Sky's the limit? Southeast Asia's budget airlines bet big

Lion Air's record aircraft orders underline the ambitious plans the privately held Indonesian group is hatching to emerge as a pan-Asian low cost carrier, throwing a serious challenge to AirAsia Bhd, the region's biggest budget airline.. The rivalry intensified on Friday when Lion Air launched its first service in Malaysia, barging onto AirAsia's home turf, but the pace of expansion has raised questions about whether airlines are overextending themselves.. Financiers and industry executives, however, say the party is just starting, with the region's budget carriers just beginning on the rapid growth path enjoyed by Ryanair Holdings Plc and Easyjet Plc in Europe and Southwest Airlines Co, the pioneer of the model, in the US.. "I think it's been pretty rational in the sense that it is underpinned by economic prospects," Eric Eugene, BNP Paribas's global head of transportation banking, told Reuters in an interview in Singapore. "It's underpinned by the number of people capable of paying fares and flying.". The staggering bets being placed by both airlines rest on the dominant market shares they enjoy in their home countries and the hope that rising disposable incomes will drive Asia's growing middle class to keep flying to new destinations.. Lion Air's co-founder Rusdi Kirana placed a blockbuster order for 234 medium-haul jets with Airbus this week, just a year after ordering a record 230 Boeing planes.. Despite the projections of sharp growth, some bankers and lessors have expressed concerns that the series of record-breaking orders risks flooding Southeast Asia with too many narrow-body planes.. "The one thing that we have to consider is that the delivery span of those aircraft is over, probably, 10 years," said BNP Paribas's Eugene.. "So, if you put this number of aircraft in perspective of economic growth, and in perspective of aircraft retirement, actually our own results show that it's not irrational.". And, in a move that could reduce the risk of having too many unused planes if demand projections don't pan out, Lion Air has also set up Transportation Partners, an aircraft leasing company in Singapore, and hired senior financiers.. Establishing a base in Singapore, a growing aviation financing hub, might help Lion Air to diversify its portfolio outside Indonesia, where the country risk is much higher, and enable it to tap into a wider circle of banks for funding.. Regional rivalry The emergence of Lion Air presents Malaysia's AirAsia with the most serious challenge to its dominance of the region's budget flight business.. However Tony Fernandes, AirAsia Group's CEO, believes tight control on costs and ties with one planemaker will help his group retain its advantage.. "One aircraft the A320. Lowest cost airline in the world. That's the key. Lowest cost always wins," Fernandes tweeted on Friday.. AirAsia operates 120 aircraft and expects 360 more to be delivered up to 2026, excluding leased aircraft.. Lion Air controls a little less than half of the market in Indonesia's booming economy, home to 240 million people spread over 17,000 islands. AirAsia has recently started operations in the archipelago, but is a very small player in the market.. Lion Air has ambitious plans to start airlines across Asia-Pacific and is breaking into AirAsia's home market with its flights between Kuala Lumpur and the East Malaysian cities of Kuching and Kota Kinabalu through a partially owned venture, Malindo Air.. "What caught on in Europe with EasyJet and Ryanair 10 years ago is happening here now," Ranga Karumbunathan, managing director of origination at leasing company Avolon, said on the sidelines of an Asia aviation financing conference organised by industry consultancy CAPA. "So, I think the pie is big enough.". ASEAN hopes Investors have high hopes for plans by the 10-member Association of South East Asian Nations (ASEAN) for a single market for a combined economy of $2 trillion, with free movement of goods, services, investment and skilled labour among 600 million people.. Data from CAPA shows that 52 percent of seat capacity in Southeast Asia is operated by low cost carriers, or LCCs in the industry jargon.. "In less than a decade, LCCs went from virtually nothing to a majority share. So, clearly, a new market segment has been established," said Campbell Wilson, chief executive of Scoot, the medium-to-long-haul budget carrier owned by Singapore Airlines Ltd.. Airlines and leasing companies are expected to take delivery of about 175 aircraft in Southeast Asia over the next two years, accounting for one-third of all deliveries in the Asia-Pacific region, according to aviation data provider Ascend Online Fleets. The bulk of the deliveries will be in Indonesia, Malaysia and Singapore.. "It has got all the ingredients - large population in sub-three-hour flights along with a growing middle class, very rapidly growing economies and developing infrastructure, the ability to find people who haven't flown before and get them flying," said Paul Sheridan, head of consultancy, Asia, at Ascend.. "And then airports that are very happy to see low cost airlines flying in and out.". Singapore's Changi Airport, one of the main Asian gateways for international travellers, closed its no-frills terminal this year as it could not cope with the rapid expansion of the LCC segment. The sparse budget terminal, housed in a separate facility, was a big put-off for travellers looking to catch connecting flights.. Singapore is building a fourth, larger terminal estimated to cost $1 billion and be completed by 2017.. Around one-third of travellers going through Singapore are budget travellers, up from a negligible share a decade ago.. "I think if we go back and look at Ryanair, even Southwest, there were times in their evolution when they made some brave decisions about ordering planes which people thought were nuts," John Duffy, Chief Operating Officer of Transportation Partners, Lion Air Group's leasing company, told the Singapore conference.. "And probably Emirates as well, actually. But they have continued to generate traffic, sustain load factors, sustain yield.". Copyright: Thomson Reuters 2013

Sky's the limit? Southeast Asia's budget airlines bet big

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