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Lion Group expands fleet by 16 aircraft in 1H2016, surpassing the 250 aircraft milestone

Indonesia-based Lion Group expanded its fleet by 16 aircraft in 1H2016, cementing its position as the largest airline group in Southeast Asia. Lion now has a fleet of more than 250 aircraft while its rival AirAsia – the region’s second largest group – has under 200 aircraft based in Southeast Asia.

However a net gain of 16 aircraft over the last six months marks a slowdown for Lion. The group’s fleet grew by 59 aircraft in 2015 and 39 aircraft in 2014.

None of Lion Group’s five airline subsidiaries or affiliates added more than five aircraft in 1H2016, resulting in relatively modest capacity expansion. The rate of expansion will likely pick up in 2H2016 but not approach previous levels.

Lion Group fleet surpasses the 250 aircraft milestone

The Lion Group currently has a fleet of 252 aircraft compared with a fleet of 236 aircraft at the beginning of 2016, according to the CAPA Fleet Database.

There were 17 deliveries in 1H2016, including seven 737-800s, six A320s and four ATR 72-600s. The fleet grew by 16 aircraft as a Batik 737-800 is currently inactive following an Apr-2016 incident involving a collision with an ATR 42 operated by the independent Indonesian regional airline TransNusa. (There were no injuries but both aircraft were badly damaged.)

Lion Group fleet summary: as of 7-Jul-2016

Aircraft In Service On Order
Total: 252 490
Airbus A320-200 19 32
Airbus A320-200neo 0 118
Airbus A321-200neo 0 65
Airbus A330-300E 3 0
ATR 72-500 20 0
ATR 72-600 43 37
Boeing 737-800 69 10
Boeing 737-9 0 201
Boeing 737-900ER 96 27
Boeing 747-400 2 0

As CAPA has previously highlighted, the Lion Group took delivery of 57 aircraft in 2015; these included 25 737-800s, 17 ATR 72-600s, seven A320s, five 737-900ERs and three A330-300s. The group did not phase out or remove any aircraft from its fleet in 2015, resulting in a net gain of 57 aircraft. Its average fleet age is only 3.6 years.

See related report: Lion Group added 57 aircraft in 2015, overtaking AirAsia as SE Asia’s largest airline group fleet

The remarkable growth in 2015 enabled Lion to overtake AirAsia/AirAsia X as the largest airline group in Southeast Asia. In 2014 Lion overtook the Garuda Indonesia and Singapore Airlines groups as it expanded its fleet by 38 aircraft. (In 2014 Lion took delivery of 45 aircraft, but three of these aircraft were leased to an airline outside the group and its last four 737 Classics were phased out.)

Lion once again grew faster than any other leading SE Asian airline group

Lion now has the second largest airline group fleet outside Europe, North America and China. Only LATAM has a slightly larger fleet (20 more aircraft) and will likely be surpassed by Lion in 2017. Emirates currently operates 250 aircraft (two fewer than Lion) but is an all-widebody operator, whereas Lion only operates five widebody aircraft. Also, only 7% of its capacity is deployed on international routes.

Lion will continue its rapid rise in the global fleet rankings and is not about to lose its position at the top of the Southeast Asia rankings given its gigantic order book, which includes nearly another 500 aircraft. In 1H2016 Lion once again grew its fleet much faster than any other Southeast Asian top 10 airline group.

Southeast Asia top 10 airline groups ranked by fleet size: 7-Jul-2016 vs 7-Jan-2016

Rank Airline Group

Number of

airlines

Fleet size

Jan-2016

 Fleet size

Jul-2016

1 Lion Group 5 236 252 
2 AirAsia/AirAsia X Group 7 188 195
3 Garuda Indonesia Group 2 179 185
4 Singapore Airlines Group 5 179 177
5 Malaysia Airlines Group 3 128 123
6 Vietnam Airlines Group 4 108 106
7 Thai Airways Group 5 126 127 
8 Philippine Airlines Group 2 76 78 
9 Cebu Pacific Group 2 55 57 
10 Sriwijaya Air Group 2 44 44

However, the slower rate of fleet growth and deliveries is unexpected as Lion Group and its aircraft suppliers have repeatedly maintained that deferrals are not being pursued. For example, Boeing stated in Feb-2016 that Lion was not deferring any aircraft. Several of Lion’s competitors – most notably AirAsia/AirAsia X – have deferred deliveries over the last couple of years and converted orders from current generation aircraft to new generation re-engined aircraft.

