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Lion Group fleet: slowing aircraft deliveries a good strategy

The Lion Group has slowed its new aircraft deliveries for three consecutive years, from a high of 57 in 2015 to only 23 in 2018, and could take even fewer aircraft in 2019 as it contemplates cancelling orders for more than 200 737 MAX family aircraft. Another round of deferrals and even reductions (with Airbus and/or Boeing) would be sensible, given that all three of the airlines that the group launched in 2013 have concluded initial buildout periods.

Batik Air, Thai Lion Air and (particularly) Malindo Air have stopped pursuing rapid growth, ending an initial period of rapid strategic expansion. The group’s original airline, Lion Air, is also unlikely to resume rapid expansion, having slowed significantly in recent years as the Lion Group shifted focus to new markets and segments. 

Lion Group founder Rusdi Kirana threatened, in several Dec-2018 media interviews, to cancel all its remaining orders with Boeing. The threat came in the aftermath of an allegedly damning Boeing statement regarding Indonesia’s preliminary report on the 29-Oct-2018 Lion Air 737 MAX 8 accident, which infuriated Lion.

However, Lion already needed to adjust its delivery stream before the accident, and the recent discord with Boeing will accentuate that momentum.

Summary

  • The Lion Group took delivery of 23 aircraft in 2018 – its lowest delivery figure this decade.
  • The group has been pursuing deferrals with all three of its aircraft suppliers (Airbus, ATR and Boeing) in the past few years, and more deferrals had been expected before the 29-Oct-2018 crash of a Lion Air 737 MAX 8.
  • Lion has threatened to cancel all its remaining Boeing orders, a move which could also make commercial sense considering its Airbus order may be sufficient to meet its needs.
  • Whether the Boeing order is reduced or cancelled could hinge on whether Boeing agrees to a renegotiation.

Lion has Southeast Asia’s largest fleet 

The Lion Group ended 2018 with an in-service fleet of 310 aircraft, according to the CAPA Fleet Database. Lion still has the largest fleet in Southeast Asia, but a slowdown in the growth rate over the past few years has led to a narrowing of the gap with AirAsia

AirAsia/AirAsia X ended 2018 with a combined in-service fleet of 237 aircraft in Southeast Asia (excludes aircraft operated by affiliates in India and Japan). Technically, AirAsia and AirAsia X are two separate groups but are often considered as one, since they share a brand and website.  

Singapore Airlines is the third largest airline group in Southeast Asia (based on fleet size), followed by Garuda Indonesia, Malaysia Airlines and Vietnam Airlines.

Southeast Asia’s leading airline groups* ranked by in-service fleet size: as of 31-Dec-2018 

Rank Airline group  Total number of aircraft Breakdown by airline
1. Lion 310 

Lion Air 117, Wings Air 63, Batik Air 55, Malindo Air 41, Thai Lion Air 34 

2. AirAsia/AirAsia X 237

AirAsia Malaysia 95, AirAsia Thailand 62,  AirAsia X Malaysia 24,

AirAsia Indonesia 24, AirAsia Philippines 21, AirAsia X Thailand 9,

AirAsia X Indonesia 2

3. Singapore Airlines 210

Singapore Airlines 121, Scoot 45, SilkAir 32, SIA Cargo 7,  NokScoot 5

4. Garuda Indonesia  194 Garuda Indonesia 143, Citilink 51 
5. Malaysia Airlines  113

Malaysia Airlines 84, MASWings 16, Firefly 13 

6.  Vietnam Airlines  108 

Vietnam Airlines 88, Jetstar Pacific 15, VASCO

Fleet growth has slowed since 2015 

The Lion Group has nearly tripled its fleet over the past six years, from only 112 aircraft in service at the end of 2012 to 310 aircraft at the end of 2018 (based on the CAPA Fleet Database). Back in 2012 the group consisted of only two airlines – Lion Air and the turboprop subsidiary Wings Air. 

Indonesia-based Batik, Malaysia’s Malindo and Thai Lion all launched operations in 2015.

Malindo and Batik follow a full service model, whereas Thai Lion follows an LCC model (along with Lion Air and Wings Air). Batik, Malindo and Thai Lion currently operate 130 aircraft and therefore account for 66% of the 198 aircraft added by the group over the past six years. 

Although the Lion Group fleet has continued to grow, the pace of expansion has slowed significantly the past three years. The Lion Group in-service fleet grew by only 22 aircraft in 2018 and by 21 aircraft in 2017, according to the CAPA Fleet Database. This represents a growth rate of only 8% for both 2017 and 2018. 

