	48	32	27

The Lion Group has 32 remaining ATR 72-600s on order, most of which are expected to be allocated to Wings. There were no ATR order cancellations in 2016.

Lion slowed its rate of ATR deliveries compared to 2015, but this had been expected.

Malindo accelerates expansion

Malindo took five ATR 72-600s in 2016, picking up the slack as the group decided to slow the expansion at Wings. Malindo also took delivery of four 737-800s and inherited the six 737-800s that were removed by Batik.

Malindo Air fleet summary: as of 01-Jan-2017 vs 01-Jan-2016 vs 01-Jan-2015 and 01-Jan-2014

Aircraft	01-Jan-2017	01-Jan-2016	01-Jan-2015	01-Jan-2014
ATR 72-600	16	11	11	5
Boeing 737-800	20	10	2	0
Boeing 737-900ER	6	6	6	6
TOTAL	42	27	19	11

As a result, Malindo expanded its fleet by 15 aircraft in 2016. As CAPA highlighted in a Nov-2016 analysis report, Malindo was initially only planning to add five or six aircraft in 2016. In 1Q2016 it accelerated expansion and decided to add 10 aircraft, which would have matched the figure from 2015, and decided on a further acceleration in 2Q2016.

The much faster than planned expansion was partially a response to relatively favourable conditions and opportunities in the Malaysia market. But it was also driven by Lion Group's need to find alternative homes for aircraft that were initially intended for Indonesia but could not be delivered to Indonesia due to regulatory constraints. Malindo is planning more rapid fleet expansion in 2017 as it continues to pursue strategic expansion, despite intensifying competition in the Malaysian market.

Thai Lion only added six aircraft in 2017

Thai Lion could also have been an outlet for aircraft initially intended for Indonesia, but Lion Group instead decided to slow its expansion in Thailand.

Thai Lion added six aircraft in 2016 - three 737-800s and three 737-900ERs. In 2015 it added 10 aircraft, and the original fleet plan for 2016 was to add 10 aircraft again.

Thai Lion initially adjusted its 2016 fleet plan in early 2016 from 10 to seven aircraft. Ultimately it fell one aircraft short of the revised target.

Thai Lion Air fleet summary: as of 01-Jan-2017 vs 01-Jan-2016, 01-Jan-2015 and 01-Jan-2014

Aircraft	01-Jan-2017	01-Jan-2016	01-Jan-2015	01-Jan-2014
Boeing 737-800	8	5	0	0
Boeing 737-900ER	16	13	8	2
TOTAL	24	18	8	2

The slowdown in expansion at Thai Lion, which launched services at the end of 2013, is likely an indication of challenging market conditions.

Thailand's domestic market - which Thai Lion focused on in its first two years of operations - has reached saturation. Thai Lion started to focus more on international expansion in 2016, but Thailand's international market is extremely competitive and most regional routes are already oversupplied. The outlook in Thailand for 2017 is relatively bleak, and therefore Lion Group may refrain from reaccelerating expansion at Thai Lion.

Lion Group focuses growth at the full service end

In general overcapacity is a concern in Southeast Asia, particularly in the LCC sector. Given the current irrational level of competition between LCCs in the region it is not a surprise that Lion Group is focusing increasingly on the full service sector.

Batik and Malindo are both full service airlines, providing two classes of service and offering the full package of frills in economy, including checked bags, seat assignments, seat-back inflight entertainment, meals and drinks. Malindo has also emerged as a network airline, relying heavily on transfer traffic and interlines with foreign full service airlines. Batik is likely to adapt a similar network and partnership model as it starts to expand internationally.

At the same time as being full service airlines, Batik and Malindo have extremely low cost structures because they were developed by an LCC group that knows how to keep costs at an absolute minimum. Therefore Batik and Malindo are able to compete effectively against full service airlines, undercutting competitors without necessarily impacting profitability.

There are still opportunities for Lion Group's LCCs to expand. However, in 2016 the opportunities were better at the full service end of the market.

By pursuing faster FSC growth Lion is also now a more balanced company. Lion currently has 31% of its fleet at FSCs - compared to 25% at the beginning of 2016 and 20% at the beginning of 2015.

Lion will come back strong

The relatively slow growth in 2016 at Lion's LCCs - and the slower than typical growth at the overall group - is hardly surprising.

The group's rate of growth in prior years was staggering and it was not realistic to believe it could be maintained every year. The 36 aircraft deliveries in 2016 is still an impressive figure by almost any measure. No other airline group in Southeast Asia came close to adding that many aircraft in 2016, including AirAsia.

The fact Lion has slowed down growth and cancelled some orders will be highlighted by sceptics as an indication that Asia's largest airline group outside China (based on fleet size) is in a tailspin However, the reality is Lion has endured a difficult period, is still growing faster than virtually any airline group in the world and remains an extremely tough competitor.