Lion 737 delivery rate seems to slow

Over the past few years the Lion Group has been taking delivery of new 737s at a rate of at least two aircraft per month. With only seven 737 deliveries in 1H2016, Lion will need to pick up the rate of 737 deliveries significantly in 2H2016 to match its year-end figures for 2014 and 2015.

Catching up in 2H2016 is possible as the group typically takes more aircraft in the second half of the year. However, Lion seems more behind than normal.

A deferral of 737s in parallel with a conversion of some of its remaining 737NG orders to the new generation 737 MAX family would be logical. Lion is slated to start taking delivery of 737 MAX 9 aircraft in 2017.

Lion has been looking at phasing out some of its oldest 737-900s, which were delivered from 2006. Initially Lion was trying to start replacing these aircraft in 2016 as they turn 10 years old. However leasing out or selling these aircraft could be challenging, prompting the group to adjust its delivery and fleet plan.

Lion can more easily catch up on ATR deliveries

The Lion Group has also been taking delivery of ATR 72-600s at a slower rate. Over the past couple of years the group has taken at least one ATR 72 per month.

Again, Lion may be able to catch up with ATR deliveries in 2H2016. The slower ATR delivery rate in 1H2016 is not surprising and was likely intended. In early 2016 the Lion Group began taking delivery of its Nov-2014 order for 40 additional ATR 72-600s.

For A320s, the Lion Group has only recently begun taking aircraft at a rate of one per month. Lion only began adding Airbus aircraft in 2H2014 and pursued a gradual spool-up.

Batik slows expansion as 737 fleet is reduced

Batik Air is the only A320 operator within the Lion Group. The Indonesia-based full service, predominantly domestic airline also operates 737s but has started reducing its 737 fleet.

Batik took delivery of six A320s in 1H2016 and two of its 737-800s were transferred to Lion Group’s Malaysian affiliate Malindo Air. As previously mentioned, a Batik 737-800 has been inactive since an Apr-2016 incident at Jakarta Halim Airport.

As a result, Batik’s fleet grew by a relatively modest three aircraft in 1H2016. This represents a significant slowdown compared with 2015 and 2H2014. As it added a remarkable 27 aircraft during the 18-month period from mid-2014 to end-2015 Batik was the fastest growing airline in Southeast Asia – and perhaps the fastest growing in the world.

Batik Air fleet summary: as of 1-Jul-2016 vs 1-Jan-2016, 1-Jan-2015 and 1-Jan-2014

Aircraft 1-Jul-2016 1-Jan-2016 1-Jan-2015 1-Jan-2014
Total: 36 33 18 6
Airbus A320-200 19 13 6 0
Boeing 737-800 11 14 6 0
Boeing 737-900ER 6 6 6 6

Batik continued to expand its network in 1H2016 with several new domestic routes. Some of the expansion was likely achieved through an increase in utilisation rates for the aircraft which were delivered in 2015. However Batik is unlikely to meet an initial plan to expand its fleet to 49 aircraft by the end of 2016.

See related report: Lion Group’s Batik Air continues rapid expansion with 19 A320 deliveries by end of 2016

Batik is expected to continue to take A320s at a rate of at least one per month in 2H2016, with an acceleration to two aircraft for some months. However, more 737 reductions are now in the pipeline, offsetting some of the A320 growth.

Batik could transition to an all A320 fleet as early as 2017 – a logical move as it would allow the airline to focus on A320s as deliveries of A320neo family aircraft begin.

Malindo expansion continues with five additional aircraft

Mailndo took over two of Batik’s 737-800s in 1H2016. Malindo also took one 737-800 direct from Boeing and added two ATR 72-600s.