The growth rate began slowing in 2016, when the Lion Group fleet grew by 16%. Growth peaked at 31% in 2015 and 30% in 2014. 

The slower growth in the past three years has been driven primarily by a slowdown in the new aircraft delivery rate, although the group has also phased out some older aircraft.

Deliveries peaked at 57 aircraft in 2015 and have since slowed significantly; the group took 36 aircraft in 2016, 29 aircraft in 2017 and only 23 aircraft in 2018. (The 2018 figure includes the two-month old Lion Air 737 MAX 8 that crashed on 29-Oct-2018.)

Lion Group annual year-end fleet size and number of aircraft deliveries: end 2012 to end 2018

Year 

Number of  aircraft in service at year-end

Number of aircraft deliveries for the year  
2012 112 30
2013 136 33
2014 177 43
2015 232 57
2016 269 36
2017 288 29
2018 310  23

Lion reduced delivery rate with Airbus and Boeing 

Lion was originally planning to further accelerate deliveries further in 2016 and 2017, but challenging market conditions prompted the group to negotiate deferrals. Another round of deferrals were pursued in 2018. The 23 deliveries for 2018 consisted of 12 737s (four 737-900ERs, three 737 MAX 9s, three 737 MAX 8s and two 737-900ERs), four A320s and seven ATR 72s.

Lion has taken delivery of 737s at an average frequency of one per month since 2016. It took 737s at an average rate of two aircraft per month in 2015 and initially was aiming to accelerate 737 deliveries to three per month.

Lion was also originally planning to accelerate A320 deliveries to a rate of two per month. The group took its first six A320s in 2014 and seven aircraft in 2015. It ramped up to 14 A320 deliveries in 2016 but has since slowed down its Airbus intake, taking 10 A320s in 2017 and just four aircraft in 2018.

Three of the four 2018 A320 deliveries were in Jan-2018. Lion’s last A320 delivery was Jul-2018; the group has therefore taken just one Airbus aircraft in the past year.

The Lion Group also operates six A330-300s, three of which were delivered in 4Q2015 and the other three in 4Q2017. The group plans to take four A330-900neos in 2019. The A330-900neos and the three most recent A330-300s were acquired as Lion deferred and converted A320s. 

Lion Group order book needs pruning in the short term

More narrowbody deferrals were expected before the 29-Oct-2018 crash. Reductions and cancellations were also considered as a possibility before the crash.

The group seems to have too many narrowbody aircraft on order, given its current needs. Lion has outstanding orders for more than 400 narrowbody jets (178 A320neo family aircraft and 227 737 MAX family aircraft).

Lion Group fleet summary: as of 1-Feb-2019


Aircraft
In service On order (confirmed) On order (unconfirmed)
Airbus A320-200 41 0 0
Airbus A320-200neo 0 113 0
Airbus A321-200neo 0 65 0
Airbus A330-300E 6 0 0
Airbus A330-900neo 0 0 8
ATR 72-500 19 0 0
ATR 72-600 57 21 0
Boeing 737 MAX* 0 187 0
Boeing 737-10 0 50 0
Boeing 737-8 10 0 0
Boeing 737-800 80 0 0
Boeing 737-9 3 0 0
Boeing 737-900ER 94 0 0
Boeing 747-400 0 0 0
Total: 310 436 8

Cancelling all the Boeing orders seems extreme, but is commercially feasible given Lion’s current needs.

The group does not require that many narrowbody growth aircraft in the short to medium term. It also does not need a significant number of replacement aircraft as its current fleet is relatively young (the oldest aircraft in the current in-service fleet is 12 years old).

Malindo is in a consolidation phase 

Batik, Malindo and Thai Lion are no longer in their initial buildout phases, where they were pursuing rapid strategic expansion.

Malindo has not taken delivery of any aircraft since 1H2017 and since then has been in a consolidation phase as part of an effort to improve profitability. After an initial four years of rapid growth, Malindo’s fleet has shrunk over the past 18 months due to the transfer of 737 MAX 8s to Lion Air and ATR 72-600s to Wings Air. 

Malindo is not planning to resume rapid growth in 2019. It may add a small number of 737s in 2019 but these would be aircraft transferred from Batik, rather than new deliveries. 

Thai Lion does not plan to add any 737s in 2019 

Thai Lion is still growing but is slowing down significantly and will be focusing on widebody expansion over the next years, in part because of the slot constraints at its Bangkok Don Mueang base.