With the five additional aircraft Malindo was the fastest growing Lion Group airline in 1H2016. Malindo is now on track to meet its plan for expanding the fleet by 10 aircraft in 2016 (although the original plan did not include any ATRs).

See related report: Malaysia’s Malindo Air to pursue faster expansion following rebranding and fully embracing FSC model

737s exiting Batik will likely contribute to most of Malindo’s fleet expansion in 2H2016 and 2017. As Batik reduces its 737 fleet Malindo is the most logical candidate since Batik and Malindo operate 737-800s and 737-900s in identical two-class configuration, with the same inflight entertainment product. Transferring Batik 737s to Lion Air or Thai Lion requires a reconfiguration, adding cost, since Lion and Thai Lion are LCCs with all-economy configurations.

Malindo launched services in Mar-2013 and has since quickly expanded, adding 11 aircraft in 2013, followed by eight aircraft in both 2014 and 2015.

Malindo Air fleet summary: as of 1-Jul-2016 vs 1-Jan-2016, 1-Jan-2015 and 1-Jan-2014

Aircraft 1-Jul-2016 1-Jan-2016 1-Jan-2015 1-Jan-2014
Total: 32 27 19 11
ATR 72-600 13 11 11 5
Boeing 737-800 13 10 2 0
Boeing 737-900ER 6 6 6 6

Malindo added several domestic and international routes in 1H2016 and is planning further network expansion in 2H2016. Some of this expansion is planned for Jul-2016 as four of the five aircraft Malindo added in 1H2016 were delivered in recent weeks.

Thai Lion expands at relatively modest pace

Thai Lion launched services in Dec-2013 with two 737-900s and has also pursued rapid expansion since. Thai Lion added 10 aircraft in 2015 but only three aircraft in 1H2016.

Thai Lion Air fleet summary: as of 1-Jul-2016 vs 1-Jan-2016, 1-Jan-2015 and 1-Jan-2014

Aircraft 1-Jul-2016 1-Jan-2016 1-Jan-2015 1-Jan-2014
Total: 21 18 8 2
Boeing 737-800 8 5 0 0
Boeing 737-900ER 13 13 8 2

As CAPA highlighted in a Mar-2016 report, Thai Lion adjusted its 2016 fleet plan from an initial 10 deliveries to seven. Thai Lion therefore seems on track with its 2016 plan and should take four more 737s in 2H2016.

See related report: Thai Lion Air accelerates international expansion with Beijing, Hanoi, Ho Chi Minh, Jakarta & Yangon

Network expansion at Thai Lion slowed considerably in 1H2016. Thai Lion currently serves the same 10 domestic destinations as in Jan-2016. In 1H2016 the LCC has focused mainly on adding capacity on domestic trunk routes but has also resumed services to Jakarta and expanded its charter operation to China.

Network expansion at Thai Lion is expected to accelerate in 2H2016, starting with the 22-Jul-2016 launch of services to Yangon. Thai Lion also has Hanoi, Ho Chi Minh and three new domestic markets (Khon Kaen, Phitsanulok and Trang) in its business plan for 2016. Some of these routes were initially expected to be launched in 1H2016 and will likely now be added in 2H2016.

Lion Air growth slows under a challenging domestic environment

The group’s original airline, Indonesia-based Lion Air, added only three 737-800s in 1H2016, giving it a fleet of 113 aircraft. Lion has been the slowest-growing of all the group’s airlines over the last two years but remains by far the largest.

Lion Air fleet summary: as of 1-Jul-2016 vs 1-Jan-2016 and 1-Jan-2015

Aircraft 1-Jul-2016 1-Jan-2016 1-Jan-2015
Total: 113 110 103
Airbus A330-300E 3 3 0
Boeing 737-800 37 34 30
Boeing 737-900ER 71 71 71
Boeing 747-400 2 2 2

Lion's passenger traffic contracted in 2015 as domestic market conditions became challenging. As CAPA has previously described, Indonesia’s total domestic market grew by less than 1% and the Lion Group lost market share to rival airline group Garuda, which grew its domestic passenger traffic by 14%.

See related report: Garuda Indonesia Part 3: new domestic strategy is to slow Garuda growth, accelerate LCC Citilink

In recent months Lion has been unable to launch new domestic routes due to Indonesian regulatory constraints. In 2015 Lion also faced artificial regulatory barriers as a newly implemented - and irrational - price floor prevented it from offering low fares, and therefore from being able to stimulate demand.

It will be difficult for Lion to pursue further domestic growth until the regulatory environment improves and the local economy strengthens. However, Lion is pursuing rapid growth in the China market with new routes (mainly charters) connecting Indonesian holiday destinations with several Chinese cities. The fast-expanding China operation should enable Lion to improve aircraft utilisation rates, which have been impacted as Lion has reduced domestic flying while still expanding its fleet.

Wings Air growth also starts to slow

In 2015 the group pursued much faster growth in the domestic Indonesian market using its two other Indonesian subsidiaries – Batik Air and Wings Air. However, the rate of growth at Batik and Wings has slowed considerably in 2016.

The slower growth at Batik, a full service airline, was discussed earlier in this report. Wings, which operates an all-ATR turboprop fleet under a regional LCC model, only added two aircraft in 1H2016. In 2015 Wings added 17 aircraft.

Wings Air fleet summary: as of 1-Jul-2016 vs 1-Jan-2016, 1-Jan-2015 and 1-Jan-2014

Aircraft 1-Jul-2016 1-Jan-2016 1-Jan-2015 1-Jan-2014
Total: 50 48 31 27
ATR 72-500 20 20 20 20
ATR 72-600 30 28 11 7

Wings has benefited from growth opportunities in secondary cities where there has generally been stronger demand and less competition than on trunk routes. However, Garuda is starting to penetrate more of the smaller markets as it expands its own ATR 72 fleet and Wings may not be able to maintain a rapid rate of expansion.

Transportation Partners has become an important Lion Group subsidiary

The Lion Group has alternatives and is able to reduce growth in Indonesia without necessarily deferring deliveries or cancelling orders. In addition to having the flexibility to accelerate growth at its joint ventures in Malaysia and Thailand, Lion is able to use its Singapore-based sister company Transportation Partners to lease aircraft outside the group.

Transportation Partners stated on 1-Jul-2016 that it had ended 1H2016 with a fleet of 60 aircraft. So far it has only placed three aircraft outside the group – a transaction for three 737-800s with China’s 9Air that was completed back in 2014. It also has an ATR 72 at Brazil’s Azul but this aircraft was acquired rather than placed from the group’s order book.

Transportation Partners has not placed any aircraft outside the group since 2014 but continues to look at potential third party placement opportunities. Transportation Partners has also become more involved in assisting all of Lion Group’s airline subsidiaries and affiliates in arranging financing for aircraft that are not owned by Transportation Partners.

The leasing company stated on 1-Jul-2016 that it “expects to get busier in 2H2016 as the Lion Group diversifies its sources of capital”. Transportation Partners pointed out that the recent removal of Lion Air and Batik Air from EU’s blacklist opens up “traditionally more conservative areas such as the German banking and KG Funds market”.

As CAPA highlighted in an Apr-2016 report, efforts to remove Lion, Batik and (later) Wings from the blacklist and secure IOSA certification for all its airlines are part of an initiative to improve the group's position in the international market.

See related report: Indonesia’s Lion Group begins to focus more on international expansion

Lion Group’s aircraft deliveries rate could re-accelerate

Transportation Partners also stated that it expects to play an advisory role in potential initial public offerings and external third-party equity investment placements at some of its sister companies.

In addition to the five airlines, the Lion Group has a fast-expanding aircraft maintenance subsidiary.

Lion Group is entering a new phase that could open up new funding sources and lead to reaccelerated expansion.

The 17 aircraft deliveries from 1H2016 make a relatively small figure for Lion given its massive order book and higher rate of deliveries from 2015. However, Lion is still adding aircraft at a faster pace than all other airline groups in Southeast Asia and virtually all other airline groups in the world.

But for now, a further slowdown is not a likely scenario for the ambitious Lion Group.

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