Thai Lion added only four aircraft in 2018 and is now planning to add only two aircraft in 2019. Both of its planned 2019 deliveries are A330-900neos.

Thai Lion’s 2019 fleet plan initially included two more 737 MAX 9s as well as the two A330-900neos. However, in 2H2018 Thai Lion decided to scrap plans for adding 737 MAX 9s (or any other narrowbody types) in 2019.

Thai Lion was the launch operator for the 737 MAX 9 and took three of the type in 2018 (with deliveries in March, April and November). Initially, it was planning to take four 737 MAX 9s in 2018.

See related report: Thai Lion Air SWOT: domestic and China networks are major strengths 

Thai Lion’s decision to take three rather than four 737 MAX 9s in 2018 and not to take any 737 MAX 9s in 2019 was made before the Lion Air 737 MAX 8 crash. Lion Group was the 737 MAX 8 launch operator; Malindo put the world's first 737 MAX 8 into service in May-2017, but then transferred the aircraft and two other 737 MAX 8s to Lion Air in 3Q2017.

Batik Air has barely expanded over the past year 

As highlighted earlier in this report, Batik Air only grew its fleet by four aircraft in 2018 and has barely expanded since Jan-2018, when three A320s were delivered. 

In contrast to 2018, Batik could re-accelerate expansion in 2019, but is not expected to take nearly as many aircraft as in prior years. Batik expanded its fleet by a staggering 18 aircraft in 2016 and by 10 aircraft in 2017. 

Batik Air is not relying on Lion Group’s Boeing order book as it is in the process of transitioning to an all-Airbus fleet. The airline still operates 14 737s, all of which are slated to be transferred to other Lion Group airlines as Batik takes more A320s. 

Batik’s 14 737s can be used to provide some growth for the group’s remaining 737 operators in the event that Lion cancels its remaining 737 orders. While 14 aircraft is not that many, it could be sufficient for the next few years because Malindo, Thai Lion and Lion Air are no longer pursuing significant narrowbody growth.

Lion has enough A320s on order to meet its narrowbody needs

The Lion Group could also potentially transition another one of its airlines to Airbus. It is hard to imagine Batik operating all 234 of the A320 family aircraft that Lion Group ordered in 2013, when Lion decided to diversify and not rely entirely on Boeing. 

The group has so far taken delivery of 41 of the 234 A320s that were initially ordered. The 178 A320 family aircraft that are now on outstanding order (a mix of A320neos and A321neos) should be sufficient to meet the group’s long term narrowbody needs. (The outstanding A320 family order book is less than the number originally ordered minus aircraft already delivered due to the conversion of several A320 orders to A330s).

Airbus would obviously be happy to reaccelerate A320 deliveries and potentially sell Lion more A320neos in the event that it cancels its Boeing order.

Lion does not necessarily need Boeing - and Boeing doesn't need Lion 

Lion Group ultimately will go for the best commercial outcome. If it can secure a good deal from Boeing – and patch up the now rocky relationship with its largest supplier – Lion could pursue further deferrals and, potentially, reductions with Airbus.

The threats about cancelling all its Boeing orders could include the motive of trying to get a better deal from Boeing.

However, if Lion does not get what it wants from Boeing there could be an opportunity to cancel its remaining Boeing orders (excluding a few aircraft already in production) without significant financial impact.

While a major cancellation in the aftermath of a crash is not ideal from a public relations perspective, Boeing has a strong enough order book for the 737 MAX (nearly 5,000 aircraft) to stomach a possible cancellation from one of its largest customers. Boeing could actually improve its long term position by reducing or eliminating its exposure to Lion and using Lion’s slots for other customers.

In any event, Lion would remain a large Boeing operator. Transitioning all the group’s airlines to Airbus would be challenging and is not necessary (even if the current feud with Boeing is not resolved amicably). Most of the 187 Boeing aircraft that are now operated by Lion are likely to remain with the group for a long time.

Even under a cancellation scenario, Lion could potentially order Boeing aircraft in the future – particularly if market conditions improve.

Whatever fleet decision Lion makes in the coming months will grab headlines, but could later be further adjusted. In such a rapidly growing market Lion has always taken a very flexible approach to fleet planning in order to remain positioned for the medium and long term. At the same time, the major OEMs (and lessors) are well aware of behavioural patterns in this still-immature market and of the need for them to be able to respond to the needs of their larger clients.

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